----

**UNITED        STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,        D. C. 20549**

**FORM        10-K **

**X        **
**ANNUAL        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF        1934**

**For        the Fiscal Year Ended December 31, 2005**

**OR**

** __**
**TRANSITION        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF        1934        FOR THE TRANSITION PERIOD FROM **

**Commission        File No. 1-6407**

**SOUTHERN        UNION COMPANY**

| **Delaware**                                                                    | **75-0571592**                                        |
|---------------------------------------------------------------------------------|-------------------------------------------------------|
| (State                  or other jurisdiction of incorporation or organization) | (I.R.S.                  Employer Identification No.) |

| **5444                  Westheimer Road**                 | **77056-5306**              |
|-----------------------------------------------------------|-----------------------------|
| **Houston,                  Texas**                       | (Zip                  Code) |
| (Address                  of principal executive offices) |                        |

**(713)        989-2000**

| **417                  Lackawanna Avenue**                       | **18503-2013**              |
|------------------------------------------------------------------|-----------------------------|
| **Scranton,                  Pennsylvania**                      | (Zip                  Code) |
| (Former                  address of principal executive offices) |                        |

| **Title                  of each class**                  | **Name                  of each exchange on which registered** |
|-----------------------------------------------------------|----------------------------------------------------------------|
| **Common                  Stock, par value $1 per share** | **New                  York Stock Exchange**                   |
| **7.55%                  Depositary Shares**              | **New                  York Stock Exchange**                   |
| **5.75%                  Corporate Units**                | **New                  York Stock Exchange**                   |
| **5.00%                  Corporate Units**                | **New                  York Stock Exchange**                   |

**P**

**P**

**P**

**P**

**P**

**P**

**DOCUMENTS        INCORPORATED BY REFERENCE**

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**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**FORM        10-K**

**DECEMBER        31, 2005**

**Table        of Contents**

|                                                                              |                                                                                                                                                     | Page   |
|-----------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                              | **PART                  I**                                                                                                                              |   |
| ITEM                  1.                                                          | Business.                                                                                                                                                | 2      |
| ITEM                  1A.                                                         | Risk                  Factors.                                                                                                                           | 20     |
| ITEM                  1B.                                                         | Unresolved                  Staff Comments.                                                                                                              | 26     |
| ITEM                  2.                                                          | Properties.                                                                                                                                              | 26     |
| ITEM                  3.                                                          | Legal                  Proceedings.                                                                                                                      | 27     |
| ITEM                  4.                                                          | Submission                  of Matters to a Vote of Security Holders.                                                                                    | 27     |
|                                                                              | **PART                  II**                                                                                                                             |   |
| ITEM                  5.                                                          | Market                  for the Registrant’s Common Stock, Related Stockholder Matters and Issuer                  Purchases of Equity Securities. | 28     |
| ITEM                  6.                                                          | Selected                  Financial Data.                                                                                                                | 30     |
| ITEM                  7.                                                          | Management's                  Discussion and Analysis of Financial Condition and Results of                  Operations*.*                               | 31     |
| ITEM                  7A.                                                         | Quantitative                  and Qualitative Disclosures About Market Risk.                                                                             | 50     |
| ITEM                  8.                                                          | Financial                  Statements and Supplementary Data.                                                                                            | 52     |
| ITEM                  9.                                                          | Changes                  in and Disagreements with Accountants on Accounting and Financial                  Disclosure.                                  | 52     |
| ITEM                  9A.                                                         | Controls                  and Procedures.                                                                                                                | 52     |
| ITEM                  9B.                                                         | Other                  Information.                                                                                                                      | 53     |
|                                                                              | **PART                  III**                                                                                                                            |   |
| ITEM                  10.                                                         | Directors                  and Executive Officers of the Registrant.                                                                                     | 54     |
| ITEM                  11.                                                         | Executive                  Compensation.                                                                                                                 | 54     |
| ITEM                  12.                                                         | Security                  Ownership of Certain Beneficial Owners and Management and Related                  Stockholder Matters.                        | 54     |
| ITEM                  13.                                                         | Certain                  Relationships and Related Transactions.                                                                                         | 54     |
| ITEM                  14.                                                         | Principal                  Accountant Fees and Services.                                                                                                 | 54     |
|                                                                              | **PART                  IV**                                                                                                                             |   |
| ITEM                  15.                                                         | Exhibits                  and Financial Statement Schedules.                                                                                             | 55     |
| Signatures.                                                                       | 59                                                                                                                                                       |
| Index                  to the Consolidated Financial                  Statements. | F-1                                                                                                                                                      |

----

*Table            of Contents*

**PART        I**

**ITEM        1. Business.**

***OUR        BUSINESS***

***Introduction***

*Southern        Union*
*Company*
*(Panhandle        Eastern Pipe Line)*
*Panhandle        Energy*
*LNG*
*CCE        Holdings*
*Transwestern*
*Florida        Gas*

***Recent        Acquisitions and Divestiture -***

***Acquisition        of Sid Richardson Energy Services -***
*Sid        Richardson Bridge Loan*
*ESSI*

----

*Table            of Contents*

***Disposition        of the Rhode Island Operations of New England Gas Company        -***

***Disposition        of PG Energy -***

*Accounting        for the Impairment or Disposal of Long-Lived Assets*
*Item        7. Management’s Discussion and Analysis of Financial Condition and Results of        Operations - Results of Operations - Federal and State Income Taxes from        Continuing Operations*

***Investment        in CCE Holdings -***
*CrossCountry        Energy*
*ONEOK*
*Citrus*
*FERC*
*Earnings        from unconsolidated investments*

***Acquisition        of Panhandle Energy -***

***Sale        of Texas Operations -***
*Texas        Operations*
*discontinued        operations*
*assets        held for sale*

----

*Table            of Contents*

***BUSINESS        SEGMENTS***

***Reportable        Segments***

| ·   | The                Transportation and Storage segment, which is primarily engaged in                the                interstate transportation and storage of natural gas from gas producing                areas in Texas, Oklahoma, Colorado, the Gulf of Mexico and the Gulf                Coast                to markets throughout the Midwest, Southwest to California and to                Florida,                and also provides LNG terminalling and regasification services. Its                operations are conducted through Panhandle Energy and the Company’s equity                investment in CCE Holdings; and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | The                Distribution segment, which is primarily engaged in the local distribution                of natural gas in Missouri, Pennsylvania, Massachusetts and Rhode                Island.                Its operations are conducted through the Company’s three regulated utility                divisions: Missouri Gas Energy, PG Energy and New England Gas Company. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*All        Other*
*Item        8. Financial Statements and Supplementary Data, Note 21 - Reportable        Segments*

*Item        7. Management’s Discussion and Analysis of Financial Condition and Results of        Operations - Other matters - Management Agreement*

*EBIT*
*Earnings        from unconsolidated investments*
*Net        earnings available for common stockholders*

| ·   | items                that do not impact net earnings from continuing operations, such                as                extraordinary items, discontinued operations and the impact of accounting                changes; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | income                taxes; |
|--------------------|------------------------------|
| ·   | interest;                and |
|--------------------|------------------------------|
| ·   | dividends                on preferred stock. |
|--------------------|----------------------------------------------|

----

*Table            of Contents*

***Transportation        and Storage Segment***

***Services***

*Earnings        from unconsolidated investments*

***Panhandle        Energy.***
*Panhandle        Eastern Pipe Line)*
*Trunkline*
*Sea        Robin*
*.*
*Southwest        Gas Storage*
*Trunkline        LNG*
*Bcf/d*

***Investment        in CCE Holdings.***

----

*Table            of Contents*

*Earnings        from unconsolidated investments*

*TBtu*

|                                                                                                                                                                                          |   |   |   |   |   | **Year                  Ended**   |   |   |   | **Six                  Months Ended** |   |   |   | **Year                  Ended** |   |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|-----------------------------------|--------|--------|--------|---------------------------------------|--------|--------|--------|---------------------------------|--------|--------|--------|
|                                                                                                                                                                                          |   |   |   |   |   | **December                  31,** |   |   |   | **December                  31,**     |   |   |   | **June                  30,**   |   |   |   |
|                                                                                                                                                                                          |   |   |   |   |   | **2005**                          |   |   |   | **2004**                              |   |   |   | **2004**                        |   |   |   |
|                                                                                                                                                                                          |   |   |   |   |   |                              |   |   |   |                                  |   |   |   |                            |   |   |   |
| **Panhandle                  Energy**                                                                                                                                                         |   |   |   |   |   |                              |   |   |   |                                  |   |   |   |                            |   |   |   |
| Panhandle                  Eastern Pipe Line                                                                                                                                                  |   |   |   |   |   |                              |   |   | 609    |                                  |   |   |   |                            | 269    |   |   |   |   |   | 576 |   |
| Trunkline                                                                                                                                                                                     |   |   |   |   |   |                              |   |   | 459    |                                  |   |   |   |                            | 267    |   |   |   |   |   | 564 |   |
| Sea                  Robin                                                                                                                                                                    |   |   |   |   |   |                              |   |   | 146    |                                  |   |   |   |                            | 94     |   |   |   |   |   | 182 |   |
| Trunkline                  LNG Usage Volumes                                                                                                                                                  |   |   |   |   |   |                              |   |   | 108    |                                  |   |   |   |                            | 92     |   |   |   |   |   | 217 |   |
|                                                                                                                                                                                          |   |   |   |   |   |                              |   |   |   |                                  |   |   |   |                            |   |   |   |   |   |   |   |   |
| **CCE                  Holdings**    (1)                                                                                                                                       |   |   |   |   |   |                              |   |   |   |                                  |   |   |   |                            |   |   |   |   |   |   |   |   |
| Transwestern                                                                                                                                                                                  |   |   |   |   |   |                              |   |   | 589    |                                  |   |   |   |                            | N/A    |   |   |   |   |   | N/A |   |
| Florida                  Gas                                                                                                                                                                  |   |   |   |   |   |                              |   |   | 699    |                                  |   |   |   |                            | N/A    |   |   |   |   |   | N/A |   |
|                                                                                                                                                                                          |   |   |   |   |   |                              |   |   |   |                                  |   |   |   |                            |   |   |   |   |   |   |   |   |
| (1)                   Represents                  100 percent of Transwestern and Florida Gas versus the Company's                  effective                  equity ownership interest |
|                     of 50 percent and 25 percent, respectively.                                                                                                                     |   |   |   |   |   |                              |   |   |   |                                  |   |   |   |                            |   |   |   |   |   |   |   |   |

----

*Table            of Contents*

| **Panhandle                    Energy**                                                                                                        |   |   |   |   |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|  Approximate                  Total Miles of Pipelines                                                                                    |   |   |   |   |   |   |   |
| Panhandle                    Eastern Pipe Line                                                                                                 |   |   |   |   | 6,500  |   |
| Trunkline                                                                                                                                      |   |   |   |   | 3,500  |   |
| Sea                    Robin                                                                                                                   |   |   |   |   | 450    |   |
| Peak                    Day Delivery Capacity (Bcf/d)                                                                                          |   |   |   |   |   |   |
| Panhandle                    Eastern Pipe Line                                                                                                 |   |   |   |   | 2.8    |   |
| Trunkline                                                                                                                                      |   |   |   |   | 1.5    |   |
| Sea                    Robin                                                                                                                   |   |   |   |   | 1.0    |   |
| Trunkline                    LNG                                                                                                               |   |   |   |   | 1.3    |   |
| Underground                    Storage Capacity-Owned (Bcf)                                                                                    |   |   |   |   | 72     |   |
| Underground                    Storage Capacity-Leased (Bcf)                                                                                   |   |   |   |   | 16     |   |
| Trunkline                    LNG Terminal Storage Capacity (Bcf)                                                                               |   |   |   |   | 6.3    |   |
| Average                    Number of Transportation Customers                                                                                  |   |   |   |   | 500    |   |
| Weighted                    Average Remaining Life of Firm Transportation Contracts                                                            |   |   |   |   |   |   |
| Panhandle                    Eastern Pipe Line                                                                                                 |   |   |   |   | 3.0    |   |
| Trunkline                                                                                                                                      |   |   |   |   | 10.5   |   |
| Sea                    Robin   (1)                                                                                                   |   |   |   |   | 1.0    |   |
| Weighted                    Average Remaining Life of Firm Storage Contracts                                                                   |   |   |   |   |   |   |
| Panhandle                    Eastern Pipe Line                                                                                                 |   |   |   |   | 2.5    |   |
| Trunkline                                                                                                                                      |   |   |   |   | 0.3    |   |
|                                                                                                                                           |   |   |   |   |   |   |
| **CCE                    Holdings (100 percent)**(2)                                                                                           |   |   |   |   |   |   |
| Approximate                    Total Miles of Pipelines                                                                                        |   |   |   |   |   |   |
| Transwestern                                                                                                                                   |   |   |   |   | 2,500  |   |
| Florida                    Gas                                                                                                                 |   |   |   |   | 5,000  |   |
| Peak                    Day Delivery Capacity (Bcf/d)                                                                                          |   |   |   |   |   |   |
| Transwestern                                                                                                                                   |   |   |   |   | 2.1    |   |
| Florida                    Gas                                                                                                                 |   |   |   |   | 2.1    |   |
| Average                    Number of Transportation Customers                                                                                  |   |   |   |   |   |   |
| Transwestern                                                                                                                                   |   |   |   |   | 55     |   |
| Florida                    Gas                                                                                                                 |   |   |   |   | 110    |   |
| Weighted                    Average Remaining Life of Firm Transportation Contracts                                                            |   |   |   |   |   |   |
| Transwestern                                                                                                                                   |   |   |   |   | 3.6    |   |
| Florida                    Gas                                                                                                                 |   |   |   |   | 10.3   |   |
|                                                                                                                                           |   |   |   |   |   |   |
| (1)                      Sea Robin firm transportation contracts have a one-year remaining                    life but are evergreen |   |   |   |
|                       and are tied to the life of the gas reserves.                                                                  |   |   |   |   |   |   |
|  (2) Represents                  100 percent of Transwestern and Florida Gas versus the Company's                  effective         |   |   |   |
|                       equity ownership interest of 50 percent and 25 percent,                    respectively.                       |   |   |   |   |   |

***System        Enhancements - Completed or Under Construction.***
*Bcf/d*
*Bcf*
*Phase        I*

----

*Table            of Contents*

*Phase        II*

*MMcf/d*

*Item        7. Management Discussion and Analysis of Financial Condition and Results        of        Operations - Business Strategy*

***Significant        Customers.***

|                                             |   | **Percent                    of**             |   | Weighted                                 |   |        |      |   |   |
|--------------------------------------------------|--------|----------------------------------------------------|--------|------------------------------------------|--------|--------|-----------|--------|--------|
|                                             |   | **Revenues**                                  |   | **average                    life**      |   |   |      |   |   |
|                                             |   | **For                    Year Ended**         |   | **of                    contracts at**   |   |   |      |   |   |
| **Customer**                                     |   | **December                    31, 2005 (5)**  |   | **December                    31, 2005** |   |   |      |   |   |
|                                             |   |                                          |   |                                     |   |   |      |   |   |
| BG                    LNG Services (1)           |   |                                               | 17     | %                                        |   | 18.1   |      |   |   |
| ProLiance                                        |   |                                               | 16     |                                     |   | 2.7    |      |   |   |
| Ameren                    Corp (2)               |   |                                               | 11     |                                     |   | 0.4    |  (4) |   |   |
| CMS                    Energy and affiliates (3) |   |                                               | 8      |                                     |   | 3.3    |      |   |   |
| Other                    top 10 customers        |   |                                               | 14     |                                     |   | N/A    |      |   |   |
| Remaining                    customers           |   |                                               | 34     |                                     |   | N/A    |      |   |   |
| Total                    percentage              |   |                                               | 100    | %                                        |   |   |      |   |   |

| (1)   | BG                LNG Services’ contracts will expand with the completion of Phase I and                Phase II. Phase I is currently expected to be completed late in the                first                quarter or early second quarter 2006. Phase II is expected to be                completed                by mid-2006. Phase I will provide an annual increase of gross reservation                revenues of approximately $39 million, $6 million of which was realized                during 2005 due to the expanded vaporization capacity associated                with the                Phase I project. Phase II will provide additional annual gross revenues                of                approximately $22 million. (See *Item                8. Financial Statements and Supplementary Data, Note 16 - Regulation                and                Rates*).                BG LNG Services’ transportation contract with Trunkline will increase in                volume proportionally with the Phase I and Phase II expansions and                is                expected to increase reservation revenues by $8 million and $5 million,                respectively, from 2005 firm transport levels. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)   | Primarily                these Ameren Corp subsidiaries are Union Electric, Central Illinois                Light                Company, Illinois Power and Central Illinois Public Service. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)   | Primarily                Consumers Energy contracts that originally were set to expire in                late 2005                but were amended and extended to 2008. These amended contracts will                result                in a reduction in CMS Energy’s revenue contribution to Panhandle Energy in                calendar year 2006, the first full year of effectiveness. If the                new                contract had been in effect for the full year ended December 31,                2005,                Panhandle Energy’s operating revenues would have been approximately $9                million lower. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4)   | In                February 2006, certain expiring contracts with Ameren were renewed.                These                renewed contracts have a weighted average remaining life of 9.3                years. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5)   | Panhandle                Energy has no single customer, or group of customers under common                control,                which accounted for ten percent or more of the Company’s total                consolidated operating revenues. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

|                                                  |   | **Percent                    of**            |   |   |   |                                     |   |   |   |
|-------------------------------------------------------|--------|----------------------------------------------|--------|--------|--------|------------------------------------------|--------|--------|--------|
|                                                  |   | **Transwestern's**                           |   |   |   |                                     |   |   |   |
|                                                  |   | **Total                    Operating**       |   |   |   | **Remaining**                            |   |   |   |
|                                                  |   | **Revenues**                                 |   |   |   | **average                    life**      |   |   |   |
|                                                  |   | **For                    Year Ended**        |   |   |   | **of                    contracts at**   |   |   |   |
| **Customer**                                          |   | **December                    31, 2005 (1)** |   |   |   | **December                    31, 2005** |   |   |   |
|                                                  |   |                                         |   |   |   |                                     |   |   |   |
| Southern                    California Gas Company    |   |                                         | 24     | %      |   |                                     |   |   | 4.2    |   |
| BP                    Energy                          |   |                                         | 14     |   |   |                                     |   |   | 4.0    |   |
| Pacific                    Gas & Electric Company |   |                                         | 11     |   |   |                                     |   |   | 1.2    |   |
| Other                    top 10 customers             |   |                                         | 29     |   |   |                                     |   |   | N/A    |   |
| Remaining                    customers                |   |                                         | 22     |   |   |                                     |   |   | N/A    |   |
| Total                    percentage                   |   |                                         | 100    | %      |   |                                     |   |   |   |   |
|                                                  |   |                                         |   |   |   |                                     |   |   |   |   |

| (1)   | The                Company accounts for its investment in CCE Holdings using the equity                method. Accordingly, it reports its share of CCE Holdings’ earnings,                including the Company’s share of Transwestern’s revenues, within                *Earnings                from unconsolidated investments*in                the Consolidated Statement of Operations. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                          |   | **Percent                    of**            |   |   |   |                                     |   |   |   |
|-----------------------------------------------|--------|----------------------------------------------|--------|--------|--------|------------------------------------------|--------|--------|--------|
|                                          |   | **Florida                    Gas'**          |   |   |   |                                     |   |   |   |
|                                          |   | **Total                    Operating**       |   |   |   | **Remaining**                            |   |   |   |
|                                          |   | **Revenues**                                 |   |   |   | **average                    life**      |   |   |   |
|                                          |   | **For                    Year Ended**        |   |   |   | **of                    contracts at**   |   |   |   |
| **Customer**                                  |   | **December                    31, 2005 (1)** |   |   |   | **December                    31, 2005** |   |   |   |
|                                          |   |                                         |   |   |   |                                     |   |   |   |
| Florida                    Power & Light  |   |                                         | 42     | %      |   |                                     |   |   | 9.4    |   |
| Tampa                    Electric/Peoples Gas |   |                                         | 16     |   |   |                                     |   |   | 11.0   |   |
| Other                    top 10 customers     |   |                                         | 26     |   |   |                                     |   |   | N/A    |   |
| Remaining                    customers        |   |                                         | 16     |   |   |                                     |   |   | N/A    |   |
| Total                    percentage           |   |                                         | 100    | %      |   |                                     |   |   |   |   |
|                                          |   |                                         |   |   |   |                                     |   |   |   |   |

| (1)   | The                Company accounts for its investment in CCE Holdings using the equity                method. Accordingly, it reports its share of CCE Holdings’ earnings,                including the Company’s share of Florida Gas’ revenues, within                *Earnings                from unconsolidated investments*                in                the Consolidated Statement of Operations. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Item        7. Management’s Discussion and Analysis - Results of Operations - Business        Segment Results - Transportation and Storage*
*Item        8. Financial Statements and Supplementary Data, Note 21 - Reportable Segments.        *

----

*Table            of Contents*

***Regulation        and Rates***

*        Item        1A. Risk Factors - Risks That Relate to the Company’s Transportation*
*        Storage Segment *
*        Item        8. Financial Statements and Supplementary Data, Note 16 - Regulation and        Rates.*

|                                           |   | **Date                    of Last** |   |                                                                                                                                                                |
|------------------------------------------------|--------|-------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Company**                                    |   | **Rate                    Filing**  |   | **Status**                                                                                                                                                          |
|                                           |   |                                |   |                                                                                                                                                                |
| Panhandle                    Eastern Pipe Line |   | May                    1992         |   | Settlement                    effective April 1997                                                                                                                  |
| Trunkline                                      |   | January                    1996     |   | Settlement                    effective May 2001                                                                                                                    |
| Sea                    Robin                   |   | April                    2001       |   | Settlement                    effective May 2002                                                                                                                    |
| Trunkline                    LNG               |   | June                    2001        |   | Settlement                    effective January 2002                                                                                                                |
| Southwest                    Gas Storage       |   | April                    1989       |   | Settlement                    effective October 1989                                                                                                                |
| Transwestern                                   |   | November                    1992    |   | Settlement                    effective April 1994; expected to file for new rates proposed                    to be                    effective November 2006     |
| Florida                    Gas                 |   | October                    2003     |   | Settlement                    effective March 2005; moratorium in effect until October 2007,                    required to                    file by October 2009 |

*Item        8. Financial Statements and Supplementary Data, Note 16 - Regulation and        Rates.*

***Competition***

----

*Table            of Contents*

***Distribution        Segment***

***Services***

*MMcf*

----

*Table            of Contents*

*Item        7. Management’s Discussion and Analysis - Results of Operations - Business        Segment Results - Distribution Segment*
*Item        8. Financial Statements and Supplementary Data, Note 21 - Reportable        Segments.*

***Missouri        Gas Energy.***
*MPSC*
*Item        1. Business - Business Segments - Distribution Segment - Regulation and        Rates*
*.*

***PG        Energy.***
*PPUC*
*Item        1. Business - Business Segments - Distribution Segment - Regulation and        Rates*
*.*

***New        England Gas Company.***
*RIPUC*
*MDTE*
*Item        1. Business - Business Segments - Distribution Segment - Regulation and        Rates*

----

*Table            of Contents*

|                                                                          |   |                                |    | **Six**                             |   |                                        |   |     |    |
|-------------------------------------------------------------------------------|--------|-------------------------------------|---------|-------------------------------------|--------|---------------------------------------------|--------|----------|---------|
|                                                                          |   | **Year                    Ended**   |    | **Months                    Ended** |   |                                        |   |     |    |
|                                                                          |   | **December                    31,** |    | **December                    31,** |   | **Years                    ended June 30,** |   |
|                                                                          |   | **2005**                            |    | **2004**                            |   | **2004**                                    |   | **2003** |    |
| Average                    number of customers:                               |   |                                |    |                                |   |                                        |   |     |    |
| Residential                                                              |   |                                | 432,627 |                                |   | 429,292                                     |   |     | 432,037 |   |   | 430,861 |   |
| Commercial                                                               |   |                                | 62,908  |                                |   | 61,273                                      |   |     | 61,957  |   |   | 60,774 |   |
| Industrial                                                               |   |                                | 101     |                                |   | 98                                          |   |     | 95      |   |   | 99 |   |
|  Total                    average customers served                       |   |                                | 495,636 |                                |   | 490,663                                     |   |     | 494,089 |   |   | 491,734 |   |
| Transportation                    customers                              |   |                                | 931     |                                |   | 879                                         |   |     | 786     |   |   | 461 |   |
|  Total                    average gas sales and transportation customers |   |                                | 496,567 |                                |   | 491,542                                     |   |     | 494,875 |   |   | 492,195 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Gas                    sales in millions of cubic feet (MMcf):                |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|  Residential                                                             |   |                                | 35,094  |                                |   | 10,837                                      |   |     | 36,880  |   |   | 39,821 |   |
|  Commercial                                                              |   |                                | 15,335  |                                |   | 5,082                                       |   |     | 16,026  |   |   | 17,399 |   |
|  Industrial                                                              |   |                                | 467     |                                |   | 152                                         |   |     | 338     |   |   | 391 |   |
|  Gas                    sales billed                                     |   |                                | 50,896  |                                |   | 16,071                                      |   |     | 53,244  |   |   | 57,611 |   |
|  Net                    change in unbilled gas sales                     |   |                                | 308     |                                |   | 3,503                                       |   |     | 112     |   |   | 61 |   |
|  Total                    gas sales                                      |   |                                | 51,204  |                                |   | 19,574                                      |   |     | 53,356  |   |   | 57,672 |   |
|  Gas                    transported                                      |   |                                | 26,165  |                                |   | 11,721                                      |   |     | 25,761  |   |   | 26,893 |   |
|  Total                    gas sales and gas transported                  |   |                                | 77,369  |                                |   | 31,295                                      |   |     | 79,117  |   |   | 84,565 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Gas                    sales revenues (In thousands of dollars):         |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|  Residential                                                             |   | $                                   | 441,897 |                                | $      | 139,086                                     |   | $        | 395,350 |   | $ | 337,293 |   |
|  Commercial                                                              |   |                                | 183,202 |                                |   | 58,054                                      |   |     | 163,826 |   |   | 138,676 |   |
|  Industrial                                                              |   |                                | 9,633   |                                |   | 1,923                                       |   |     | 3,943   |   |   | 3,930 |   |
|  Gas                    revenues billed                                  |   |                                | 634,732 |                                |   | 199,063                                     |   |     | 563,119 |   |   | 479,899 |   |
|  Net                    change in unbilled gas sales revenues            |   |                                | 19,413  |                                |   | 38,124                                      |   |     | 2,024   |   |   | 3,434 |   |
|  Total                    gas sales revenues                             |   |                                | 654,145 |                                |   | 237,187                                     |   |     | 565,143 |   |   | 483,333 |   |
|  Gas                    transportation revenues                          |   |                                | 10,202  |                                |   | 4,095                                       |   |     | 8,702   |   |   | 8,439 |   |
|  Other                    revenues                                       |   |                                | 7,665   |                                |   | 4,261                                       |   |     | 7,013   |   |   | 5,017 |   |
| Total                    operating revenues                                   |   | $                                   | 672,012 |                                | $      | 245,543                                     |   | $        | 580,858 |   | $ | 496,789 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Weather:                                                                      |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Degree                    days (a)                                       |   |                                | 4,621   |                                |   | 1,669                                       |   |     | 4,770   |   |   | 5,105 |   |
| Percent                    of 10-year measure (b)                        |   |                                | 89      | %                                   |   | 81                                          | %      |     | 92      | % |   | 98 | % |
| Percent                    of 30-year measure (b)                        |   |                                | 89      | %                                   |   | 82                                          | %      |     | 92      | % |   | 98 | % |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |

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*Table            of Contents*

|                                                                          |   |                                |    | **Six**                             |   |                                        |   |     |    |
|-------------------------------------------------------------------------------|--------|-------------------------------------|---------|-------------------------------------|--------|---------------------------------------------|--------|----------|---------|
|                                                                          |   | **Year                    Ended**   |    | **Months                    Ended** |   |                                        |   |     |    |
|                                                                          |   | **December                    31,** |    | **December                    31,** |   | **Years                    ended June 30,** |   |
|                                                                          |   | **2005**                            |    | **2004**                            |   | **2004**                                    |   | **2003** |    |
| Average                    number of customers:                               |   |                                |    |                                |   |                                        |   |     |    |
| Residential                                                              |   |                                | 143,019 |                                |   | 142,152                                     |   |     | 142,422 |   |   | 141,769 |   |
| Commercial                                                               |   |                                | 14,735  |                                |   | 14,469                                      |   |     | 14,384  |   |   | 14,141 |   |
| Industrial                                                               |   |                                | 118     |                                |   | 115                                         |   |     | 116     |   |   | 120 |   |
| Public                    authorities and other                          |   |                                | 347     |                                |   | 345                                         |   |     | 340     |   |   | 337 |   |
|  Total                    average customers served                       |   |                                | 158,219 |                                |   | 157,081                                     |   |     | 157,262 |   |   | 156,367 |   |
| Transportation                    customers                              |   |                                | 575     |                                |   | 586                                         |   |     | 602     |   |   | 613 |   |
|  Total                    average gas sales and transportation customers |   |                                | 158,794 |                                |   | 157,667                                     |   |     | 157,864 |   |   | 156,980 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Gas                    sales in millions of cubic feet (MMcf):                |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|  Residential                                                             |   |                                | 16,667  |                                |   | 4,649                                       |   |     | 17,133  |   |   | 18,372 |   |
|  Commercial                                                              |   |                                | 6,631   |                                |   | 2,130                                       |   |     | 6,505   |   |   | 6,732 |   |
|  Industrial                                                              |   |                                | 377     |                                |   | 150                                         |   |     | 379     |   |   | 376 |   |
|  Public                    authorities and other                         |   |                                | 314     |                                |   | 99                                          |   |     | 290     |   |   | 334 |   |
|  Gas                    sales billed                                     |   |                                | 23,989  |                                |   | 7,028                                       |   |     | 24,307  |   |   | 25,814 |   |
|  Net                    change in unbilled gas sales                     |   |                                | (159    | )                                   |   | 1,955                                       |   |     | 34      |   |   | 4 |   |
|  Total                    gas sales                                      |   |                                | 23,830  |                                |   | 8,983                                       |   |     | 24,341  |   |   | 25,818 |   |
|  Gas                    transported                                      |   |                                | 23,935  |                                |   | 11,679                                      |   |     | 26,007  |   |   | 28,366 |   |
|  Total                    gas sales and gas transported                  |   |                                | 47,765  |                                |   | 20,662                                      |   |     | 50,348  |   |   | 54,184 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Gas                    sales revenues (thousands of dollars):            |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|  Residential                                                             |   | $                                   | 207,823 |                                | $      | 60,119                                      |   | $        | 183,941 |   | $ | 175,337 |   |
|  Commercial                                                              |   |                                | 76,554  |                                |   | 23,699                                      |   |     | 62,407  |   |   | 56,730 |   |
|  Industrial                                                              |   |                                | 4,158   |                                |   | 1,512                                       |   |     | 3,376   |   |   | 2,895 |   |
|  Public                    authorities and other                         |   |                                | 3,542   |                                |   | 1,057                                       |   |     | 2,676   |   |   | 2,667 |   |
|  Gas                    revenues billed                                  |   |                                | 292,077 |                                |   | 86,387                                      |   |     | 252,400 |   |   | 237,629 |   |
|  Net                    change in unbilled gas sales revenues            |   |                                | 6,514   |                                |   | 20,310                                      |   |     | 929     |   |   | 135 |   |
|  Total                    gas sales revenues                             |   |                                | 298,591 |                                |   | 106,697                                     |   |     | 253,329 |   |   | 237,764 |   |
|  Gas                    transportation revenues                          |   |                                | 12,861  |                                |   | 5,968                                       |   |     | 13,872  |   |   | 15,389 |   |
|  Other                    revenues                                       |   |                                | 1,197   |                                |   | 523                                         |   |     | 1,713   |   |   | 1,515 |   |
| Total                    operating revenues                                   |   | $                                   | 312,649 |                                | $      | 113,188                                     |   | $        | 268,914 |   | $ | 254,668 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Weather:                                                                      |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Degree                    days (a)                                       |   |                                | 6,288   |                                |   | 2,301                                       |   |     | 6,240   |   |   | 6,654 |   |
| Percent                    of 10-year measure (b)                        |   |                                | 103     | %                                   |   | 100                                         | %      |     | 103     | % |   | 109 | % |
| Percent                    of 30-year measure (b)                        |   |                                | 100     | %                                   |   | 98                                          | %      |     | 100     | % |   | 106 | % |

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*Table              of Contents*

|                                                                          |   |                                |    | **Six**                             |   |                                        |   |     |    |
|-------------------------------------------------------------------------------|--------|-------------------------------------|---------|-------------------------------------|--------|---------------------------------------------|--------|----------|---------|
|                                                                          |   | **Year                    Ended**   |    | **Months                    Ended** |   |                                        |   |     |    |
|                                                                          |   | **December                    31,** |    | **December                    31,** |   | **Years                    ended June 30,** |   |
|                                                                          |   | **2005**                            |    | **2004**                            |   | **2004**                                    |   | **2003** |    |
| Average                    number of customers:                               |   |                                |    |                                |   |                                        |   |     |    |
| Residential                                                              |   |                                | 269,463 |                                |   | 270,051                                     |   |     | 269,926 |   |   | 268,312 |   |
| Commercial                                                               |   |                                | 25,455  |                                |   | 25,358                                      |   |     | 25,798  |   |   | 25,442 |   |
| Industrial                    and irrigation                             |   |                                | 205     |                                |   | 207                                         |   |     | 226     |   |   | 225 |   |
| Public                    authorities and other                          |   |                                | 53      |                                |   | 50                                          |   |     | 47      |   |   | 41 |   |
|  Total                    average customers served                       |   |                                | 295,176 |                                |   | 295,666                                     |   |     | 295,997 |   |   | 294,020 |   |
| Transportation                    customers                              |   |                                | 1,538   |                                |   | 1,248                                       |   |     | 1,242   |   |   | 1,462 |   |
|  Total                    average gas sales and transportation customers |   |                                | 296,714 |                                |   | 296,914                                     |   |     | 297,239 |   |   | 295,482 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Gas                    sales in millions of cubic feet (MMcf):                |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|  Residential                                                             |   |                                | 23,154  |                                |   | 6,633                                       |   |     | 24,194  |   |   | 25,481 |   |
|  Commercial                                                              |   |                                | 9,449   |                                |   | 2,669                                       |   |     | 9,753   |   |   | 9,725 |   |
|  Industrial                    and irrigation                            |   |                                | 2,135   |                                |   | 1,234                                       |   |     | 1,968   |   |   | 2,055 |   |
|  Public                    authorities and other                         |   |                                | 21      |                                |   | 9                                           |   |     | 25      |   |   | 28 |   |
|  Gas                    sales billed                                     |   |                                | 34,759  |                                |   | 10,545                                      |   |     | 35,940  |   |   | 37,289 |   |
|  Net                    change in unbilled gas sales                     |   |                                | (119    | )                                   |   | 3,074                                       |   |     | (1,366  | ) |   | 1,336 |   |
|  Total                    gas sales                                      |   |                                | 34,640  |                                |   | 13,619                                      |   |     | 34,574  |   |   | 38,625 |   |
|  Gas                    transported                                      |   |                                | 9,392   |                                |   | 3,859                                       |   |     | 9,080   |   |   | 10,959 |   |
|  Total                    gas sales and gas transported                  |   |                                | 44,032  |                                |   | 17,478                                      |   |     | 43,654  |   |   | 49,584 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Gas                    sales revenues (thousands of dollars):            |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|  Residential                                                             |   | $                                   | 341,329 |                                | $      | 97,734                                      |   | $        | 307,534 |   | $ | 290,370 |   |
|  Commercial                                                              |   |                                | 127,102 |                                |   | 35,509                                      |   |     | 111,712 |   |   | 97,091 |   |
|  Industrial                    and irrigation                            |   |                                | 24,494  |                                |   | 11,581                                      |   |     | 16,542  |   |   | 15,045 |   |
|  Public                    authorities and other                         |   |                                | 425     |                                |   | 193                                         |   |     | 437     |   |   | 511 |   |
|  Gas                    revenues billed                                  |   |                                | 493,350 |                                |   | 145,017                                     |   |     | 436,225 |   |   | 403,017 |   |
|  Net                    change in unbilled gas sales revenues            |   |                                | 8,427   |                                |   | 36,914                                      |   |     | 5,231   |   |   | (12,657 | ) |
|  Total                    gas sales revenues                             |   |                                | 501,777 |                                |   | 181,931                                     |   |     | 441,456 |   |   | 390,360 |   |
|  Gas                    transportation revenues                          |   |                                | 15,021  |                                |   | 5,952                                       |   |     | 11,835  |   |   | 14,906 |   |
|  Other                    revenues                                       |   |                                | 1,813   |                                |   | 2,732                                       |   |     | 1,343   |   |   | 2,242 |   |
| Total                    operating revenues                                   |   | $                                   | 518,611 |                                | $      | 190,615                                     |   | $        | 454,634 |   | $ | 407,508 |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
|                                                                          |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Weather:                                                                      |   |                                |    |                                |   |                                        |   |     |    |   |   |   |   |
| Degree                    days (a)                                       |   |                                | 5,801   |                                |   | 2,004                                       |   |     | 5,644   |   |   | 6,143 |   |
| Percent                    of 10-year measure (b)                        |   |                                | 106     | %                                   |   | 98                                          | %      |     | 102     | % |   | 111 | % |
| Percent                    of 30-year measure (b)                        |   |                                | 101     | %                                   |   | 96                                          | %      |     | 98      | % |   | 107 | % |

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*Table            of Contents*

***Gas        Supply***

***Competition***

----

*Table            of Contents*

***Regulation        and Rates***

*Item        8. Financial Statements and Supplementary Data, Note 16 - Regulation and        Rates.*

----

*Table            of Contents*

|                                   |   |                                |   |                                                                                                           |
|----------------------------------------|--------|-------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|
|                                   |   | **Date                    of Last** |   |                                                                                                           |
| **Company**                            |   | **Rate                    Filing**  |   | **Status**                                                                                                     |
|                                   |   |                                |   |                                                                                                           |
| Missouri                    Gas Energy |   | September                    2004   |   | Effective                    October 2004; potentially may file new rate case in April                    2006 |
| PG                    Energy           |   | December                    2000    |   | Effective                    January 2001; potentially may file new rate case in April                    2006 |
| New                    England Gas     |   | May                    2002         |   | Effective                    July 2002                                                                         |
|                                   |   |                                |   |                                                                                                           |

***OTHER        MATTERS***

***Environmental***

*        Item        8. Financial Statements and Supplementary Data, Note 18 - Commitments and        Contingencies*

***Insurance***

----

*Table            of Contents*

***Employees***

|                                             |   | **Number                    of employees**   |   | **Expiration                    of**    |   |
|--------------------------------------------------|--------|----------------------------------------------|--------|-----------------------------------------|--------|
| **Company**                                      |   | **Represented                    by Unions** |   | **Current                    Contract** |   |
|                                             |   |                                         |   |                                    |   |
| Missouri                    Gas                  |   |                                         |   |                                    |   |
| Gas                    Workers 781               |   | 193                                          |   | April                    30, 2009       |   |
| IBEW                    Local 53                 |   | 97                                           |   | April                    30, 2009       |   |
| PACE                    Local 5-267              |   | 28                                           |   | April                    30, 2009       |   |
| USW                    Local 12561, 14228        |   | 139                                          |   | April                    30, 2009       |   |
|                                             |   |                                         |   |                                    |   |
| PG                    Energy                     |   |                                         |   |                                    |   |
| IBEW                    Local 2244               |   | 57                                           |   | July                    31, 2006        |   |
| UWUA                    Local 406, 407, 408, 529 |   | 117                                          |   | March                    31, 2007       |   |
|                                             |   |                                         |   |                                    |   |
| Panhandle                    Energy              |   | 226                                          |   | May                    28, 2006         |   |
|                                             |   |                                         |   |                                    |   |
| New                    England Gas               |   |                                         |   |                                    |   |
| UWUA                    Local 472, 431           |   | 133                                          |   | April                    1, 2006        |   |
| USWA                    Local 12431-01, 12431-02 |   | 285                                          |   | May                    24, 2007         |   |
|                                             |   |                                         |   |                                    |   |

***Available        Information***

*SEC*

*Code*

----

*Table            of Contents*

*Guidelines*

**ITEM        1A. Risk Factors**

***RISKS        THAT RELATE TO SOUTHERN UNION***

***Southern        Union has substantial debt and depends on its ability to access the capital        markets.***

***Credit        ratings downgrades would increase the Company’s financing costs and limit its        ability to access the capital markets.***

----

*Table            of Contents*

***The        Company’s growth strategy entails risk for investors.***

| ·   | examine                and potentially acquire regulated or unregulated businesses, including                transportation and storage assets and gathering and processing businesses                within the natural gas industry; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | enter                into joint venture agreements and/or other transactions with other                industry participants or financial investors; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | selectively                divest parts of its business, including parts of its core operations;                and |
|--------------------|---------------------------------------------------------------------------------------------------------------------|
| ·   | continue                expanding its existing operations. |
|--------------------|------------------------------------------------------------|
| ·   | its                success in bidding for the opportunities; |
|--------------------|--------------------------------------------------------------|
| ·   | its                ability to assess the risks of the opportunities; |
|--------------------|----------------------------------------------------------------------|
| ·   | its                ability to obtain regulatory approvals on favorable terms; and |
|--------------------|-----------------------------------------------------------------------------------|
| ·   | its                access to financing on acceptable terms. |
|--------------------|-------------------------------------------------------------|
| ·   | the                risk of diverting management's attention from day-to-day operations; |
|--------------------|-----------------------------------------------------------------------------------------|
| ·   | the                risk that the acquired businesses will require substantial capital                and                financial investments; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | the                risk that the investments will fail to perform in accordance with                expectations; and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------|
| ·   | the                risk of substantial difficulties in the transition and integration                process. |
|--------------------|---------------------------------------------------------------------------------------------------------------|

***The        Company depends on distributions from its subsidiaries and joint ventures        to        meet its needs.***

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*Table            of Contents*

***The        Company is subject to operating risks.***

***The        Company is subject to extensive federal, state and local laws and regulations        regulating the environmental aspects of its business that may increase its        costs        of operation, expose it to environmental liabilities and require it to make        material unbudgeted expenditures.***

*SPCC*

***Terrorist        attacks, such as the attacks that occurred on September 11, 2001, have        resulted in increased costs, and the consequences of the War on Terror and        the        Iraq conflict may adversely impact the Company’s results of        operations.***

----

*Table            of Contents*

***The        Internal Revenue Service may challenge the like-kind exchange treatment the        Company has taken or expects to take.***

***RISKS        THAT RELATE TO THE COMPANY’S TRANSPORTATION AND STORAGE        BUSINESS***

***The        Company’s transportation and storage business is highly regulated.***

***The        pipeline businesses are subject to competition.***

----

*Table            of Contents*

***The        success of the pipeline businesses depends, in part, on factors beyond the        Company’s control.***

| ·   | future                weather conditions, including those that favor alternative energy                sources; |
|--------------------|-----------------------------------------------------------------------------------------------------------------|
| ·   | the                market price of natural gas; |
|--------------------|-------------------------------------------------|
| ·   | price                competition; |
|--------------------|-----------------------------------|
| ·   | drilling                activity and supply availability; |
|--------------------|-----------------------------------------------------------|
| ·   | the                expiration of significant contracts; |
|--------------------|---------------------------------------------------------|
| ·   | service                area competition; and |
|--------------------|----------------------------------------------|
| ·   | regulatory                actions. |
|--------------------|------------------------------------|

***The        success of the pipelines depends on the continued development of additional        natural gas reserves in the vicinity of their facilities and their ability        to        access additional reserves to offset the natural decline from existing wells        connected to their systems.***

***Fluctuations        in energy commodity prices could adversely affect the pipeline        businesses.***

***The        pipeline businesses are dependent on a small number of customers for a        significant percentage of their sales.***

***The        pipeline revenues are generated under contracts that must be renegotiated        periodically.***

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*Table            of Contents*

***The        Company is exposed to the credit risk of its transportation and storage        customers in the ordinary course of business.***

***Substantial        risks are involved in operating a natural gas pipeline system.***

***The        inability to continue to access Tribal lands could adversely affect the        Company’s ability to operate its pipeline system and the inability to recover        the cost of right-of-way grants on tribal lands could adversely affect its        financial results.***

***The        Company’s assets and operations can be affected by weather and other natural        phenomena.***

***RISKS        THAT RELATE TO THE COMPANY’S DISTRIBUTION BUSINESS***

***The        distribution business is highly regulated.***

----

*Table            of Contents*

***The        distribution business’ operating results and liquidity needs are seasonal in        nature and can fluctuate based on weather conditions and natural gas        prices.***

***The        Company’s revenues, operating results and financial condition may fluctuate with        the distribution business’ ability to achieve timely and effective rate relief        from state regulators.***

***CAUTIONARY        FACTORS THAT MAY AFFECT FUTURE RESULTS***

| ·   | changes                in demand for natural gas by the Company’s customers, in the composition                of the Company’s customer base and in the sources of natural gas available                to the Company; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | the                effects of inflation and the                timing and extent of changes in the prices and overall demand for                and                availability of natural gas as well as electricity, oil, coal and                other                bulk materials and chemicals; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | adverse                weather conditions, such as warmer than normal weather in the Company’s                service territories, and the operational impact of natural disasters                such                as Hurricanes Katrina and Rita; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | changes                in laws or regulations, third-party relations and approvals, decisions                of                courts, regulators and governmental bodies                affecting or involving Southern Union, including deregulation initiatives                and the impact of rate and tariff proceedings before FERC and various                state regulatory commissions; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | the                speed and degree to which additional competition is introduced to                Southern                Union’s business and the resulting effect on revenues; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | the                outcome of pending and future litigation; |
|--------------------|--------------------------------------------------------------|
| ·   | the                Company’s ability to comply with or to challenge successfully existing or                new environmental regulations; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | unanticipated                environmental liabilities; |
|--------------------|---------------------------------------------------------|
| ·   | risks                relating to Southern Union’s recent acquisition of the Sid Richardson                Energy Services business, including without limitation, the Company’s                increased indebtedness resulting from that                acquisition; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | risks                relating to the completion of Southern Union’s pending divestitures of PG                Energy and the Rhode Island assets of New England Gas                Company; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | the                Company’s ability to acquire new businesses and assets and integrate those                operations into its existing operations, as well as its ability to                expand                its existing businesses and facilities; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | the                Company’s ability to control costs successfully and achieve operating                efficiencies, including the purchase and implementation of new                technologies for achieving such efficiencies; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | the                impact of factors affecting operations such as maintenance or repairs,                environmental incidents, gas pipeline system constraints and relations                with labor unions representing bargaining-unit employees; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | exposure                to customer concentration with a significant portion of revenues                realized                from a relatively small number of customers and any credit risks                associated with the financial position of those                customers; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | changes                in the ratings of the debt securities of Southern Union or any of                its                subsidiaries; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | changes                in interest rates and other general capital markets conditions, and                in                the Company’s ability to continue to access the capital                markets; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | acts                of nature, sabotage, terrorism or other acts causing damage greater                than                the Company’s insurance coverage limits; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | market                risks beyond the Company’s control affecting its risk management                activities including market liquidity, commodity price volatility                and                counterparty creditworthiness; and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | other                risks and unforeseen events.  |
|--------------------|---------------------------------------------------------|

**ITEM        1B. Unresolved Staff Comments.**

**ITEM        2. Properties.**

***TRANSPORTATION        AND STORAGE***

*Item        1. Business - Business Segments - Transportation and Storage Segment*

***DISTRIBUTION***

*Item        1. Business - Business Segments - Distribution Segment *

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*Table            of Contents*

***OTHER***

**ITEM        3. Legal Proceedings.**

*Item        1. Business -*
*Regulation        and Rates,*
*Item        7. Management’s Discussion and Analysis of Results of Operations and        Financial*
*Condition*
*Item        8. Financial Statements and Supplementary Data, Notes to Consolidated Financial        Statements*
*Cautionary        Factors That May Affect Future Results.*

**ITEM        4. Submission of Matters to a Vote of Security        Holders.**

----

*Table            of Contents*

**PART        II**

**ITEM        5. Market for the Registrant’s Common Equity, Related        Stockholder Matters and Issuer Purchases of Equity        Securities.**

***MARKET        INFORMATION***

|                                          |   |   |   | **$/Share** |
|-----------------------------------------------|--------|--------|--------|-------------|
|                                          |   |   |   | **High**    |   | **Low** |
|                                          |   |   |   |        |   |   |   |   |   |   |
| January                    1 to March 3, 2006 |   |   | $25.21 |        |   |   | $23.05 |   |
|                                          |   |   |   |        |   |   |   |   |   |   |
| (Quarter                    Ended)            |   |   |   |        |   |   |   |   |   |   |
| December                    31, 2005          |   |   |   |        | 26.29 |   |   |   | 21.66 |   |
| September                    30, 2005         |   |   |   |        | 25.82 |   |   |   | 23.35 |   |
| June                    30, 2005              |   |   |   |        | 24.33 |   |   |   | 21.80 |   |
| March                    31, 2005             |   |   |   |        | 25.48 |   |   |   | 20.77 |   |
|                                          |   |   |   |        |   |   |   |   |   |   |
| (Quarter                    Ended)            |   |   |   |        |   |   |   |   |   |   |
| December                    31, 2004          |   |   |   |        | 23.78 |   |   |   | 19.52 |   |
| September                    30, 2004         |   |   |   |        | 19.67 |   |   |   | 17.14 |   |
| June                    30, 2004              |   |   |   |        | 19.37 |   |   |   | 17.12 |   |
| March                    31, 2004             |   |   |   |        | 17.91 |   |   |   | 16.10 |   |
|                                          |   |   |   |        |   |   |   |   |   |   |

***HOLDERS***

***DIVIDENDS***

*Item        8. Financial Statements and Supplementary Data, Note 13 - Debt and Capital        Leases.*

----

*Table            of Contents*

***EQUITY        COMPENSATION PLANS***

*1992        Plan*

|                                                  | **Number                  of Securities** |                                     | **Number                  of Securities**      |
|-------------------------------------------------------|-------------------------------------------|------------------------------------------|------------------------------------------------|
|                                                  | **to                  be issued Upon**    | **Weighted-Average**                     | **Remaining                  Available for**   |
|                                                  | **Exercise                  of**          | **Exercise                  Price of**   | **Future                  Issuance Under**     |
| **Plan                  Category**                    | **Outstanding                  Options**  | **Outstanding                  Options** | **Equity                  Compensation Plans** |
|  Plans                  approved by stockholders |  2,759,037                           |  15.64                              |  6,246,939                                |

|   **Period**  |   |  **Total                    number of shares purchased** |   |   **Average                    price paid per share** |   | **Total                    number of shares purchased as part of publicly announced plans                    or                    programs** |   | **Maximum                    number (or approximate dollar value) of shares that may yet be                    purchased                    under the plans or programs** |
|------------------------------|--------|---------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         |   |                                                          |   |                                                            |   |                                                                                                                                          |   |                                                                                                                                                                      |
|                         |   |                                                          |   |                                                            |   |                                                                                                                                          |   |                                                                                                                                                                      |
| 11/9/2005                    |   | 649,343                                                       |   | $23.15                                                          |   | N/A                                                                                                                                           |   | N/A                                                                                                                                                                       |
|                         |   |                                                          |   |                                                            |   |                                                                                                                                          |   |                                                                                                                                                                      |

----

*Table            of Contents*

**ITEM        6. Selected Financial Data. **

|                                                     |   | **As                    of and for the**                               |      | **As                    of and for the** |   |                                                          |   |                            |      |                            |   |                            |   |
|----------------------------------------------------------|--------|------------------------------------------------------------------------|-----------|------------------------------------------|--------|---------------------------------------------------------------|--------|---------------------------------|-----------|---------------------------------|--------|---------------------------------|--------|
|                                                     |   | **year                    ended**                                      |      | **six                    months ended**  |   |                                                          |   |                            |      |                            |   |                            |   |
|                                                     |   | **December                    31,**                                    |      | **December                    31,**      |   | **As                    of and for the years ended June 30,** |   |
|                                                     |   | **2005**                                                               |      | **2004                    (a)**          |   | **2004**                                                      |   | **2003                    (b)** |      | **2002                    (c)** |   | **2001                    (d)** |   |
|                                                     |   | (In                    thousands of dollars, except per share amounts) |      |
|                                                     |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |
| Total                    operating revenues              |   | $                                                                      | 2,019,430 |                                     | $      | 794,338                                                       |   | $                               | 1,799,774 |                            | $      | 1,188,500                       |   | $ | 980,614 |   | $ | 1,461,811 |   |
| Earnings                    from unconsolidated          |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |   |   |   |   |   |   |
| investments                                              |   |                                                                   | 70,742    |                                     | $      | 4,745                                                         |   | $                               | 200       |                            | $      | 422                             |   | $ | 1,420 |   | $ | 83 |   |
| Net                    earnings:                         |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |   |   |   |   |   |   |
| Continuing                    operations (e)             |   |                                                                   | 3,318     |                                     |   | 6,088                                                         |   |                            | 101,339   |                            |   | 43,669                          |   |   | 1,520 |   |   | 40,159 |   |
| Discontinued                    operations (f)           |   |                                                                   | -         |                                     |   | -                                                             |   |                            | -         |                            |   | 32,520                          |   |   | 18,104 |   |   | 16,524 |   |
| Available                    for common stockholders     |   |                                                                   | 3,318     |                                     |   | 6,088                                                         |   |                            | 101,339   |                            |   | 76,189                          |   |   | 19,624 |   |   | 57,285 |   |
| Net                    earnings per diluted              |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |   |   |   |   |   |   |
| common                    share (g):                     |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |   |   |   |   |   |   |
| Continuing                    operations                 |   |                                                                   | 0.03      |                                     |   | 0.07                                                          |   |                            | 1.24      |                            |   | 0.66                            |   |   | 0.02 |   |   | 0.60 |   |
| Discontinued                    operations               |   |                                                                   | -         |                                     |   | -                                                             |   |                            | -         |                            |   | 0.49                            |   |   | 0.28 |   |   | 0.25 |   |
| Available                    for common stockholders     |   |                                                                   | 0.03      |                                     |   | 0.07                                                          |   |                            | 1.24      |                            |   | 1.15                            |   |   | 0.30 |   |   | 0.85 |   |
| Total                    assets                          |   |                                                                   | 5,836,819 |                                     |   | 5,568,289                                                     |   |                            | 4,572,458 |                            |   | 4,590,938                       |   |   | 2,680,064 |   |   | 2,907,299 |   |
| Stockholders’                    equity            |   |                                                                   | 1,854,069 |                                     |   | 1,497,557                                                     |   |                            | 1,261,991 |                            |   | 920,418                         |   |   | 685,346 |   |   | 721,857 |   |
| Current                    portion of long-term debt and |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |   |   |   |   |   |   |
| capital                    lease obligation              |   |                                                                   | 126,648   |                                     |   | 89,650                                                        |   |                            | 99,997    |                            |   | 734,752                         |   |   | 108,203 |   |   | 5,913 |   |
| Long-term                    debt and capital lease      |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |   |   |   |   |   |   |
| obligation,                    excluding current portion |   |                                                                   | 2,049,141 |                                     |   | 2,070,353                                                     |   |                            | 2,154,615 |                            |   | 1,611,653                       |   |   | 1,082,210 |   |   | 1,329,631 |   |
| Company-obligated                    mandatorily         |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |   |   |   |   |   |   |
| redeemable                    preferred securities       |   |                                                                   |      |                                     |   |                                                          |   |                            |      |                            |   |                            |   |   |   |   |   |   |   |
| of                    subsidiary trust                   |   |                                                                   | -         |                                     |   | -                                                             |   |                            | -         |                            |   | 100,000                         |   |   | 100,000 |   |   | 100,000 |   |
| Common                    stock dividends (h)            |   |                                                                   | -         |                                     |   | -                                                             |   |                            | -         |                            |   | -                               |   |   | - |   |   | - |   |

| (a)   | The                Company’s investment in CCE Holdings, which is accounted for using the                equity method, was included in the Company’s Consolidated Balance Sheet at                December 31, 2004. The Company’s share of net income from CCE Holdings has                been recorded as *Earnings                from unconsolidated investments*                in                the Company’s Consolidated Statement of Operations since its acquisition                on November 17, 2004. For these reasons, the Consolidated Statement                of                Operations for the periods subsequent to such acquisition is not                comparable to the year of acquisition. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b)   | Panhandle                Energy was acquired on June 11, 2003 and was accounted for as a purchase.                The Panhandle Energy assets were included in the Company's Consolidated                Balance Sheet at June 30, 2003 and its results of operations have                been                included in the Company's Consolidated Statement of Operations since                its                acquisition on June 11, 2003. For these reasons, the Consolidated                Statement of Operations for the periods subsequent to such acquisition                is                not comparable to the year of                acquisition. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (c)   | Effective                July 1, 2001, the Company ceased amortization of goodwill pursuant                to the                FASB Statement No. 142,*Accounting for Goodwill and Other Intangible Assets.*Goodwill,                which was previously classified on the Consolidated Balance Sheet                as                additional purchase cost assigned to utility plant and amortized                on a                straight-line basis over forty years, is now subject to at least                an annual                assessment for impairment by applying a fair-value based test.                Additionally, during the year ended June 30, 2002, the Company recorded                an                after-tax restructuring charge of $9 million. See *Item                8. Financial Statements and Supplementary Data, Note 7 - Goodwill                and                Intangibles*                and *Note                14 - Employee Benefits*. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (d)   | The                New England operations, formed through the acquisition of Providence                Energy Corporation and Fall River Gas Company on September 28, 2000,                and                Valley Resources, Inc. on September 20, 2000, were accounted for                as a                purchase. Their assets are included in the Company's Consolidated                Balance                Sheet at June 30, 2001 and their results of operations have been                included                in the Company's Consolidated Statement of Operations since their                respective acquisition dates. For these reasons, the Consolidated                Statement of Operations for the periods subsequent to such acquisitions                is                not comparable to the year of                acquisition. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (e)   | Net                earnings from continuing operations are net of dividends on preferred                stock of $17.4 million, $8.7 million and $12.7 million for the year                ended                December 31, 2005, the six months ended December 31, 2004 and the                year                ended June 30, 2004, respectively. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (f)   | On                January 1, 2003, ONEOK acquired the Company’s Texas Operations, which are                accounted for as discontinued operations in the Consolidated Statement                of                Operations for the respective periods presented in this document.                In                accordance with generally accepted accounting principles, *Net                earnings from discontinued operations*                do                not include any allocation of interest expense or other corporate                costs.                At the time of the sale, all outstanding debt of Southern Union Company                and subsidiaries was maintained at the corporate level, and no debt                was                assumed by ONEOK. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (g) | Earnings                  per share for all periods presented were computed based on the                  weighted                  average number of shares of common stock and common stock equivalents                  outstanding during the period adjusted for the five percent stock                  dividends distributed on September 1, 2005, August 31, 2004, July                  31,                  2003, July 15, 2002 and August 30,                  2001. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (h) | No                  common stock cash dividends were paid during the periods reported.                  See                  *Item                  5. Market for Registrant’s Common Equity, Related Stockholder Matters and                  Issuer Purchases of Equity Securities -                  Dividends.* |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

**ITEM        7. Management's Discussion and Analysis of Financial        Condition and Results of Operations.**

***INTRODUCTION***

***OVERVIEW***

*Item      1. Business*

***BUSINESS      STRATEGY***

| ·   | *Effectively                managing the Company’s substantial base of energy infrastructure assets.*Southern                Union will continue to focus on increasing utilization and cost savings                while making prudent capital expenditures across its base of interstate                transmission assets. Since the Company’s acquisition of Panhandle Energy                and CCE Holdings’ acquisition of CrossCountry Energy, the Company has been                successful in reducing costs while integrating back-office and support                functions within the Company. Further, Southern Union will continue                to                focus each of its regulated operating units on meeting their allowable                rates of return by managing operating costs and capital spending,                without                sacrificing customer safety or quality of service. When appropriate,                the                Company will continue to seek rate increases within its interstate                transmission and gas distribution operations. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | *Maintaining                an investment grade rating and credit profile while growing the business.*The                Company will continue to pursue opportunities to enhance its credit                profile through further diversification of both regulated and unregulated                cash flow and earnings sources and reduce its ratio of total debt                to total                capital over time in order to strengthen the Company’s balance sheet and                financial flexibility. In this regard, Southern Union’s acquisition of                Panhandle Energy in June 2003, CCE Holdings’ acquisition of                CrossCountry Energy in November 2004 and the acquisition of the Sid                Richardson Energy Services business in March 2006 diversified the                Company’s regulated and nonregulated cash flow and earnings sources. In                addition, the Company’s use of common stock, preferred stock and equity                units offerings and use of free cash flow has reduced the Company’s                indebtedness and enhanced its financial strength. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | *Expanding                through development of the Company’s existing businesses.*To                complement the organic growth of its existing operations, the Company                will                continue to pursue growth opportunities through the expansion of                its                existing asset base. (See *Item                1A. Risk Factors*).                Following                is a summary of ongoing or planned expansion growth opportunities. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                       |                              | **Estimated**                         | **Estimated**                      |                                         | **Company**    | **Project**                                   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|---------------------------------------|------------------------------------|----------------------------------------------|----------------|-----------------------------------------------|
|                                                                                                                                                                                                       |                              | **Project**                           | **Annual**                         | **Projected**                                | **Ownership**  | **Status                  at**                |
| **Project                  Name**                                                                                                                                                                          | **Capacity**                      | **Cost                  (1)**         | **EBIT**                           | **In                  Service**              | **Percentage** | **December                  31, 2005**        |
|                                                                                                                                                                                                       |                              | (In                  thousands)       |                               |                                         |           |
| **Projects                  Related to Consolidated Operations**                                                                                                                                           |                              |                                  |                               |                                         |           |                                          |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |
| Trunkline                  LNG Phase I                                                                                                                                                                     | .57                  Bcf/d        | $137,000                              | $28,000                            | Late                  first quarter or early | 100%           | Vaporization                  in service,     |
|                                                                                                                                                                                                       | 2.7                  Bcf storage  |                                  |                               | second                  quarter 2006         |           | remainder                  under construction |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |
| Trunkline                  LNG Phase II                                                                                                                                                                    | .6                  Bcf/d         | $82,000                               | $16,000                            | Mid                  2006                    | 100%           | Under                  construction           |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |
| Trunkline                  North Texas                                                                                                                                                                     | .3                  to .6 Bcf/d   | $90,000                  to $110,000  | (2)                                | Late                  2007                   | 100%           | Customer                  negotiations        |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |
| Trunkline                  LNG Infrastructure                                                                                                                                                              | Ambient                  Air      | $250,000                  to $280,000 | (2)                                | Mid                  2008                    | 100%           | Customer                  negotiations        |
| Enhancement                  Project (IEP)                                                                                                                                                                 | Vaporization                  and |                                  |                               |                                         |           |                                          |
|                                                                                                                                                                                                       | NGL                  extraction   |                                  |                               |                                         |           |                                          |
| **Projects                  Related to Unconsolidated Investments**                                                                                                                                        |                              |                                  |                               |                                         |           |                                          |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |
| Florida                  Gas Phase VII                                                                                                                                                                     | .1                  to .16 Bcf/d  | $60,000                  to $100,000  | $6,000                  to $14,000 | Mid                  2007                    | 25%            | Filed                  with the FERC          |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |
| Transwestern                  Phoenix Expansion (3)                                                                                                                                                        | .5                  Bcf/d         | $500,000                  to $600,000 | (2)                                | Early                  2008                  | 50%            | Commencing                  development       |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |
| (1)                  Excludes capitalized interest and equity costs.                                                                                                                                       |                              |                                  |                               |                                         |
| (2)                  Amount is not currently determinable as related contractual discussions                  are ongoing and/or the project economic analyses are still being                  developed. |
| (3)                  Project scope and structure under discussion with CCE Holdings                  members.                                                                                              |                              |                                  |                               |
|                                                                                                                                                                                                       |                              |                                  |                               |                                         |           |                                          |

| ·   | *Selectively                  acquiring businesses primarily within the natural gas ind**ustry.*The                  Company’s strategy for long-term growth includes acquiring assets that                  will position it favorably in the evolving North American natural                  gas                  markets. Consistent with the Company’s acquisition of Panhandle Energy,                  CCE Holdings’ acquisition of CrossCountry Energy and the March 1, 2006                  acquisition of the Sid Richardson Energy Services business, the                  Company                  will continue to evaluate opportunities within the North American                  energy                  sector that will optimize stockholder value. As part of that evaluation,                  the Company seeks to balance its ability to integrate newly acquired                  assets** **with                  its ability to maintain an investment grade rating while providing                  growth                  in earnings and cash flow. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***RESULTS      OF OPERATIONS***

***Overview***

*See      Item 1. Business - Business Segments. *

----

*Table            of Contents*

*EBIT*
*Earnings      from unconsolidated investments*

*Net      earnings available for common stockholders*

|                                                                     |   | **Year                  Ended December 31,** |    | **Six                  Months Ended December 31,** |   | **Years                  Ended June 30,** |   |
|--------------------------------------------------------------------------|--------|----------------------------------------------|---------|----------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                     |   |                                         |    | **2004**                                           |   |                                           |   | **2003** |   |   |   |  |   |
|                                                                     |   | **2005**                                     |    | **(Unaudited)**                                    |   |  **2004**                            |   | **(Unaudited)** |   |  **2004** |   |  **2003** |   |
|                                                                     |   | **(In                  thousands)**          |    |
| EBIT:                                                                    |   |                                         |    |                                               |   |                                      |   |   |   |   |   |   |   |
| Transportation                  and storage segment                      |   | $                                            | 281,344 |                                               | $      | 198,422                                   |   | $ | 94,971 |   | $ | 96,212 |   | $ | 200,912 |   | $ | 9,699 |   |
| Distribution                  segment                                    |   |                                         | (43,928 | )                                                  |   | 106,178                                   |   |   | 19,330 |   |   | 34,953 |   |   | 120,838 |   |   | 144,971 |   |
| Corporate                  and other                                     |   |                                         | (10,699 | )                                                  |   | (23,685                                   | )      |   | (20,705 | ) |   | (7,488 | ) |   | (10,755 | ) |   | 6,095 |   |
| Total                  EBIT                                              |   |                                         | 226,717 |                                               |   | 280,915                                   |   |   | 93,596 |   |   | 123,677 |   |   | 310,995 |   |   | 160,765 |   |
| Interest                                                                 |   |                                         | 135,157 |                                               |   | 126,166                                   |   |   | 64,898 |   |   | 66,600 |   |   | 127,867 |   |   | 83,343 |   |
| Dividends                  on preferred securities of subsidiary trust   |   |                                         | -       |                                               |   | -                                         |   |   | - |   |   | - |   |   | - |   |   | 9,480 |   |
| Earnings                  from continuing operations before income taxes |   |                                         | 91,560  |                                               |   | 154,749                                   |   |   | 28,698 |   |   | 57,077 |   |   | 183,128 |   |   | 67,942 |   |
| Federal                  and state income taxes                          |   |                                         | 70,877  |                                               |   | 60,668                                    |   |   | 13,927 |   |   | 22,362 |   |   | 69,103 |   |   | 24,273 |   |
| Net                  earnings from continuing operations                 |   |                                         | 20,683  |                                               |   | 94,081                                    |   |   | 14,771 |   |   | 34,715 |   |   | 114,025 |   |   | 43,669 |   |
|                                                                     |   |                                         |    |                                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  earnings from discontinued operations               |   |                                         | -       |                                               |   | -                                         |   |   | - |   |   | - |   |   | - |   |   | 32,520 |   |
| Preferred                  stock dividends                               |   |                                         | 17,365  |                                               |   | 17,365                                    |   |   | 8,683 |   |   | 4,004 |   |   | 12,686 |   |   | - |   |
|                                                                     |   |                                         |    |                                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  earnings available for common stockholders          |   | $                                            | 3,318   |                                               | $      | 76,716                                    |   | $ | 6,088 |   | $ | 30,711 |   |  $ | 101,339 |   | $ | 76,189 |   |
|                                                                     |   |                                         |    |                                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |

***Year      ended December 31, 2005 versus the year ended December 31,      2004.***
* *

----

*Table            of Contents*

***Six-month      period ended December 31, 2004 versus the six-month period ended December 31,      2003.***
*** ***
*Earnings      from unconsolidated investments*

***Year      ended June 30, 2004 versus the year ended June 30, 2003.***

***Business      Segment Results***

***Transportation      and Storage Segment.***
** **

*      Item      1A. Risk Factors - Risks that Relate to the Company’s Transportation and Storage      Segment, *
*Item      1. Business - Business Segments - Transportation and Storage      Segment*
*.      *

*Item      1. Business - Business Segments - Transportation and Storage      Segment*

----

*Table            of Contents*

|                                                      |   | **Years                  Ended**    |    | **Six                  Months Ended** |   | **Years                  Ended** |   |
|-----------------------------------------------------------|--------|-------------------------------------|---------|---------------------------------------|--------|----------------------------------|--------|
|                                                      |   | **December                  31,**   |    | **December                  31,**     |   | **June                  30,**    |   |
|                                                      |   |                                |    | **2004**                              |   |                             |   | **2003** |   |   |   |   |   |
| **Transportation                  and Storage Segment**   |   | **2005**                            |    | **(Unaudited)**                       |   | **2004**                         |   | **(Unaudited)** |   | **2004** |   | **2003** |   |
|                                                      |   | **(In                  thousands)** |    |
|                                                      |   |                                |    |                                  |   |                             |   |   |   |   |   |   |   |
| Operating                  revenues                       |   | $                                   | 505,233 |                                  | $      | 489,164                          |   | $ | 242,743 |   | $ | 244,473 |   | $ | 490,883 |   | $ | 24,522 |   |
|                                                      |   |                                |    |                                  |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                  expenses                       |   |                                | 204,711 |                                  |   | 212,106                          |   |   | 109,796 |   |   | 107,796 |   |   | 210,105 |   |   | 10,102 |   |
| Depreciation                  and amortization            |   |                                | 62,171  |                                  |   | 56,989                           |   |   | 30,159 |   |   | 33,158 |   |   | 59,988 |   |   | 3,197 |   |
| Taxes                  other than on income and revenues  |   |                                | 28,196  |                                  |   | 26,867                           |   |   | 12,667 |   |   | 13,089 |   |   | 27,288 |   |   | 1,595 |   |
| Total                  operating income                   |   |                                | 210,155 |                                  |   | 193,202                          |   |   | 90,121 |   |   | 90,430 |   |   | 193,502 |   |   | 9,628 |   |
| Earnings                  from unconsolidated investments |   |                                | 70,618  |                                  |   | 4,861                            |   |   | 4,761 |   |   | 90 |   |   | 200 |   |   | 7 |   |
| Other                  income (expense), net              |   |                                | 571     |                                  |   | 359                              |   |   | 89 |   |   | 5,692 |   |   | 7,210 |   |   | 64 |   |
| EBIT                                                      |   | $                                   | 281,344 |                                  | $      | 198,422                          |   | $ | 94,971 |   | $ | 96,212 |   | $ | 200,912 |   | $ | 9,699 |   |
|                                                      |   |                                |    |                                  |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |

*      Item      1. Business - Business Segments - Transportation and Storage      Segment*

***Year      ended December 31, 2005 versus the year ended December 31, 2004.***

| ·   | Higher                transportation and storage revenue of approximately $11.5 million                primarily due to: |
|--------------------|--------------------------------------------------------------------------------------------------------------------------|

| o   | An                $8.8 million increase on Panhandle Eastern Pipe Line, reflecting                higher                average reservation rates on new contracts; |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | A                $7.4 million increase in Trunkline reservation revenues primarily                related                to the pipeline loop facilities extending from the Trunkline LNG                terminal,                which went into service in the third quarter of                2005. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Decreased                commodity revenues on Trunkline of $2.3 million due to a reduction                in                commodity volumes of six percent resulting from lower market spreads;                and |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Impacts                of Hurricane Rita, which significantly reduced volumes flowing on                Sea                Robin and caused shutdowns of liquids production, resulting in                approximately $3 million of revenue decreases. Management estimates                further revenue reductions of approximately $2 million will be experienced                in 2006 as a result of the hurricanes, plus an estimated $8 million                to $12                million in lost opportunity revenues from delayed LNG expansion in-service                dates which were affected by the hurricanes and other technical                issues; |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                LNG terminalling revenue of $6 million primarily due to expanded                vaporization capacity and a base capacity increase on the BG LNG                contract,                partially offset by lower volumes resulting from fewer                cargoes; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A                reduction in certain administrative and operating expenses of                approximately $6.9 million primarily due to synergies associated                with the                workforce reduction undertaken in the fourth quarter of 2004 associated                with the integration of CrossCountry Energy,                LLC; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A                decrease of approximately $3.8 million in operating expenses due                to a                change in vacation pay practice and a corresponding accrual                reduction; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A                decrease of approximately $3.4 million of benefit costs primarily                due to                headcount reductions and lower postretirement costs due to enactment                of                Medicare Part D reimbursements; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Incurrence                of approximately $1.7 million of severance-related costs in 2004                associated with the CrossCountry Energy integration;                and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Lower                LNG power costs of approximately $1.5 million due to lower LNG volumes                received in 2005. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

| ·   | The                higher net recovery of previously under-recovered fuel volumes of                approximately $4.2 million in 2004; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                expense of approximately $7 million of damages directly associated                with                Hurricanes Katrina and Rita; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                depreciation and amortization of $5.2 million primarily due to normal                property, plant and equipment growth of approximately $2 million                and a                $3.2 million acquisition adjustment recorded by Southern Union in                2004                reducing customer contracts value and related amortization;                and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | An                increase of $1.4 million in property tax assessments related to higher                utility income. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------|

***Six-month      period ended December 31, 2004 versus the six-month period ended December 31,      2003.***

| ·   | Recognition                of a $6.1 million non-recurring gain in 2003 on the early extinguishment                of debt; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------|

| ·   | Reservation                revenues were $4.6 million lower in 2004 primarily due to the replacement                of expired Trunkline contracts during 2004 at lower average reservation                rates than were in effect in 2003 due to market driven                factors; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | LNG                terminalling revenues were $1.6 million lower due to decreased volumes                received; |
|--------------------|--------------------------------------------------------------------------------------------------------------------|

| ·   | Net                commodity revenues increased in 2004 by $4.1 million primarily due                to                higher parking revenue of $6.5 million, partially offset by the impact                of                a six percent reduction in throughput volumes associated with a cooler                winter during 2003 versus 2004. Commodity revenues are dependent                upon a                number of variable factors, including weather, storage levels and                customer                demand for firm, interruptible and parking                services; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Operating                expenses were higher by $2 million in 2004 primarily due to increased                insurance and severance-related costs of $3 million and $1.7 million,                respectively, partially offset by the net over-recovery of approximately                $2 million in 2004 of previously under-recovered fuel volumes and                a $1.3                million reduction in contract storage expenses due to a reduction                in                contracted storage capacity; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Decrease                in depreciation and amortization expense of $3 million in 2004 versus                2003                was primarily due to preliminary purchase price allocations used                in 2003                that were subsequently revised in 2004;                and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Realization                of equity earnings from CCE Holdings of $4.6 million for the period                subsequent to the acquisition on November 17,                2004. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Year      ended June 30, 2004 versus the year ended June 30, 2003.***

***Distribution      Segment.***
** **
*Item      1. Business - Business Segments - Distribution Segment*
*      Item      1A. Risk Factors - Risks that Relate to the Company’s Distribution      Segment.*

----

*Table            of Contents*

|                                                                                                                                                                                                                                      |   | **Years                  Ended**    |    | **Six                  Months Ended** |   | **Years                  Ended** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|---------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                                                                                                                      |   | **December                  31,**   |    | **December                  31,**     |   | **June                  30,**    |   |
|                                                                                                                                                                                                                                      |   |                                |    | **2004**                              |   |                             |   | **2003** |   |   |   |   |   |
| **Distribution                  Segment**                                                                                                                                                                                                 |   | **2005**                            |    | **(Unaudited)**                       |   | **2004**                         |   | **(Unaudited)** |   | **2004** |   | **2003** |   |
|                                                                                                                                                                                                                                      |   | **(In                  thousands)** |    |
|                                                                                                                                                                                                                                      |   |                                |    |                                  |   |                             |   |   |   |   |   |   |   |
| Net                  operating revenue (1)                                                                                                                                                                                                |   | $                                   | 411,547 |                                  | $      | 402,505                          |   | $ | 170,420 |   | $ | 163,288 |   | $ | 395,373 |   | $ | 394,760 |   |
|                                                                                                                                                                                                                                      |   |                                |    |                                  |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                  expense, excluding goodwill impairment                                                                                                                                                                         |   |                                | 201,736 |                                  |   | 209,200                          |   |   | 104,295 |   |   | 89,489 |   |   | 194,394 |   |   | 171,463 |   |
| Depreciation                  and amortization                                                                                                                                                                                            |   |                                | 63,278  |                                  |   | 60,849                           |   |   | 32,511 |   |   | 29,263 |   |   | 57,601 |   |   | 56,396 |   |
| Goodwill                  impairment                                                                                                                                                                                                      |   |                                | 175,000 |                                  |   | -                                |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Taxes                  other than on income and revenues                                                                                                                                                                                  |   |                                | 14,009  |                                  |   | 27,082                           |   |   | 14,218 |   |   | 11,620 |   |   | 24,484 |   |   | 24,139 |   |
| Total                  operating income (loss)                                                                                                                                                                                            |   |                                | (42,476 | )                                     |   | 105,374                          |   |   | 19,396 |   |   | 32,916 |   |   | 118,894 |   |   | 142,762 |   |
| Other                  income (expense), net                                                                                                                                                                                              |   |                                | (1,452  | )                                     |   | 804                              |   |   | (66 | ) |   | 2,037 |   |   | 1,944 |   |   | 2,209 |   |
| EBIT                                                                                                                                                                                                                                      |   | $                                   | (43,928 | )                                     | $      | 106,178                          |   | $ | 19,330 |   | $ | 34,953 |   | $ | 120,838 |   | $ | 144,971 |   |
|                                                                                                                                                                                                                                      |   |                                |    |                                  |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                  Operating revenues for the Distribution segment are reported net                  of                  *Cost                  of gas and other energy*                  and *Revenue-related                  taxes*, |   |                                |    |                                  |   |
|                        which are pass through costs.                                                                                                                                                             |   |                                |    |                                  |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                      |   |                                |    |                                  |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |

*      Item      1. Business - Business Segments - Distribution Segment*

***Year      ended December 31, 2005 versus the year ended December 31, 2004.***

| ·   | Net                operating revenues increased by approximately $9 million primarily                due to                Missouri Gas Energy’s higher average rates in 2005 based on the $22.4                million MPSC base revenue rate order authorization in October                2004; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Operating                expenses were lower by $7.5 million primarily due to the net deferral                of                approximately $6.6 million of pension expense for Missouri Gas Energy                associated with the October 2004 MPSC rate order authorization and                approximately $3.3 million of lower bad debt expense primarily as                a result                of more aggressive collection efforts in 2005, partially offset by                approximately $2.3 million of insurance costs primarily due to higher                claims in 2005; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Depreciation                and amortization were higher by approximately $2.5 million primarily                due                to normal growth in plant and the implementation of certain financial                information systems in the first quarter of 2005;                and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes                other than on income and revenues were approximately $13.1 million                lower                primarily due to property tax refunds for the years 2002 to 2004                received                by Missour Gas Energy during 2005. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Six-month      period ended December 31, 2004 versus the six-month period ended December 31,      2003.***

| ·   | Environmental                site remediation costs were higher in the 2004 period by approximately                $6.6 million primarily due to mercury remediation costs at New England                Gas                Company; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Bad                debt expense increased $3.4 million resulting from the aging of higher                customer receivables due to higher gas                prices; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Outside                service costs increased $2.5 million in the 2004 period for costs                related                to increased collection agency fees, distribution system inspection                fees                and fees associated with Sarbanes-Oxley documentation and compliance                efforts; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | An                increase of $2.3 million in other net operating costs primarily due                to                general wage increases, increased overtime costs associated with                distribution system maintenance and Sarbanes-Oxley related                costs; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                depreciation and amortization expense principally related to a charge                of                $3.2 million taken in the 2004 period to write off certain capitalized                software costs, in addition to normal plant                growth; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes                other than on income and revenues, principally consisting of property,                payroll and state franchise taxes, increased $2.6 million, primarily                due                to a $2 million increase in the 2004 period in property taxes in                the                Company’s Missouri service                territory. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Year      ended June 30, 2004 versus the year ended June 30, 2003.***

| ·   | Pension                and other postretirement benefit costs increased $8.9 million in                the 2004                period primarily due to the impact of stock market volatility on                plan                assets; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Bad                debt expense increased by $6.4 million in the 2004 period due to                higher                customer receivables resulting from increased gas prices;                and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                medical and insurance premiums of $1.6 million and $1.5 million,                respectively. |
|--------------------|------------------------------------------------------------------------------------------------------------------------|

***Corporate      and Other***
* *

*Item      1. Management’s Discussion and Analysis of Financial Condition and Results of      Operations - Other Matters - Management Agreement*

***Year      ended December 31, 2005 versus the year ended December 31, 2004.***

| ·   | Recognition                of a $4.3 million management fee for services provided under the                Management Agreement with CCE                Holdings; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                incurrence in 2004 of a charge of $16.4 million for an                other-than-temporary impairment of the Company’s investment in a                technology company; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A                $1.5 million charge in 2004 related to a sales and use tax                audit; |
|--------------------|---------------------------------------------------------------------------------------------------|

| ·   | A                charge of $3 million recorded by PEI Power Corporation in 2004 to                provide                for estimated debt service payments in excess of projected tax revenues                for the incremental financing obtained for the development of PEI                Power                Park; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Additional                charges of $6.3 million recorded in 2005 to reserve for an                other-than-temporary impairment of the Company’s investments in technology                companies; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Noncash                compensation expense incurred in 2005 totaling $3.8 million related                to                separation agreements with former executives of the Company;                and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                pension expense incurred in 2005 of $3.1 million, including $1.3                million                of curtailment losses from a plan termination and a $1.1 million                curtailment loss associated with a payment obligation to a former                executive of the Company. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

***Six-month      period ended December 31, 2004 versus the six-month period ended December 31,      2003.***

| ·   | A                charge of $16.4 million in 2004 for an other-than-temporary impairment                of                the Company’s investment in a technology company; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A                charge of $1.5 million recorded by PEI Power Corporation in 2004                to                provide for estimated future debt service payments in excess of projected                tax revenues for the tax incremental financing obtained for the                development of PEI Power Park; and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Charges                of $1.6 million and $1.2 million recorded in the 2003 period for                an                other-than-temporary impairment of the Company’s investments in a                technology company and an energy-related joint venture,                respectively. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Year      ended June 30, 2004 versus the year ended June 30, 2003.***

| ·   | Gain                of $22.5 million recorded in fiscal year 2003 on the settlement of                the                Southwest litigation, partially offset by $6 million of related legal                costs; and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Charges                of $3 million recorded by PEI Power Corporation in fiscal year 2004                to                provide for estimated future debt service payments in excess of projected                tax revenues for the tax incremental financing obtained for the                development of PEI Power Park. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Interest      Expense***

***Year      ended December 31, 2005 versus the year ended December 31, 2004.***

| ·   | Increased                interest expense of $3.9 million related to the issuance of the Company’s                4.375% Senior Notes in February                2005; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                interest expense of $6.5 million related to increased costs for borrowings                under the Company’s credit agreements, primarily due to the increase in                the average amount of short-term debt outstanding from $125.8 million                in                2004 to $234.2 million in 2005, principally as a result of increases                in                the cost of natural gas purchased for the Distribution operations,                and the                increase in the average interest rate on such debt from 2.2% in 2004                to                4.0% in 2005; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                interest expense of $373,000 recorded in 2004 related to the $407                million                bridge loan used to finance a portion of the Company’s investment in CCE                Holdings; and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Decreased                interest expense of $2.1 million on the $311.1 million bank note                (*2002                Term Note*)                primarily due to the $76.1 million payoff of the 2002 Term Note in                June                2005. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Six-month      period ended December 31, 2004***
***versus the six-month period ended December 31, 2003.***

| ·   | Dividends                on Preferred Securities decreased $3.2 million due to the redemption                of                the Preferred Securities on October 31, 2003 (see*Item 8. Financial Statements and Supplementary Data, Note 12 - Preferred                Securities*); |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Decreased                interest expense of $530,000 on the 2002 Term Note due to the                principal repayment of $85                million on the 2002 Term Note since December 31,                2003; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                interest expense of $2.7 million recorded in 2004 related to the                $407                million bridge loan used to finance a portion of the Company’s investment                in CCE Holdings; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                interest expense in 2004 on Panhandle Energy’s debt of $801,000 (net of                amortization of debt premiums established in purchase accounting                related                to the Panhandle Energy acquisition);                and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Lower                interest expense on short-term debt primarily due to the decrease                in the                average amount of short-term debt outstanding from $240.3 million                during                2003 to $121.7 million during 2004. The decrease in the average amount                of                short-term debt outstanding was primarily due to cash generated from                operations and the excess proceeds from capital market issuances                over the                amounts used for the redemption of                securities. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

***Year      ended June 30, 2004 versus the year ended June 30, 2003.***

| ·   | Interest                expense of $47.6 million (net of $10.8 million of amortization of                debt                premiums established in purchase accounting related to the Panhandle                Energy acquisition) on Panhandle Energy debt realized for the full                fiscal                year period versus $2.1 million applicable to the post-acquisition                period                of 19 days during fiscal year 2003 ;                and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Dividends                on preferred securities of the Company’s subsidiary trust of $3.2 million,                which were required to be classified as interest expense pursuant                to FASB                Statement No. 150, *Accounting                for Certain Financial Instruments with Characteristics of both Liabilities                and Equity*,                upon adoption by the Company effective July 1, 2003. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Federal      and State Income Taxes from Continuing Operations***

***Year      ended December 31, 2005 versus the year ended December 31,      2004.***
** **

***Six-month      period ended December 31, 2004 versus the six-month period ended December 31,      2003.***

***Year      ended June 30, 2004 versus the year ended June 30, 2003.***

***Disposition      of PG Energy and Rhode Island Operations of New England Gas      Company.***

*Section      1031 of the IRC*

----

*Table            of Contents*

***Net      Earnings from Discontinued Operations***

*Item      1. Business.*

***Preferred      Stock Dividends***

*Item      8. Financial Statements and Supplementary Data, Note 12 - Preferred      Securities*

***LIQUIDITY      AND CAPITAL RESOURCES***

***Operating      Activities***

***Year      ended December 31, 2005 versus the year ended December 31,      2004.***
** **
*Item      7A. Quantitative and Qualitative Disclosures About Market Risk*

----

*Table            of Contents*

***Six-month      period ended December 31, 2004 versus the six-month period ended December 31,      2003.***
*** ***

***Year      ended June 30, 2004 versus the year ended June 30, 2003.***

***Investing      Activities***

***Summary***

----

*Table            of Contents*

|                                                                                                                                                                        |   | **Year**                          |    | **Six                  months**   |   | **Year**                      |   | **Year**                      |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|-------------------------------|--------|-------------------------------|---------|
|                                                                                                                                                                        |   | **Ended**                         |    | **Ended**                         |   | **Ended**                     |   | **Ended**                     |    |
|                                                                                                                                                                        |   | **December                  31,** |    | **December                  31,** |   | **June                  30,** |   | **June                  30,** |    |
| **Property,                  Plant and Equipment Additions**                                                                                                                |   | **2005**                          |    | **2004**                          |   | **2004**                      |   | **2003**                      |    |
|                                                                                                                                                                        |   | (In                  thousands)   |    |
| Transportation                  and Storage Segment                                                                                                                         |   |                              |    |                              |   |                          |   |                          |    |
| LNG                  Terminal Expansions                                                                                                                                    |   | $                                 | 75,263  |                              | $      | 51,751                        |   | $                             | 65,260  |   | $ | - |   |
| Trunkline                  LNG Loop                                                                                                                                         |   |                              | 25,329  |                              |   | 17,647                        |   |                          | 3,675   |   |   | - |   |
| Pipeline                  Integrity                                                                                                                                         |   |                              | 21,816  |                              |   | 11,278                        |   |                          | 18,378  |   |   | - |   |
| System                  Reliability                                                                                                                                         |   |                              | 22,637  |                              |   | 8,296                         |   |                          | 17,179  |   |   | - |   |
| Information                  Technology                                                                                                                                     |   |                              | 6,162   |                              |   | 2,762                         |   |                          | 10,696  |   |   | - |   |
| Other                                                                                                                                                                       |   |                              | 38,208  |                              |   | 20,152                        |   |                          | 16,190  |   |   | 5,128 |  (1) |
| Total                                                                                                                                                                  |   |                              | 189,415 |                              |   | 111,886                       |   |                          | 131,378 |   |   | 5,128 |   |
|                                                                                                                                                                        |   |                              |    |                              |   |                          |   |                          |    |   |   |   |   |
| Distribution                  Segment                                                                                                                                       |   |                              |    |                              |   |                          |   |                          |    |   |   |   |   |
| Missouri                  Safety Program                                                                                                                                    |   |                              | 11,426  |                              |   | 4,653                         |   |                          | 6,878   |   |   | 9,094 |   |
| Other,                  primarily system replacement and expansion                                                                                                          |   |                              | 73,470  |                              |   | 51,789                        |   |                          | 71,913  |   |   | 58,233 |   |
| Total                                                                                                                                                                  |   |                              | 84,896  |                              |   | 56,442                        |   |                          | 78,791  |   |   | 67,327 |   |
|                                                                                                                                                                        |   |                              |    |                              |   |                          |   |                          |    |   |   |   |   |
| Corporate                  and other                                                                                                                                        |   |                              | 2,306   |                              |   | 10,109                        |   |                          | 15,884  |   |   | 7,275 |   |
|                                                                                                                                                                        |   |                              |    |                              |   |                          |   |                          |    |   |   |   |   |
| Total                  (2)                                                                                                                                             |   | $                                 | 276,617 |                              | $      | 178,437                       |   | $                             | 226,053 |   | $ | 79,730 |   |
|                                                                                                                                                                        |   |                              |    |                              |   |                          |   |                          |    |   |   |   |   |
| (1)                  Represents Panhandle Energy's property, plant and equipment additions                  for                  the period from June 12 to June 30, 2003.  |   |                              |    |                              |   |
| (2)                  Includes net capital accruals totaling $(3.1) million, $7.8 million,                  $12.1                  million and $(248,000) for the year ended |   |                              |    |                              |   |                          |
| December                  31, 2005, six-month period ended December 31, 2004 and years ended                  June                  30, 2004 and 2003, respectively.   |   |                              |    |                              |   |                          |
|                                                                                                                                                                        |   |                              |    |                              |   |                          |   |                          |    |   |   |   |   |

***Principal      Capital Expenditure Projects***

*see      Item 7. Management’s Discussion and Analysis of Results of Operations and      Financial Condition - Business Strategy.*

***LNG      Terminal Expansion.***

***Trunkline      LNG Loop***
**.**

***Hurricane-Related      Expenditures.***

----

*Table            of Contents*

***Panhandle      Eastern Pipe Line East End Enhancement.***

***Missouri      Safety Program***
**.**
*Missouri      Safety Program*

***Financing      Activities***

***Summary***

*** ***

----

*Table            of Contents*

***Common      Stock, Equity Units and Preferred Stock Issuances***

*CCE      Holdings Transaction Bridge Loan*

----

*Table            of Contents*

***Debt      Refinancing, Repayment and Issuance Activity***

*Long-Term      Facility*
*Uncommitted      Facilities*
*Senior      Notes*

*LNG      Holdings*

*Panhandle      Tender Offer*
*Panhandle      Calls*

----

*Table            of Contents*

***Debt      Maturities 2006 and Other Debt Matters***

----

*Table            of Contents*

***OTHER      MATTERS***

***Off-Balance      Sheet Arrangements and Aggregate Contractual      Obligations***

|                                                |   | **Contractual                  Obligations (In thousands)** |      |
|-----------------------------------------------------|--------|-------------------------------------------------------------|-----------|
|                                                |   |                                                        |      |   |   |   |   |   |   |   |   |   |   | **2011                  and** |   |
|                                                |   | **Total**                                                   |      | **2006** |   | **2007** |   | **2008** |   | **2009** |   | **2010** |   | **thereafter** |   |
| Long-term                  debt,                    |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |
| including                  capital leases (1) (2)   |   | $                                                           | 2,169,238 |   | $ | 126,648 |   | $ | 457,274 |   | $ | 401,646 |   | $ | 61,998 |   | $ | 41,875 |   | $ | 1,079,797 |   |
| Short-term                  borrowing,              |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| including                  credit facilities (1)    |   |                                                        | 420,000   |   |   | 420,000 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Gas                  purchases (3)                  |   |                                                        | 1,778,806 |   |   | 602,564 |   |   | 444,262 |   |   | 283,041 |   |   | 239,058 |   |   | 185,913 |   |   | 23,968 |   |
| Missouri                  Gas Energy Safety Program |   |                                                        | 144,801   |   |   | 10,453 |   |   | 9,729 |   |   | 9,826 |   |   | 9,924 |   |   | 10,024 |   |   | 94,845 |   |
| Transportation                  contracts           |   |                                                        | 398,014   |   |   | 67,629 |   |   | 66,368 |   |   | 66,368 |   |   | 62,504 |   |   | 48,395 |   |   | 86,750 |   |
| Storage                  contracts (4)              |   |                                                        | 348,365   |   |   | 65,122 |   |   | 63,330 |   |   | 53,937 |   |   | 48,574 |   |   | 45,674 |   |   | 71,728 |   |
| LNG                  terminal expansion             |   |                                                        | 32,091    |   |   | 32,091 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Operating                  lease payments           |   |                                                        | 107,237   |   |   | 21,676 |   |   | 19,524 |   |   | 14,472 |   |   | 11,604 |   |   | 10,822 |   |   | 29,139 |   |
| Interest                  payments on debt          |   |                                                        | 1,739,444 |   |   | 139,596 |   |   | 116,150 |   |   | 104,969 |   |   | 94,096 |   |   | 89,406 |   |   | 1,195,227 |   |
| Benefit                  plan contributions         |   |                                                        | 32,575    |   |   | 32,575 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Non-trading                  derivative liabilities |   |                                                        | 5,725     |   |   | 3,244 |   |   | 2,481 |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Total                  contractual cash obligations |   | $                                                           | 7,176,296 |   | $ | 1,521,598 |   | $ | 1,179,118 |   | $ | 934,259 |   | $ | 527,758 |   | $ | 432,109 |   | $ | 2,581,454 |   |
|                                                |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (1)   | The                Company is party to certain debt agreements containing certain covenants                that if not satisfied would be an event of default that would cause                such                debt to become immediately due and payable. Such covenants require                the                Company to maintain a certain level of net worth, to meet certain                debt to                total capitalization ratios, and to meet certain ratios of earnings                before                depreciation, interest and taxes to cash interest expense. See                *Item                8. Financial Statements and Supplementary Data, Note 13 - Debt and                Capital                Leases*. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | The                long-term debt cash obligations exclude $12.2 million of unamortized                debt                premium as of December 31, 2005. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | The                Company has purchase gas tariffs in effect for all its utility service                areas that provide for recovery of its purchased gas costs under                defined                methodologies. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | Charges                for third party storage capacity. |
|-----------------|----------------------------------------------------------|

***Management      Agreement***

*Manager*
*Management      Agreement*

----

*Table            of Contents*

***Contingencies***

*Item      8. Financial Statements and Supplementary Data, Note 18 - Commitments and      Contingencies*

***Inflation***

***Regulatory***

*** ***
*See      Item 8. Financial Statements and Supplementary Data, Note 16 - Regulation and      Rates. *

***Benefit      Plan Changes***

***Panhandle      Energy Postretirement Benefits.***

***Panhandle      Energy Vacation Plan.***

***Critical      Accounting Policies***

***Summary***

*Item      8. Financial Statements and Supplementary Data, Note 2 - Summary of Significant      Accounting Policies*

----

*Table            of Contents*

***Effects      of Regulation***

*Accounting      for the Effects of Certain Types of Regulation, *
*Item      8. Financial Statements and Supplementary Data, Note 16 - Regulation and      Rates*

***Long-Lived      Assets***

*Goodwill      and Other Intangible Assets*

----

*Table            of Contents*

***Pensions      and Other Postretirement Benefits***

*Employers’      Accounting for Pensions*
*Employers’      Accounting for Postretirement Benefits Other Than Pensions*
*Item      8. Financial Statements and Supplementary Data, Note 14 - Employee      Benefits*

***Derivatives      and Hedging Activities***

*Accounting      for Derivative Instruments and Hedging Activities, *
*fair      value hedge*
*cash      flow hedge*
*a      trading or non-hedging instrument*

*Item      8. Financial Statements and Supplementary Data, Note 11 - Derivative Instruments      and Hedging Activities.*

***Commitments      and Contingencies***

*Item      8. Financial Statements and Supplementary Data, Note*
*18      -      Commitments and Contingencies.*

----

*Table            of Contents*

***Purchase      Accounting***

*Business      Combinations. *
* *

***New      Accounting Pronouncements***

*Share-Based      Payment*

*Item      8. Financial Statements and Supplementary Data, Note 2 - Summary of Significant      Accounting Policies - New Accounting Principles*

**ITEM      7A. **
***Quantitativeand      Qualitative Disclosures About Market      Risk.***

*2006      Put Options*
*2007      Put Options*
*Prepayments      and other current assets*
*Deferred      charges*
*Accounting      for Derivative Instruments and Hedging Activities*

----

*Table            of Contents*

*Accounting      for the Effects of Certain Types of Regulation,*

*Item      8. Financial Statements and Supplementary Data, Note 13 *
*Debt      and Capital Leases*

*Taxing      Authorities*
*TIF      Plan*

| ·   | the                Redevelopment Authority of Lackawanna County raise $10.6 million                of funds                to be used for infrastructure improvements of PEI Power Park; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                Taxing Authorities create a tax increment district and use the incremental                tax revenues generated from new development to service the $10.6                million                debt; and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | PEI                Power Corporation, a subsidiary of the Company, guarantee the debt                service                payments. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------|

*TIF      Debt*

*Item      8. Financial Statements and Supplementary Data, Note 13 - Debt and Capital      Leases*
*Accumulated      other comprehensive loss*

*Accumulated      other comprehensive loss*

----

*Table            of Contents*

*Accumulated      other comprehensive loss*
*Accumulated      other comprehensive loss*

*Accounting      for Derivative Instruments and Hedging Activities,*

**ITEM      8. Financial Statements and Supplementary      Data.**

*Index      to Consolidated Financial Statements*

**ITEM      9. Changes in and Disagreements with Accountants on      Accounting and Financial Disclosure.**

**ITEM      9A. Controls and Procedures.**

***EVALUATION      OF DISCLOSURE CONTROLS AND PROCEDURES***

*Exchange      Act*
*CEO*
*CFO*

----

*Table            of Contents*

***MANAGEMENT’S      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING***

| ·   | Pertain                to the maintenance of records in reasonable detail to accurately                and                fairly reflect the transactions and dispositions of the assets of                the                Company; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Provide                reasonable assurance that transactions are recorded as necessary                to permit                preparation of financial statements in accordance with generally                accepted                accounting principles, and that receipts and expenditures of the                Company                are being made only in accordance with authorizations of management                and                directors of the Company; and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Provide                reasonable assurance regarding the prevention or timely detection                of                unauthorized acquisition, use or disposition of the Company’s assets that                could have a material effect on the financial                statements. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Internal      Control-Integrated Framework*
* *
*      (COSO)*

***CHANGES      IN INTERNAL CONTROL OVER FINANCIAL REPORTING***

**ITEM      9B. Other Information.**

----

*Table            of Contents*

**PART      III**

**ITEM      10. Directors and Executive Officers of the      Registrant.**

*Board        of Directors - Board Size and Composition, Board of Directors - Board Committees        and Meetings - Audit Committee *
*        -        Corporate Governance Committee *
*        Board of Directors - Corporate Governance Guidelines and Code of        Ethics*
*        Report of the Audit Committee, *
*Executive        Officers and Compensation - Executive Officers Who Are Not Directors, -        Executive Compensation and - Section 16(a) Beneficial Ownership Reporting        Compliance. *

**ITEM      11. Executive Compensation.**

*Executive      Officers and Compensation - Executive Compensation *
*Certain      Relationships*

**ITEM      12. Security Ownership of Certain Beneficial Owners and      Management and Related Stockholder Matters.**

*Executive      Officers and Compensation - Information Regarding Plans and Other Arrangements      Not Subject to Stockholder Approval *
*      -      Equity Compensation Plans and Security Ownership.*

**ITEM      13. Certain Relationships and Related      Transactions.**

*Certain      Relationships.*

**ITEM      14. Principal Accountant Fees and Services.**

*Independent      Auditors.*

----

*Table            of Contents*

**PART      IV**

**ITEM      15. Exhibits and Financial Statement      Schedules**
***.***

**(a)(1)      and (2)**
**Financial      Statements and Financial Statement Schedules.**

**(a)(3)**
**Exhibits**

**Exhibit      No.**
**Description**

3(a)

----

*Table            of Contents*

3(b)

----

*Table            of Contents*

----

*Table            of Contents*

10(m)

|   | 14 |   | Code                of Ethics and Business Conduct. |
|--------|----|--------|-----------------------------------------------------|

|   | 18 |   | Independent                Registered Public Accounting Firm Preferability                Letter |
|--------|----|--------|--------------------------------------------------------------------------------------------------|

|   | 21 |   | Subsidiaries                of the Registrant. |
|--------|----|--------|------------------------------------------------|

|   | 23 |   | Consent                of Independent Registered Public Accounting Firm. |
|--------|----|--------|--------------------------------------------------------------------------|

|   | 24 |   | Power                of Attorney. |
|--------|----|--------|-----------------------------------|

|   | 31.1 | Certificate                by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)                promulgated under the Securities Exchange Act of 1934, as adopted                pursuant                to Section 302 of the Sarbanes-Oxley Act of                2002. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 31.2 | Certificate                by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)                promulgated under the Securities Exchange Act of 1934, as adopted                pursuant                to Section 302 of the Sarbanes-Oxley Act of                2002. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.1   | Certificate                by Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b)                promulgated under the Securities Exchange Act of 1934 and Section                906 of                the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section                1350. |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.2   | Certificate                by Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b)                promulgated under the Securities Exchange Act of 1934 and Section                906 of                the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section                1350. |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

**SIGNATURES**

| /s/                  GEORGE L. LINDEMANN* George                  L. Lindemann                                                                                                                                                                                                                                                                                                                                                                               | Chairman                  of the Board, President and                  Chief                  Executive Officer (Principal                  Executive Officer)                                                                                                                                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  /s/                  Julie H. EdwardsJulie                  H. Edwards                                                                                                                                                                                                                                                                                       |   Senior                  Vice President and Chief Financial Officer(Principal                  Financial Officer)                                                                                                                                                                                                                                                                                                   |
| /s/                  George E. Aldrich George                  E. Aldrich                                                                                                                | Vice                  President and Controller(Chief                  Accounting Officer)                                                                                                                                                                                                                                                                                                                                      |
| /s/                  David Brodsky *  David                  Brodsky                                                                                                                                                                                                                                   | Director                                                                                                                                                                                                                                                                                                                                                                                                                  |
|  /s/ Frank W. Denius* Frank W. Denius                                                                                                                                                                                                                                         | Director                                                                                                                                                                                                                                                                                                                                                                                                                  |
|  /s/ Kurt A. Gitter,                  M.D.* Kurt                  A. Gitter, M.D.                                                                                                                                                                                                                                                                                                                                                                       |  Director                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                           |
|  /s/ Herbert H. Jacobi*     Herbert                  H. Jacobi                                                                                                                                                                                                                               |  Director                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
|  /s/ Adam M. Lindemann *  Adam M. Lindemann                                                                                                                                                                                                                                                                                                                                                                                              |  Director                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                           |
|  /s/ Thomas N. McCarter,                  III *Thomas N. McCarter, III                                                                                                                                                                                                                                                                                                                                                                                  |  Director                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                           |
|  /s/ George Rountree,                  III* George                  Rountree,                  III                                                                   |  Director                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                           |
|  /s/ Allan D. Scherer* Allan                  Scherer                                                                                                                                                                                                          |  Director                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                           |
|  *By:                /s/                JULIE H. EDWARDS           Julie                  H. Edwards      Senior                  Vice                  President and           Chief Financial                  Officer                           Attorney-in-fact |  *By: /s/                ROBERT M. KERRIGAN, III          Robert                  M. Kerrigan, III                    Vice President, Assistant General         Counsel                  and                  Secretary                            Attorney-in-fact |

----

*Table            of Contents*

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**INDEX      TO CONSOLIDATED FINANCIAL STATEMENTS**

| Financial                Statements and Supplementary Data:                                                         | Page(s):                 |
|---------------------------------------------------------------------------------------------------------------------|--------------------------|
| Consolidated                Statement of Operations - year ended December 31, 2005, six months                ended |                     |
| December                31, 2004 and years ended June 30, 2004 and 2003                                             | F-2                      |
| Consolidated                Balance Sheet - December 31, 2005 and December 31, 2004                                 | F-3                - F-4 |
| Consolidated                Statement of Cash Flows - year ended December 31, 2005, six months                ended |                     |
| December                31, 2004 and years ended June 30, 2004 and 2003                                             | F-5                      |
| Consolidated                Statement of Stockholders’ Equity and Comprehensive Income                -       |                     |
| year                ended December 31, 2005, six months ended December 31, 2004 and years                ended      |                     |
| June                30, 2004 and 2003                                                                               | F-6                - F-7 |
| Notes                to Consolidated Financial Statements                                                           | F-8                      |
| Report                of Independent Registered Public Accounting Firm                                              | F-64                     |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED        STATEMENT OF OPERATIONS**

|                                                                     |   | **Year                  Ended**                                                 |        | **Six                  Months Ended** |   | **Year                  Ended** |   | **Year                  Ended** |       |
|--------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|-------------|---------------------------------------|--------|---------------------------------|--------|---------------------------------|------------|
|                                                                     |   | **December                  31,**                                               |        | **December                  31,**     |   | **June                  30,**   |   | **June                  30,**   |       |
|                                                                     |   | **2005**                                                                        |        | **2004**                              |   | **2004**                        |   | **2003**                        |       |
|                                                                     |   | (In                  thousands of dollars, except shares and per share amounts) |        |
| Operating                  revenues:                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |
| Gas                  distribution                                        |   | $                                                                               | 1,503,272   |                                  | $      | 549,346                         |   | $                               | 1,304,405  |   | $ | 1,158,964 |   |
| Gas                  transportation and storage                          |   |                                                                            | 505,233     |                                  |   | 242,743                         |   |                            | 490,883    |   |   | 24,522 |   |
| Other                                                                    |   |                                                                            | 10,925      |                                  |   | 2,249                           |   |                            | 4,486      |   |   | 5,014 |   |
| Total                  operating revenues                                |   |                                                                            | 2,019,430   |                                  |   | 794,338                         |   |                            | 1,799,774  |   |   | 1,188,500 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Operating                  expenses:                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Cost                  of gas and other energy                            |   |                                                                            | 1,040,956   |                                  |   | 361,256                         |   |                            | 864,438    |   |   | 724,611 |   |
| Revenue-related                  taxes                                   |   |                                                                            | 51,857      |                                  |   | 18,037                          |   |                            | 45,395     |   |   | 40,485 |   |
| Operating,                  maintenance and general                      |   |                                                                            | 417,663     |                                  |   | 217,967                         |   |                            | 411,811    |   |   | 193,745 |   |
| Depreciation                  and amortization                           |   |                                                                            | 126,393     |                                  |   | 63,376                          |   |                            | 118,755    |   |   | 60,642 |   |
| Goodwill                  impairment (Note 7)                            |   |                                                                            | 175,000     |                                  |   | -                               |   |                            | -          |   |   | - |   |
| Taxes,                  other than on income and revenues                |   |                                                                            | 44,517      |                                  |   | 26,771                          |   |                            | 54,048     |   |   | 26,653 |   |
| Total                  operating expenses                                |   |                                                                            | 1,856,386   |                                  |   | 687,407                         |   |                            | 1,494,447  |   |   | 1,046,136 |   |
| Operating                  income                                        |   |                                                                            | 163,044     |                                  |   | 106,931                         |   |                            | 305,327    |   |   | 142,364 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Other                  income (expenses):                                |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Interest                                                                 |   |                                                                            | (135,157    | )                                     |   | (64,898                         | )      |                            | (127,867   | ) |   | (83,343 | ) |
| Earnings                  from unconsolidated investments                |   |                                                                            | 70,742      |                                  |   | 4,745                           |   |                            | 200        |   |   | 422 |   |
| Dividends                  on preferred securities of subsidiary trust   |   |                                                                            | -           |                                  |   | -                               |   |                            | -          |   |   | (9,480 | ) |
| Other,                  net (Note 4)                                     |   |                                                                            | (7,069      | )                                     |   | (18,080                         | )      |                            | 5,468      |   |   | 17,979 |   |
| Total                  other expenses, net                               |   |                                                                            | (71,484     | )                                     |   | (78,233                         | )      |                            | (122,199   | ) |   | (74,422 | ) |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Earnings                  from continuing operations before income taxes |   |                                                                            | 91,560      |                                  |   | 28,698                          |   |                            | 183,128    |   |   | 67,942 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Federal                  and state income taxes                          |   |                                                                            | 70,877      |                                  |   | 13,927                          |   |                            | 69,103     |   |   | 24,273 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Net                  earnings from continuing operations                 |   |                                                                            | 20,683      |                                  |   | 14,771                          |   |                            | 114,025    |   |   | 43,669 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Discontinued                  operations (Note 19):                      |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Earnings                  from discontinued operations before            |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| income                  taxes                                            |   |                                                                            | -           |                                  |   | -                               |   |                            | -          |   |   | 84,773 |   |
| Federal                  and state income taxes                          |   |                                                                            | -           |                                  |   | -                               |   |                            | -          |   |   | 52,253 |   |
| Net                  earnings from discontinued operations               |   |                                                                            | -           |                                  |   | -                               |   |                            | -          |   |   | 32,520 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Net                  earnings                                            |   |                                                                            | 20,683      |                                  |   | 14,771                          |   |                            | 114,025    |   |   | 76,189 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Preferred                  stock dividends                               |   |                                                                            | (17,365     | )                                     |   | (8,683                          | )      |                            | (12,686    | ) |   | - |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Net                  earnings available for common stockholders          |   | $                                                                               | 3,318       |                                  | $      | 6,088                           |   | $                               | 101,339    |   | $ | 76,189 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Net                  earnings available for common stockholders from     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| continuing                  operations per share (Note 5):               |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Basic                                                                    |   | $                                                                               | 0.03        |                                  | $      | 0.07                            |   | $                               | 1.26       |   | $ | 0.67 |   |
| Diluted                                                                  |   | $                                                                               | 0.03        |                                  | $      | 0.07                            |   | $                               | 1.24       |   | $ | 0.66 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Net                  earnings available for common stockholders per      |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| share                  (Note 5):                                         |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Basic                                                                    |   | $                                                                               | 0.03        |                                  | $      | 0.07                            |   | $                               | 1.26       |   | $ | 1.17 |   |
| Diluted                                                                  |   | $                                                                               | 0.03        |                                  | $      | 0.07                            |   | $                               | 1.24       |   | $ | 1.15 |   |
|                                                                     |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Weighted                  average shares outstanding (Note 5):           |   |                                                                            |        |                                  |   |                            |   |                            |       |   |   |   |   |
| Basic                                                                    |   |                                                                            | 109,395,418 |                                  |   | 87,313,787                      |   |                            | 80,431,988 |   |   | 64,949,776 |   |
| Diluted                                                                  |   |                                                                            | 112,794,210 |                                  |   | 89,717,427                      |   |                            | 81,479,503 |   |   | 66,025,488 |   |

----

*Table            of Contents*

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEET**

**ASSETS      **

|                                                                          |   | **December                  31,**          |      | **December                  31,** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------------------|-----------|-----------------------------------|--------|
|                                                                          |   | **2005**                                   |      | **2004**                          |   |
|                                                                          |   | (In                  thousands of dollars) |      |
| Property,                  plant and equipment (Note 6):                      |   |                                       |      |                              |   |
| Plant                  in service                                        |   | $                                          | 4,183,280 |                              | $      | 3,869,221 |   |
| Construction                  work in progress                           |   |                                       | 184,423   |                              |   | 237,283 |   |
|                                                                          |   |                                       | 4,367,703 |                              |   | 4,106,504 |   |
| Less                  accumulated depreciation and amortization          |   |                                       | (881,763  | )                                 |   | (778,876 | ) |
| Net                  property, plant and equipment                            |   |                                       | 3,485,940 |                              |   | 3,327,628 |   |
|                                                                          |   |                                       |      |                              |   |   |   |
| Current                  assets:                                              |   |                                       |      |                              |   |   |   |
| Cash                  and cash equivalents                               |   |                                       | 16,938    |                              |   | 30,053 |   |
| Accounts                  receivable, billed and unbilled,               |   |                                       |      |                              |   |   |   |
|  net                  of allowances of $15,893 and $15,424, respectively |   |                                       | 428,735   |                              |   | 322,888 |   |
| Accounts                  receivable – affiliates                  |   |                                       | 8,827     |                              |   | 10,604 |   |
| Inventories                                                              |   |                                       | 295,658   |                              |   | 267,136 |   |
| Gas                  imbalances - receivable                             |   |                                       | 105,233   |                              |   | 36,122 |   |
| Prepayments                  and other assets                            |   |                                       | 68,382    |                              |   | 45,705 |   |
| Total                  current assets                                         |   |                                       | 923,773   |                              |   | 712,508 |   |
|                                                                          |   |                                       |      |                              |   |   |   |
| Goodwill                  (Note 7)                                            |   |                                       | 465,547   |                              |   | 640,547 |   |
|                                                                          |   |                                       |      |                              |   |   |   |
| Deferred                  charges:                                            |   |                                       |      |                              |   |   |   |
| Regulatory                  assets (Note 8)                              |   |                                       | 112,963   |                              |   | 102,955 |   |
| Deferred                  charges                                        |   |                                       | 113,793   |                              |   | 96,109 |   |
|  Total                  deferred charges                                 |   |                                       | 226,756   |                              |   | 199,064 |   |
|                                                                          |   |                                       |      |                              |   |   |   |
| Unconsolidated                  investments (Note 9)                          |   |                                       | 682,834   |                              |   | 631,893 |   |
|                                                                          |   |                                       |      |                              |   |   |   |
| Other                                                                         |   |                                       | 51,969    |                              |   | 56,649 |   |
|                                                                          |   |                                       |      |                              |   |   |   |
|                                                                          |   |                                       |      |                              |   |   |   |
|  Total                  assets                                           |   | $                                          | 5,836,819 |                              | $      | 5,568,289 |   |
|                                                                          |   |                                       |      |                              |   |   |   |
|                                                                          |   |                                       |      |                              |   |   |   |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED        BALANCE SHEET**

**STOCKHOLDERS'          EQUITY AND LIABILITIES**

|                                                                                   |   |    |   | **December                      31,**          |   | **December                      31,** |   |
|----------------------------------------------------------------------------------------|--------|--------------|--------|------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                   |   |    |   | **2005**                                       |   | **2004**                              |   |
|                                                                                   |   |    |   | (In                      thousands of dollars) |   |
| Stockholders’                      equity (Note 10):                             |   |    |   |                                           |   |                                  |   |
| Common                      stock, $1 par value; authorized 200,000,000 shares;        |   |         |   |                                           |   |                                  |   |
| issued                      112,529,872 shares at December 31, 2005                    |   |         |   |                                           | $      | 112,530                               |   | $ | 90,763 |   |
| Preferred                      stock, no par value; authorized 6,000,000 shares;  |   |         |   |                                           |   |                                  |   |   |   |   |
| issued                      920,000 shares at December 31, 2005 (Note 12)              |   |         |   |                                           |   | 230,000                               |   |   | 230,000 |   |
| Premium                      on capital stock                                     |   |         |   |                                           |   | 1,681,167                             |   |   | 1,204,590 |   |
| Less                      treasury stock: 1,053,879 and 404,536                   |   |         |   |                                           |   |                                  |   |   |   |   |
| shares,                      respectively, at cost                                     |   |         |   |                                           |   | (27,566                               | )      |   | (12,870 | ) |
| Less                      common stock held in trust: 1,216,221                   |   |         |   |                                           |   |                                  |   |   |   |   |
| and                      1,033,150 shares, respectively                                |   |         |   |                                           |   | (12,910                               | )      |   | (17,980 | ) |
| Deferred                      compensation plans                                  |   |         |   |                                           |   | 10,173                                |   |   | 14,128 |   |
| Accumulated                      other comprehensive loss                         |   |         |   |                                           |   | (56,272                               | )      |   | (59,118 | ) |
| Retained                      earnings (deficit)                                  |   |         |   |                                           |   | (83,053                               | )      |   | 48,044 |   |
| Total                      stockholders' equity                                   |   |         |   |                                           |   | 1,854,069                             |   |   | 1,497,557 |   |
|                                                                                   |   |         |        |                                           |   |                                  |   |   |   |   |
| Long-term                      debt and capital lease obligation (Note 13)             |   |         |   |                                           |   | 2,049,141                             |   |   | 2,070,353 |   |
|                                                                                   |   |         |        |                                           |   |                                  |   |   |   |   |
| Total                      capitalization                                              |   |         |   |                                           |   | 3,903,210                             |   |   | 3,567,910 |   |
|                                                                                   |   |         |        |                                           |   |                                  |   |   |   |   |
| Current                      liabilities:                                              |   |         |   |                                           |   |                                       |   |   |   |   |
| Long-term                      debt and capital lease obligation                  |   |         |   |                                           |   |                                  |   |   |   |   |
| due                      within one year (Note 13)                                |   |         |   |                                           |   | 126,648                               |   |   | 89,650 |   |
| Notes                      payable                                                |   |         |   |                                           |   | 420,000                               |   |   | 699,000 |   |
| Accounts                      payable and accrued liabilities                     |   |         |   |                                           |   | 206,504                               |   |   | 183,018 |   |
| Federal,                      state and local taxes payable                       |   |         |   |                                           |   | 47,195                                |   |   | 33,946 |   |
| Accrued                      interest                                             |   |         |   |                                           |   | 40,688                                |   |   | 36,934 |   |
| Customer                      deposits                                            |   |         |   |                                           |   | 16,096                                |   |   | 13,156 |   |
| Deferred                      gas purchases                                       |   |         |   |                                           |   | 83,147                                |   |   | 3,709 |   |
| Gas                      imbalances - payable                                     |   |         |   |                                           |   | 124,297                               |   |   | 102,567 |   |
| Other                                                                             |   |         |   |                                           |   | 158,555                               |   |   | 151,856 |   |
| Total                      current liabilities                                    |   |         |   |                                           |   | 1,223,130                             |   |   | 1,313,836 |   |
|                                                                                   |   |         |        |                                           |   |                                  |   |   |   |   |
| Deferred                      credits:                                                 |   |         |   |                                           |   |                                  |   |   |   |   |
| Regulatory                      liabilities (Note 8)                              |   |         |   |                                           |   | 10,070                                |   |   | 10,885  |   |
| Deferred                      credits                                             |   |         |   |                                           |   | 303,919                               |   |   | 310,164 |   |
| Total                      deferred credits                                       |   |         |   |                                           |   | 313,989                               |   |   | 321,049 |   |
|                                                                                   |   |         |        |                                           |   |                                  |   |   |   |   |
| Accumulated                      deferred income taxes (Note 15)                       |   |         |   |                                           |   | 396,490                               |   |   | 365,494 |   |
|                                                                                   |   |         |   |                                           |   |                                  |   |   |   |   |
| Commitments                      and contingencies (Note 18)                           |   |         |   |                                           |   |                                  |   |   |   |   |
|                                                                                   |   |         |   |                                           |   |                                  |   |   |   |   |
| Total                      stockholders' equity and liabilities                        |   |         |   |                                           | $      | 5,836,819                             |   | $ | 5,568,289 |   |
|                                                                                   |   |         |   |                                           |   |                                  |   |   |   |   |
|                                                                                   |   |         |   |                                           |   |                                  |   |   |   |   |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED        STATEMENT OF CASH FLOWS**

|                                                                                                            |   | **Year                    Ended**            |     | **Six                    Months Ended** |   | **Year                    Ended** |   | **Year                    Ended** |     |
|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|----------|-----------------------------------------|--------|-----------------------------------|--------|-----------------------------------|----------|
|                                                                                                            |   | **December                    31,**          |     | **December                    31,**     |   | **June                    30,**   |   | **June                    30,**   |     |
|                                                                                                            |   | **2005**                                     |     | **2004**                                |   | **2004**                          |   | **2003**                          |     |
|                                                                                                            |   | (In                    thousands of dollars) |     |
| Cash                    flows provided by (used in) operating activities:                                       |   |                                         |     |                                    |   |                              |   |                              |     |
| Net                    earnings                                                                                 |   | $                                            | 20,683   |                                    | $      | 14,771                            |   | $                                 | 114,025  |   | $ | 76,189 |   |
| Adjustments                    to reconcile net earnings to net cash flows                                      |   |                                         |     |                                    |   |                              |   |                              |     |   |   |   |   |
| provided                    by (used in) operating activities:                                                  |   |                                         |     |                                    |   |                              |   |                              |     |   |   |   |   |
| Depreciation                    and amortization                                                           |   |                                         | 126,393  |                                    |   | 63,376                            |   |                              | 118,755  |   |   | 60,642 |   |
| Goodwill                    impairment                                                                     |   |                                         | 175,000  |                                    |   | -                                 |   |                              | -        |   |   | - |   |
| Amortization                    of debt premium                                                            |   |                                         | (2,484   | )                                       |   | (1,510                            | )      |                              | (14,243  | ) |   | (1,307 | ) |
| Deferred                    income taxes                                                                   |   |                                         | 61,211   |                                    |   | 12,082                            |   |                              | 67,455   |   |   | 78,747 |   |
| Provision                    for bad debts                                                                 |   |                                         | 22,519   |                                    |   | 11,649                            |   |                              | 21,216   |   |   | 17,873 |   |
| Provision                    for impairment of other assets                                                |   |                                         | 2,338    |                                    |   | 16,425                            |   |                              | 1,603    |   |   | - |   |
| Amortization                    of debt expense                                                            |   |                                         | 4,670    |                                    |   | 1,064                             |   |                              | 4,143    |   |   | 2,919 |   |
| Gain                    on sale of subsidiaries and other assets                                           |   |                                         | -        |                                    |   | -                                 |   |                              | -        |   |   | (62,992 | ) |
| Loss                    on sale of subsidiaries                                                            |   |                                         | -        |                                    |   | -                                 |   |                              | 1,150    |   |   | - |   |
| Gain                    on extinguishment of debt                                                          |   |                                         | -        |                                    |   | -                                 |   |                              | (6,354   | ) |   | - |   |
| Non-cash                    stock compensation                                                             |   |                                         | 3,848    |                                    |   | -                                 |   |                              | -        |   |   | - |   |
| Net                    cash used by assets held for sale                                                   |   |                                         | -        |                                    |   | -                                 |   |                              | -        |   |   | (23,698 | ) |
| Earnings                    from unconsolidated investments, net of cash                    distributions  |   |                                         | (55,742  | )                                       |   | (4,745                            | )      |                              | (200     | ) |   | (422 | ) |
| Other                                                                                                      |   |                                         | (1,821   | )                                  |   | (1,197                            | )      |                              | (1,075   | ) |   | (1,312 | ) |
| Changes                    in operating assets and liabilities, net of                    acquisitions:    |   |                                         |     |                                    |   |                              |   |                              |     |   |   |   |   |
|  Accounts                    receivable, billed and unbilled                                               |   |                                         | (126,590 | )                                       |   | (174,716                          | )      |                              | (6,181   | ) |   | (48,520 | ) |
|  Gas                    imbalance receivable                                                               |   |                                         | 736      |                                    |   | (5,241                            | )      |                              | 863      |   |   | - |   |
|  Accounts                    payable                                                                       |   |                                         | 43,681   |                                    |   | 45,511                            |   |                              | (4,421   | ) |   | 23,113 |   |
|  Gas                    imbalance payable                                                                  |   |                                         | (465     | )                                       |   | 2,307                             |   |                              | 1,655    |   |   | 154 |   |
|  Customer                    deposits                                                                      |   |                                         | 2,940    |                                    |   | 1,113                             |   |                              | (542     | ) |   | 5,013 |   |
|  Deferred                    gas purchase costs                                                            |   |                                         | 59,385   |                                    |   | 10,239                            |   |                              | 20,670   |   |   | (21,006 | ) |
|  Inventories                                                                                               |   |                                         | (52,420  | )                                       |   | (47,474                           | )      |                              | (9,279   | ) |   | (23,556 | ) |
|  Deferred                    charges and credits                                                           |   |                                         | (26,849  | )                                       |   | 22,743                            |   |                              | 13,773   |   |   | (12,561 | ) |
|  Prepaids                    and other assets                                                              |   |                                         | (41,992  | )                                       |   | (11,974                           | )      |                              | 8,978    |   |   | 2,541 |   |
|  Taxes                    and other liabilities                                                            |   |                                         | 3,596    |                                    |   | 18,323                            |   |                              | (4,831   | ) |   | (15,736 | ) |
| Net                    cash flows provided by (used) in operating activities                                    |   |                                         | 218,637  |                                    |   | (27,254                           | )      |                              | 327,160  |   |   | 56,081 |   |
| Cash                    flows (used in) provided by investing activities:                                       |   |                                         |     |                                    |   |                              |   |                              |     |   |   |   |   |
| Additions                    to property, plant and equipment                                              |   |                                         | (279,721 | )                                       |   | (170,644                          | )      |                              | (213,983 | ) |   | (79,978 | ) |
| Acquisition                    of equity interest in unconsolidated investment                             |   |                                         | -        |                                    |   | (605,388                          | )      |                              | -        |   |   | - |   |
| Acquisitions                    of operations, net of cash received                                        |   |                                         | -        |                                    |   | -                                 |   |                              | -        |   |   | (522,316 | ) |
| Notes                    receivable                                                                        |   |                                         | -        |                                    |   | -                                 |   |                              | (2,000   | ) |   | (6,750 | ) |
| Proceeds                    from sale of subsidiaries and other assets                                     |   |                                         | -        |                                    |   | -                                 |   |                              | 2,175    |   |   | 437,000 |   |
| Net                    cash used by assets held for sale                                                   |   |                                         | -        |                                    |   | -                                 |   |                              | -        |   |   | (13,410 | ) |
| Other                                                                                                      |   |                                         | (2,808   | )                                       |   | (1,711                            | )      |                              | (1,131   | ) |   | (6,154 | ) |
| Net                    cash flows used in investing activities                                                  |   |                                         | (282,529 | )                                       |   | (777,743                          | )      |                              | (214,939 | ) |   | (191,608 | ) |
| Cash                    flows provided by (used in) financing activities:                                       |   |                                         |     |                                    |   |                              |   |                              |     |   |   |   |   |
| Increase                    (decrease) in bank overdraft                                                   |   |                                         | (17,091  | )                                       |   | 7,405                             |   |                              | 1,820    |   |   | (137 | ) |
| Issuance                    of long-term debt                                                              |   |                                         | 255,626  |                                    |   | -                                 |   |                              | 750,000  |   |   | 311,087 |   |
| Issuance                    costs of debt                                                                  |   |                                         | (914     | )                                       |   | (337                              | )      |                              | (8,530   | ) |   | (313 | ) |
| Issuance                    of preferred stock                                                             |   |                                         | -        |                                    |   | -                                 |   |                              | 230,000  |   |   | - |   |
| Issuance                    costs of preferred stock                                                       |   |                                         | -        |                                    |   | -                                 |   |                              | (6,590   | ) |   | - |   |
| Issuance                    of common stock                                                                |   |                                         | 331,772  |                                    |   | 228,287                           |   |                              | -        |   |   | 168,682 |   |
| Issuance                    of equity units                                                                |   |                                         | 100,000  |                                    |   | -                                 |   |                              | -        |   |   | 125,000 |   |
| Issuance                    cost of equity units                                                           |   |                                         | (2,622   | )                                       |   | -                                 |   |                              | -        |   |   | (3,443 | ) |
| Purchase                    of treasury stock                                                              |   |                                         | (15,032  | )                                       |   | -                                 |   |                              | (2,403   | ) |   | (2,181 | ) |
| Dividends                    paid on preferred stock                                                       |   |                                         | (17,365  | )                                       |   | (8,683                            | )      |                              | (8,393   | ) |   | - |   |
| Repayment                    of debt and capital lease obligation                                          |   |                                         | (335,567 | )                                       |   | (94,123                           | )      |                              | (908,773 | ) |   | (500,135 | ) |
| Net                    (payments) borrowings under revolving credit                    facilities          |   |                                         | (279,000 | )                                       |   | 678,000                           |   |                              | (230,500 | ) |   | 119,700 |   |
| Proceeds                    from exercise of stock options                                                 |   |                                         | 22,242   |                                    |   | 4,530                             |   |                              | 4,122    |   |   | 3,047 |   |
| Other                                                                                                      |   |                                         | 8,728    |                                    |   | -                                 |   |                              | -        |   |   | 1,217 |   |
| Net                    cash flows provided by (used in) financing                    activities            |   |                                         | 50,777   |                                    |   | 815,079                           |   |                              | (179,247 | ) |   | 222,524 |   |
| Change                    in cash and cash equivalents                                                          |   |                                         | (13,115  | )                                       |   | 10,082                            |   |                              | (67,026  | ) |   | 86,997 |   |
| Cash                    and cash equivalents at beginning of period                                             |   |                                         | 30,053   |                                    |   | 19,971                            |   |                              | 86,997   |   |   | - |   |
| Cash                    and cash equivalents at end of period                                                   |   | $                                            | 16,938   |                                    | $      | 30,053                            |   | $                                 | 19,971   |   | $ | 86,997 |   |
|                                                                                                            |   |                                         |     |                                    |   |                              |   |                              |     |   |   |   |   |
|                                                                                                            |   |                                         |     |                                    |   |                              |   |                              |     |   |   |   |   |
| Cash                    paid for interest, net of amounts capitalized                                           |   | $                                            | 139,770  |                                    | $      | 69,954                            |   | $                                 | 143,715  |   | $ | 90,462 |   |
| Cash                    paid for income taxes, net of refunds                                                   |   |                                         | (2,007   | )                                       |   | 7,764                             |   |                              | (10,875  | ) |   | 2,351 |   |
|                                                                                                            |   |                                         |     |                                    |   |                              |   |                              |     |   |   |   |   |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT        OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME        (LOSS)**

|                                                  |   | **Common**                                   |   | **Preferred**                 |   | **Premium** |   |                           |    | **Common**                      |   | **Deferred** |   | **Accumulated**                      |    |          |   | **Total**    |   |
|-------------------------------------------------------|--------|----------------------------------------------|--------|-------------------------------|--------|-------------|--------|--------------------------------|---------|---------------------------------|--------|--------------|--------|--------------------------------------|---------|---------------|--------|--------------|--------|
|                                                  |   | **Stock,**                                   |   | **Stock,**                    |   | **on**      |   | **Treasury**                   |    | **Stock**                       |   | **Compen-**  |   | **Other**                            |    | **Retained**  |   | **Stock-**   |   |
|                                                  |   | **$1                    Par**                |   | **No                    Par** |   | **Capital** |   | **Stock,**                     |    | **Held**                        |   | **sation**   |   | **Comprehensive**                    |    | **Earnings**  |   | **holders'** |   |
|                                                  |   | **Value**                                    |   | **Value**                     |   | **Stock**   |   | **at                    cost** |    | **In                    Trust** |   | **Plans**    |   | **Income                    (Loss)** |    | **(Deficit)** |   | **Equity**   |   |
|                                                  |   | (In                    thousands of dollars) |   |
|                                                  |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |
| Balance                    July 1, 2002               |   | $                                            | 58,055 |                          | $      | -           |   | $                              | 707,912 |                            | $      | (57,673      | )      | $                                    | (17,821 | )             | $      | 9,373        |   | $ | (14,500 | ) | $ | - |   | $ | 685,346 |   |
|                                                  |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                    income (loss):       |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| Net                    earnings                       |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | 76,189 |   |   | 76,189 |   |
| Unrealized                    loss in investment      |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| securities,                    net of tax benefit     |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | (581 | ) |   | - |   |   | (581 | ) |
| Minimum                    pension liability          |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| adjustment,                    net of tax benefit     |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | (41,930 | ) |   | - |   |   | (41,930 | ) |
| Unrealized                    loss on hedging         |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| activities,                    net of tax benefit     |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | (5,568 | ) |   | - |   |   | (5,568 | ) |
| Comprehensive                    income               |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   | 28,110 |   |
| Payment                    on note receivable         |   |                                         | -      |                          |   | -           |   |                           | 305     |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 305 |   |
| Purchase                    of treasury stock         |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | (2,181       | )      |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | (2,181 | ) |
| 5%                    stock dividend                  |   |                                         | 3,468  |                          |   | -           |   |                           | 55,832  |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | (59,333 | ) |   | (33 | ) |
| Stock                    compensation plan            |   |                                         | -      |                          |   | -           |   |                           | 480     |                            |   | -            |   |                                 | 737     |          |   | -            |   |   | - |   |   | - |   |   | 1,217 |   |
| Issuance                    of stock for acquisition  |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | 48,900       |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 48,900 |   |
| Issuance                    of common stock           |   |                                         | 10,925 |                          |   | -           |   |                           | 157,757 |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 168,682 |   |
| Issuance                    costs of equity units     |   |                                         | -      |                          |   | -           |   |                           | (3,443  | )                               |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | (3,443 | ) |
| Contract                    adjustment payment        |   |                                         | -      |                          |   | -           |   |                           | (11,713 | )                               |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | (11,713 | ) |
| Sale                    of common stock held in trust |   |                                         | -      |                          |   | -           |   |                           | (243    | )                               |   | -            |   |                                 | 2,424   |          |   | -            |   |   | - |   |   | - |   |   | 2,181 |   |
| Exercise                    of stock options          |   |                                         | 626    |                          |   | -           |   |                           | 2,304   |                            |   | 487          |   |                                 | (370    | )             |   | -            |   |   | - |   |   | - |   |   | 3,047 |   |
| Contributions                    to Trust             |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | (2,165  | )             |   | 2,165        |   |   | - |   |   | - |   |   | - |   |
| Disbursements                    from Trust           |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | 1,578   |          |   | (1,578       | )      |   | - |   |   | - |   |   | - |   |
| Balance                    June 30, 2003              |   |                                         | 73,074 |                          |   | --          |   |                           | 909,191 |                            |   | (10,467      | )      |                                 | (15,617 | )             |   | 9,960        |   |   | (62,579 | ) |   | 16,856 |   |   | 920,418 |   |
|                                                  |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                    income (loss):       |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| Net                    earnings                       |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | 114,025 |   |   | 114,025 |   |
| Unrealized                    loss in investment      |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| securities,                    net of tax benefit     |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | (21 | ) |   | - |   |   | (21 | ) |
| Minimum                    pension liability          |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| adjustment,                    net of tax             |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | 10,768 |   |   | - |   |   | 10,768 |   |
| Unrealized                    gain on hedging         |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| activities,                    net of tax             |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | 1,608 |   |   | - |   |   | 1,608 |   |
| Comprehensive                    income               |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 126,380 |   |
| Preferred                    stock dividends          |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | (12,686 | ) |   | (12,686 | ) |
| Payment                    on note receivable         |   |                                         | -      |                          |   | -           |   |                           | 347     |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 347 |   |
| Purchase                    of treasury stock         |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | (2,403       | )      |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | (2,403 | ) |
| 5%                    stock dividend                  |   |                                         | 3,656  |                          |   | -           |   |                           | 67,847  |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | (71,503 | ) |   | - |   |
| Sale                    of common stock held in trust |   |                                         | -      |                          |   | -           |   |                           | 598     |                            |   | -            |   |                                 | 1,805   |          |   | -            |   |   | - |   |   | - |   |   | 2,403 |   |
| Issuance                    of preferred stock        |   |                                         | -      |                          |   | 230,000     |   |                           | (6,590  | )                               |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 223,410 |   |
| Exercise                    of stock options          |   |                                         | 411    |                          |   | -           |   |                           | 3,711   |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 4,122 |   |
| Contributions                    to Trust             |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | (2,799  | )             |   | 2,799        |   |   | - |   |   | - |   |   | - |   |
| Disbursements                    from Trust           |   |                                         | -      |                          |   | -           |   |                           | -       |                            |   | -            |   |                                 | 799     |          |   | (799         | )      |   | - |   |   | - |   |   | - |   |
| Balance                    June 30, 2004              |   | $                                            | 77,141 |                          | $      | 230,000     |   | $                              | 975,104 |                            | $      | (12,870      | )      | $                                    | (15,812 | )             | $      | 11,960       |   | $ | (50,224 | ) | $ | 46,692 |   | $ | 1,261,991 |   |
|                                                  |   |                                         |   |                          |   |        |   |                           |    |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT        OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME        (LOSS)**

**(Continued)**

|                                              |   | **Common**                                   |    | **Preferred**                 |   | **Premium** |   |                           |      | **Common**                      |   | **Deferred** |   | **Accumulated**                      |    |          |   | **Total**    |   |
|---------------------------------------------------|--------|----------------------------------------------|---------|-------------------------------|--------|-------------|--------|--------------------------------|-----------|---------------------------------|--------|--------------|--------|--------------------------------------|---------|---------------|--------|--------------|--------|
|                                              |   | **Stock,**                                   |    | **Stock,**                    |   | **on**      |   | **Treasury**                   |      | **Stock**                       |   | **Compen-**  |   | **Other**                            |    | **Retained**  |   | **Stock-**   |   |
|                                              |   | **$1                    Par**                |    | **No                    Par** |   | **Capital** |   | **Stock,**                     |      | **Held**                        |   | **sation**   |   | **Comprehensive**                    |    | **Earnings**  |   | **holders'** |   |
|                                              |   | **Value**                                    |    | **Value**                     |   | **Stock**   |   | **at                    cost** |      | **In                    Trust** |   | **Plans**    |   | **Income                    (Loss)** |    | **(Deficit)** |   | **Equity**   |   |
|                                              |   | (In                    thousands of dollars) |    |
|                                              |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |
| Balance                    June 30, 2004          |   | $                                            | 77,141  |                          | $      | 230,000     |   | $                              | 975,104   |                            | $      | (12,870      | )      | $                                    | (15,812 | )             | $      | 11,960       |   | $ | (50,224 | ) | $ | 46,692 |   | $ | 1,261,991 |   |
|                                              |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                    income (loss):   |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| Net                    earnings                   |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | 14,771 |   |   | 14,771 |   |
| Minimum                    pension liability      |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| adjustment,                    net of tax benefit |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | -            |   |   | (8,832 | ) |   | - |   |   | (8,832 | ) |
| Unrealized                    loss on hedging     |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| activities,                    net of tax benefit |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | -            |   |   | (62 | ) |   | - |   |   | (62 | ) |
| Comprehensive                    income           |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   | 5,877 |   |
| Preferred                    stock dividend       |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | (8,683 | ) |   | (8,683 | ) |
| 5%                    stock dividend              |   |                                         | 242     |                          |   | -           |   |                           | 4,494     |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | (4,736 | ) |   | - |   |
| Payment                    on note receivable     |   |                                         | -       |                          |   | -           |   |                           | 473       |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 473 |   |
| Issuance                    of common stock       |   |                                         | 13,042  |                          |   | -           |   |                           | 215,245   |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 228,287 |   |
| Exercise                    of stock options      |   |                                         | 338     |                          |   | -           |   |                           | 9,274     |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 9,612 |   |
| Contributions                    to Trust         |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | (2,168  | )             |   | 2,168        |   |   | - |   |   | - |   |   | - |   |
| Balance                    December 31, 2004      |   |                                         | 90,763  |                          |   | 230,000     |   |                           | 1,204,590 |                            |   | (12,870      | )      |                                 | (17,980 | )             |   | 14,128       |   |   | (59,118 | ) |   | 48,044 |   |   | 1,497,557 |   |
|                                              |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                    income (loss):   |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| Net                    earnings                   |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | 20,683 |   |   | 20,683 |   |
| Unrealized                    gain on hedging     |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| activities,                    net of tax         |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | -            |   |   | 1,075 |   |   | - |   |   | 1,075 |   |
| Minimum                    pension liabilitiy     |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| adjustment,                    net of tax         |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | -            |   |   | 1,771 |   |   | - |   |   | 1,771 |   |
| Comprehensive                    income           |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   | 23,529 |   |
| Preferred                    stock dividends      |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | (17,365 | ) |   | (17,365 | ) |
| Distibution                    of common stock    |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| held                    in trust                  |   |                                         | -       |                          |   | -           |   |                           | 3,130     |                            |   | -            |   |                                 | 4,186   |          |   | -            |   |   | - |   |   | - |   |   | 7,316 |   |
| Issuance                    of common stock       |   |                                         | 14,913  |                          |   | -           |   |                           | 316,859   |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 331,772 |   |
| Issuance                    cost of equity units  |   |                                         | -       |                          |   | -           |   |                           | (2,622    | )                               |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | (2,622 | ) |
| Restricted                    stock award         |   |                                         | -       |                          |   | -           |   |                           | 4,998     |                            |   | -            |   |                                 | -       |          |   | (4,998       | )      |   | - |   |   | - |   |   | - |   |
| Restricted                    stock amortization  |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | -       |          |   | 2,198        |   |   | - |   |   | - |   |   | 2,198 |   |
| Contract                    adjustment payment    |   |                                         | -       |                          |   | -           |   |                           | (1,759    | )                               |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | (1,759 | ) |
| Purchase                    of treasury stock     |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | (15,032      | )      |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | (15,032 | ) |
| 5%                    stock dividend              |   |                                         | 5,294   |                          |   | -           |   |                           | 129,121   |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | (134,415 | ) |   | - |   |
| Stock                    option award             |   |                                         | -       |                          |   | -           |   |                           | 3,848     |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 3,848 |   |
| Exercise                    of stock options      |   |                                         | 1,560   |                          |   | -           |   |                           | 20,617    |                            |   | 336          |   |                                 | (271    | )             |   | -            |   |   | - |   |   | - |   |   | 22,242 |   |
| Payment                    on note receivable     |   |                                         | -       |                          |   | -           |   |                           | 2,385     |                            |   | -            |   |                                 | -       |          |   | -            |   |   | - |   |   | - |   |   | 2,385 |   |
| Contributions                    to Trust         |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | (1,025  | )             |   | 1,025        |   |   | - |   |   | - |   |   | - |   |
| Disbursements                    from Trust       |   |                                         | -       |                          |   | -           |   |                           | -         |                            |   | -            |   |                                 | 2,180   |          |   | (2,180       | )      |   | - |   |   | - |   |   | - |   |
| Balance                    December 31, 2005      |   | $                                            | 112,530 |                          | $      | 230,000     |   | $                              | 1,681,167 |                            | $      | (27,566      | )      | $                                    | (12,910 | )             | $      | 10,173       |   | $ | (56,272 | ) | $ | (83,053 | ) | $ | 1,854,069 |   |
|                                              |   |                                         |    |                          |   |        |   |                           |      |                            |   |         |   |                                 |    |          |   |         |   |   |   |   |   |   |   |   |   |   |

*Common      Stock, $1 Par Value*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.      Corporate Structure**

***Operations.***
*Southern      Union*
*Company*
*Panhandle      Eastern Pipe Line*
*Panhandle      Energy*
*Bcf/d*
*LNG*
*CCE      Holdings*
*Transwestern*
*Florida      Gas,*

**2.      Summary of Significant Accounting Policies**

***Basis      of Presentation.***
*GAAP*

***Principles      of Consolidation.***

***Purchase      Accounting***
*.      *
*Business      Combinations. *
*Note      3 - Acquisitions and Sales*

***Plant,      Property and Equipment.***
*PP&E*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Note      6 - Property, Plant and Equipment*

***Use      of Estimates.***

***Cash      and Cash Equivalents.***

***Segment      Reporting.***
*Disclosures      about Segments of an Enterprise and Related Information*
*Note      21 - Reportable Segments*

***Gas      Distribution Revenues and Gas Purchase Costs.***

***Transportation      and Storage Revenues.***
*Trunkline*

***Accounts      Receivable and Allowance for Doubtful Accounts.***

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                             |   | **Year                  Ended**   |    | **Six                  Months Ended** |   | **Years                  Ended** |   |
|------------------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------------|--------|----------------------------------|--------|
|                                                             |   | **December                  31,** |    | **December                  31,**     |   | **June                  30,**    |   |
|                                                             |   | **2005**                          |    | **2004**                              |   | **2004**                         |   | **2003** |   |
|                                                             |   | (In                  thousands)   |    |
| Beginning                  Balance                               |   | $                                 | 15,424  |                                  | $      | 16,111                           |   | $ | 22,651 |   | $ | 20,753 |   |
| Additions:                  Charged to Cost and Expenses         |   |                              | 22,519  |                                  |   | 11,649                           |   |   | 21,216 |   |   | 17,873 |   |
| Deductions:                  Write-off of Uncollectible Accounts |   |                              | (22,751 | )                                     |   | (14,752                          | )      |   | (30,809 | ) |   | (17,715 | ) |
| Other                                                            |   |                              | 701     |                                  |   | 2,416                            |   |   | 3,053 |   |   | 1,740 |   |
| Ending                  Balance                                  |   | $                                 | 15,893  |                                  | $      | 15,424                           |   | $ | 16,111 |   | $ | 22,651 |   |
|                                                             |   |                              |    |                                  |   |                             |   |   |   |   |   |   |   |
|                                                             |   |                              |    |                                  |   |                             |   |   |   |   |   |   |   |

*Accounst      receivable*

|                                                |   | **December                  31, 2005** |    | **December                  31, 2004** |   |      |
|-----------------------------------------------------|--------|----------------------------------------|---------|----------------------------------------|--------|-----------|
|                                                |   | **Billed**                             |    | **Unbilled**                           |   | **Total** |   | **Billed** |   | **Unbilled** |   | **Total** |   |
|                                                |   | (In                  thousands)        |
|                                                |   |                                   |    |                                   |   |      |   |   |   |   |   |   |   |
| Transportation                  and Storage Segment |   | $                                      | 6,281   |                                   | $      | 47,109    |   | $ | 53,390 |   | $ | 3,310 |   | $ | 44,913 |   | $ | 48,223 |   |
| Distribution                  Segment               |   |                                   | 219,047 |                                   |   | 147,597   |   |   | 366,644 |   |   | 159,908 |   |   | 112,781 |   |   | 272,689 |   |
| Corporate                  and other                |   |                                   | 8,701   |                                   |   | -         |   |   | 8,701 |   |   | 1,976 |   |   | - |   |   | 1,976 |   |
| Total                                               |   | $                                      | 234,029 |                                   | $      | 194,706   |   | $ | 428,735 |   | $ | 165,194 |   | $ | 157,694 |   | $ | 322,888 |   |
|                                                |   |                                   |    |                                   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |

***Earnings      Per Share.***
*Earnings      per Share*

***Stock      Based Compensation.***
** **
*Accounting      for Stock Issued to Employees*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Accounting      for Stock-Based Compensation*
*Accounting      for Stock-Based Compensation—Transition and Disclosure*

|                                                                       |   | **Year                  Ended**                                      |   | **Six                  Months Ended** |   | **Years                  Ended** |   |
|----------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|---------------------------------------|--------|----------------------------------|--------|
|                                                                       |   | **December                  31,**                                    |   | **December                  31,**     |   | **June                  30,**    |   |
|                                                                       |   | **2005**                                                             |   | **2004**                              |   | **2004**                         |   | **2003** |   |
|                                                                       |   | (In                  thousands of dollars, except per share amounts) |   |
|                                                                       |   |                                                                 |   |                                  |   |                             |   |   |   |
| Net                  earnings, as reported                                 |   | $                                                                    | 20,683 |                                  | $      | 14,771                           |   | $ | 114,025 |   | $ | 76,189 |   |
| Add                  stock-based compensation expense included in          |   |                                                                 |   |                                  |   |                             |   |   |   |   |   |   |   |
| reported                  net earnings, net of related taxes               |   |                                                                 | 3,767  |                                  |   | -                                |   |   | - |   |   | - |   |
| Deduct                  total stock-based employee compensation            |   |                                                                 |   |                                  |   |                             |   |   |   |   |   |   |   |
| expense                  determined under fair value based method          |   |                                                                 |   |                                  |   |                             |   |   |   |   |   |   |   |
| for                  all awards, net of related taxes                      |   |                                                                 | 4,355  |                                  |   | 496                              |   |   | 1,699 |   |   | 1,373 |   |
| Pro                  forma net earnings                                    |   | $                                                                    | 20,095 |                                  | $      | 14,275                           |   | $ | 112,326 |   | $ | 74,816 |   |
|                                                                       |   |                                                                 |   |                                  |   |                             |   |   |   |   |   |   |   |
| Net                  earnings available for common stockholders per share: |   |                                                                 |   |                                  |   |                             |   |   |   |   |   |   |   |
| Basic-                  as reported                                        |   | $                                                                    | 0.03   |                                  | $      | 0.07                             |   | $ | 1.26 |   | $ | 1.17 |   |
| Basic-                  pro forma                                          |   | $                                                                    | 0.02   |                                  | $      | 0.06                             |   | $ | 1.24 |   | $ | 1.15 |   |
|                                                                       |   |                                                                 |   |                                  |   |                             |   |   |   |   |   |   |   |
| Diluted-                  as reported                                      |   | $                                                                    | 0.03   |                                  | $      | 0.07                             |   | $ | 1.24 |   | $ | 1.15 |   |
| Diluted-                  pro forma                                        |   | $                                                                    | 0.02   |                                  | $      | 0.06                             |   | $ | 1.21 |   | $ | 1.12 |   |
|                                                                       |   |                                                                 |   |                                  |   |                             |   |   |   |   |   |   |   |

|   |                                                |   | **Year                  ended**        |   | **Year                  ended**    |
|--------|-----------------------------------------------------|--------|----------------------------------------|--------|------------------------------------|
|   |                                                |   | **December                  31, 2005** |   | **June                  30, 2004** |
|   |                                                |   |                                   |   |                               |
|   | Dividend                  yield                     |   | 1.67%                                  |   | 0.00%                              |
|   | Volatility                                          |   | 20.57%                  to 38.83%      |   | 36.75%                             |
|   | Risk                  free interest rate            |   | 3.69%                  to 4.52%        |   | 2.95%                              |
|   | Expected                  term                      |   | 1                  to 6.5 years        |   | 6                  years           |
|   | Expected                  forfeiture                |   | 0%                                     |   | 0%                                 |
|   | Weighted                  average option fair value |   | $7.05                  to $13.96       |   | $7.35                              |
|   |                                                |   |                                   |   |                               |

*Note      10 - Stockholders’ Equity*

*Note      10 - Stockholders’ Equity*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Comprehensive      Income.***
*Reporting      Comprehensive Income.*

|                                                                                                      |   | **Year                  Ended**   |   | **Six                  Months Ended** |   | **Years                  Ended** |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------|--------|----------------------------------|--------|
|                                                                                                      |   | **December                  31,** |   | **December                  31,**     |   | **June                  30,**    |   |
| **Comprehensive                  Income Overview**                                                        |   | **2005**                          |   | **2004**                              |   | **2004**                         |   | **2003** |   |
|                                                                                                      |   | (In                  thousands)   |   |
|                                                                                                      |   |                              |   |                                  |   |                             |   |   |   |
| Net                  earnings                                                                             |   | $                                 | 20,683 |                                  | $      | 14,771                           |   | $ | 114,025 |   | $ | 76,189 |   |
| Other                  comprehensive income (loss):                                                       |   |                              |   |                                  |   |                             |   |   |   |   |   |   |   |
| Unrealized                  loss on investment securities,                                                |   |                              |   |                                  |   |                             |   |   |   |   |   |   |   |
| net                  of tax (benefit) of $0, $0, $(13) and $(323), respectively                           |   |                              | -      |                                  |   | -                                |   |   | (21 | ) |   | (581 | ) |
| Unrealized                  gain (loss) on hedging activities, net of tax (benefit)                       |   |                              |   |                                  |   |                             |   |   |   |   |   |   |   |
| of                  $73, $2,031, $4,306 and $(3,092), respectively                                        |   |                              | 108    |                                  |   | 2,154                            |   |   | 7,105 |   |   | (5,562 | ) |
| Realized                  gain (loss) on hedging activities in net earnings,                              |   |                              |   |                                  |   |                             |   |   |   |   |   |   |   |
| net                  of tax (benefit) of $608, $(2,089), $(3,331) and $(3),                  respectively |   |                              | 967    |                                  |   | (2,216                           | )      |   | (5,497 | ) |   | (6 | ) |
| Minimum                  pension liability adjustment, net of tax (benefit)                               |   |                              |   |                                  |   |                             |   |   |   |   |   |   |   |
| of                  $1,064, $(8,328), $6,526 and $(23,306), respectively                                  |   |                              | 1,771  |                                  |   | (8,832                           | )      |   | 10,768 |   |   | (41,930 | ) |
| Other                  comprehensive income (loss)                                                        |   |                              | 2,846  |                                  |   | (8,894                           | )      |   | 12,355 |   |   | (48,079 | ) |
| Comprehensive                  income                                                                     |   | $                                 | 23,529 |                                  | $      | 5,877                            |   | $ | 126,380 |   | $ | 28,110 |   |
|                                                                                                      |   |                              |   |                                  |   |                             |   |   |   |   |   |   |   |

*Accumulated      other comprehensive loss*

***Inventories.***
*MMBtu*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Unconsolidated      Investments.***
*Earnings      from unconsolidated investments*
*Other      income (expenses), net*
*Note      9 - Unconsolidated Investments*
* *

***Regulatory      Assets and Liabilities.***
*Accounting      for the Effects of Certain Types of Regulation,*
*Note      8 - Regulatory Assets and Liabilities*

***Goodwill      and Other Intangible Assets.***
*Accounting      for Goodwill and Other Intangible Assets. *
*Note      7 - Goodwill and Intangibles*

***Fair      Value of Financial Instruments.***
*      See      Note 13 - Debt and Capital Leases.*

***Gas      Imbalances.***

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Fuel      Tracker.***

***Interest      Cost Capitalized.***
*Capitalization      of Interest Cost*

***Derivative      Instruments and Hedging Activities.***
*Accounting      for Derivative Instruments and Hedging Activities, *
*fair      value hedge*
*cash      flow hedge*
*trading      or non-hedging instrument*
*Note      11 - Derivative Instruments and Hedging Activities*

***Asset      Retirement Obligations.***
*Accounting      for Asset Retirement Obligations (ARO) *
*      FIN      No. 47, Accounting for Conditional Asset Retirement Obligations.*

*Conditional      ARO*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                           |   |                            |   |                                       |   |                            |
|------------------------------------------------|--------|---------------------------------|--------|--------------------------------------------|--------|---------------------------------|
|                                           |   | **In                  Service** |   |                                       |   |                            |
| **ARO                  Description**           |   | **Date**                        |   | **Long-Lived                  Assets**     |   | **Amount**                      |
|                                           |   |                            |   |                                       |   | (In                  thousands) |
| Retire                  offshore lateral lines |   | Various                         |   | Offshore                  lateral lines    |   | $                  2,803        |
| Remove                  asbestos               |   | Various                         |   | Mainlines                  and compressors |   | 882                             |
|                                           |   |                            |   |                                       |   |                            |

|                               |   | **Year                  Ended**   |   | **Six                  Months Ended** |   | **Year                  Ended** |   |
|------------------------------------|--------|-----------------------------------|--------|---------------------------------------|--------|---------------------------------|--------|
|                               |   | **December                  31,** |   | **December                  31,**     |   | **June                  30,**   |   |
|                               |   | **2005**                          |   | **2004**                              |   | **2004**                        |   |
|                               |   | (In                  thousands)   |   |
|                               |   |                              |   |                                  |   |                            |   |
| Beginning                  Balance |   | $                                 | 5,657  |                                  | $      | 6,407                           |   | $ | 6,757 |   |
| Incurred                           |   |                              | 2,371  |                                  |   | -                               |   |   | 395 |   |
| Settled                            |   |                              | (285   | )                                     |   | (999                            | )      |   | (1,373 | ) |
| Accretion                  Expense |   |                              | 457    |                                  |   | 249                             |   |   | 628 |   |
| Ending                  Balance    |   | $                                 | 8,200  |                                  | $      | 5,657                           |   | $ | 6,407 |   |
|                               |   |                              |   |                                  |   |                            |   |   |   |   |

***Income      Taxes.***
*Accounting      for Income Taxes*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Commitments      and Contingencies.***
*      Note*
*18      -      Commitments and Contingencies.*

**New      Accounting Principles**

***Accounting      Principles Recently Adopted.***

***FSP      No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare      Prescription Drug, Improvement and Modernization Act of 2003”(***
**the**
***Medicare Prescription Drug Act):***
** **
*FSP*
*FSP      FAS 106-2*
*Note      14 - Employee Benefits - Recently Enacted Legislation*

***FSP      No. FIN 46R-5, “Implicit Variable Interests under FASB Interpretation No. 46      (revised December 2003), Consolidation of Variable Interest      Entities”:***
* *
*VIE*

***FIN      No. 47, “Accounting for Conditional Asset Retirement      Obligations”:***
*Accounting      for Asset Retirement Obligations*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Accounting      Principles not yet Adopted.***

***FASB      Statement No. 123R, “Share-Based Payment (revised      2004)”:***
** **
** **
*,      Accounting for Stock-Based Compensation*
*Accounting      for Stock Issued to Employees,*
*Statement      of Cash Flows*
*Share-Based      Payment*

***FERC      Accounting Release.***

**3.      Acquisitions and Sales**

***Acquisition      of Sid Richardson Energy Services.***
*Sid      Richardson Bridge Loan*
*ESSI*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Disposition      of the Rhode Island Assets of New England Gas Company.***

***Disposition      of PG Energy.***

*Accounting      for the Impairment or Disposal of Long-Lived Assets*

***Investment      in CCE Holdings.***
*CrossCountry      Energy*
*ONEOK*
*Transwestern*
*Citrus*
*Florida      Gas*
*Note      10 - Stockholders’ Equity*
*Earnings      from unconsolidated investments *

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Acquisition      of Panhandle Energy.***
*Texas      Operations*
*Note      10 - Stockholders’ Equity)*

*Panhandle      Eastern Pipe Line*
*Trunkline*
*Sea      Robin*
*Trunkline      LNG*
*LNG      Holdings*
*.*
*Southwest      Gas Storage*

|                                                                 |   |   | **At                June 11, 2003** |       |   |
|----------------------------------------------------------------------|--------|--------|-------------------------------------|------------|--------|
|                                                                 |   |   |  (In              thousands)   |       |   |
|                                                                 |   |   |                                |       |   |
| Property,                plant and equipment (excluding intangibles) |   |   | $                                   | 1,904,762  |   |
| Intangibles                                                          |   |   |                                | 9,503      |   |
| Current                assets (Includes cash and cash equivalents of |   |   |                                |       |   |
| approximately                $60 million)                            |   |   |                                | 217,645    |   |
| Other                non-current assets                              |   |   |                                | 30,098     |   |
| Total                assets acquired                                 |   |   |                                | 2,162,008  |   |
| Long-term                debt                                        |   |   |                                | (1,207,617 | )      |
| Current                liabilities                                   |   |   |                                | (165,585   | )      |
| Other                non-current liabilities                         |   |   |                                | (125,785   | )      |
| Total                liabilities assumed                             |   |   |                                | (1,498,987 | )      |
| ** **Net                assets acquired                         |   |   | $                                   | 663,021    |   |

|                                                                |   | **(Unaudited)**                    |      |
|---------------------------------------------------------------------|--------|------------------------------------|-----------|
|                                                                |   | **Year                  Ended**    |      |
|                                                                |   | **June                  30, 2003** |      |
|                                                                |   | (In                  thousands)    |      |
|                                                                |   |                               |      |
| Operating                  revenues                                 |   | $                                  | 1,671,114 |   |
| Net                  earnings from continuing operations            |   |                               | 132,458   |   |
| Net                  earnings per share from continuing operations: |   |                               |      |   |
| Basic                                                               |   |                               | 1.67      |   |
| Diluted                                                             |   |                               | 1.64      |   |
|                                                                |   |                               |      |   |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Sale      of Texas Operations.***
*Discontinued      operations*
*Assets      held for sale*

**4.      Other Income (Expense), Net**

*see      Note 9 - Unconsolidated Investments*
*Note      11 - Derivative Instruments and Hedging Activities*

*Note      9 - Unconsolidated Investments*
*Southwest*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**5.      Earnings Per Share**

*EPS*

|                                                                  |   |                                                                 |        | **Six                  Months**   |   |                             |   |     |       |
|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|-------------|-----------------------------------|--------|----------------------------------|--------|----------|------------|
|                                                                  |   | **Year                  Ended**                                      |        | **Ended**                         |   | **Years                  Ended** |   |
|                                                                  |   | **December                  31,**                                    |        | **December                  31,** |   | **June                  30,**    |   |
|                                                                  |   | **2005**                                                             |        | **2004**                          |   | **2004**                         |   | **2003** |       |
|                                                                  |   | (In                  thousands of dollars, except per share amounts) |        |
|                                                                  |   |                                                                 |        |                              |   |                             |   |     |       |
| Net                  earnings from continuing operations              |   | $                                                                    | 20,683      |                              | $      | 14,771                           |   | $        | 114,025    |   | $ | 43,669 |   |
| Net                  earnings from discontinued operations            |   |                                                                 | -           |                              |   | -                                |   |     | -          |   |   | 32,520 |   |
| Preferred                  stock dividends                            |   |                                                                 | (17,365     | )                                 |   | (8,683                           | )      |     | (12,686    | ) |   | - |   |
| Net                  earnings available for common stockholders       |   | $                                                                    | 3,318       |                              | $      | 6,088                            |   | $        | 101,339    |   | $ | 76,189 |   |
|                                                                  |   |                                                                 |        |                              |   |                             |   |     |       |   |   |   |   |
| Weighted                  average shares outstanding - Basic          |   |                                                                 | 109,395,418 |                              |   | 87,313,787                       |   |     | 80,431,988 |   |   | 64,949,776 |   |
| Weighted                  average shares outstanding - Diluted        |   |                                                                 | 112,794,210 |                              |   | 89,717,427                       |   |     | 81,479,503 |   |   | 66,025,488 |   |
|                                                                  |   |                                                                 |        |                              |   |                             |   |     |       |   |   |   |   |
| Basic                  earnings per share:                            |   |                                                                 |        |                              |   |                             |   |     |       |   |   |   |   |
| Net                  earnings available for common stockholders  |   |                                                                 |        |                              |   |                             |   |     |       |   |   |   |   |
| from                  continuing operations                      |   | $                                                                    | 0.03        |                              | $      | 0.07                             |   | $        | 1.26       |   | $ | 0.67 |   |
| Net                  earnings from discontinued operations       |   |                                                                 | -           |                              |   | -                                |   |     | -          |   |   | 0.50 |   |
| Net                  earnings available for common stockholders  |   | $                                                                    | 0.03        |                              | $      | 0.07                             |   | $        | 1.26       |   | $ | 1.17 |   |
|                                                                  |   |                                                                 |        |                              |   |                             |   |     |       |   |   |   |   |
| Diluted                  earnings per share:                          |   |                                                                 |        |                              |   |                             |   |     |       |   |   |   |   |
| Net                  earnings available for common stockholders  |   |                                                                 |        |                              |   |                             |   |     |       |   |   |   |   |
| from                  continuing operations                      |   | $                                                                    | 0.03        |                              | $      | 0.07                             |   | $        | 1.24       |   | $ | 0.66 |   |
| Net                  earnings from discontinued operations       |   |                                                                 | -           |                              |   | -                                |   |     | -          |   |   | 0.49 |   |
| Net                  earnings available for common stockholders  |   | $                                                                    | 0.03        |                              | $      | 0.07                             |   | $        | 1.24       |   | $ | 1.15 |   |

|                                                            |   |                              |        | **Six                  Months**   |   |                             |   |     |       |
|-----------------------------------------------------------------|--------|-----------------------------------|-------------|-----------------------------------|--------|----------------------------------|--------|----------|------------|
|                                                            |   | **Year                  Ended**   |        | **Ended**                         |   | **Years                  Ended** |   |
|                                                            |   | **December                  31,** |        | **December                  31,** |   | **June                  30,**    |   |
|                                                            |   | **2005**                          |        | **2004**                          |   | **2004**                         |   | **2003** |       |
|                                                            |   |                              |        |                              |   |                             |   |     |       |
| Weighted                  average shares outstanding - Basic    |   |                              | 109,395,418 |                              |   | 87,313,787                       |   |     | 80,431,988 |   |   | 64,949,776 |   |
| Add                  assumed vesting of restricted stock        |   |                              | 15,596      |                              |   | -                                |   |     | -          |   |   | - |   |
| Add                  assumed conversion of equity units         |   |                              | 2,141,033   |                              |   | 1,172,431                        |   |     | -          |   |   | - |   |
| Add                  assumed exercise of stock options          |   |                              | 1,242,163   |                              |   | 1,231,209                        |   |     | 1,047,515  |   |   | 1,075,712 |   |
| Weighted                  average shares outstanding - Dilutive |   |                              | 112,794,210 |                              |   | 89,717,427                       |   |     | 81,479,503 |   |   | 66,025,488 |   |
|                                                            |   |                              |        |                              |   |                             |   |     |       |   |   |   |   |

** **

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

*Note      13 - Debt and Capital Leases*
*      Note      10 - Stockholders’ Equity).*

*Note      13 - Debt and Capital Leases*
*      Note      10 - Stockholders’ Equity).*

----

*Table          of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**6.         Property, Plant and Equipment**

|                                                                           |   |                                |   | **December                  31,** |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
| **Property,                  Plant and Equipment**                             |   | **Lives                  in Years** |   | **2005**                          |   | **2004** |   |
|                                                                           |   |                                |   | (In                  thousands)   |   |
|                                                                           |   |                                |   |                              |   |   |   |
| Distribution                  plant                                            |   |                                | 10-75  |                              | $      | 1,774,802 |   | $ | 1,707,174 |   |
| Transmission                  plant                                            |   |                                | 36-46  |                              |   | 1,285,848 |   |   | 1,185,647 |   |
| General                  - LNG                                                 |   |                                | 40     |                              |   | 494,827 |   |   | 388,703 |   |
| General                  plant - other                                         |   |                                | 1-71   |                              |   | 163,684 |   |   | 143,435 |   |
| Underground                  storage plant                                     |   |                                | 36-46  |                              |   | 275,603 |   |   | 274,337 |   |
| Gathering                  plant                                               |   |                                | 26     |                              |   | 45,822 |   |   | 46,074 |   |
| Other                                                                          |   |                                | 5-38   |                              |   | 145,185 |   |   | 126,308 |   |
| Total                  plant (a)                                               |   |                                |   |                              |   | 4,185,771 |   |   | 3,871,678 |   |
| Less                  contributions in aid of construction                     |   |                                |   |                              |   | (2,491 | ) |   | (2,457 | ) |
| Plant                  in service                                              |   |                                |   |                              |   | 4,183,280 |   |   | 3,869,221 |   |
| Construction                  work in progress                                 |   |                                |   |                              |   | 184,423 |   |   | 237,283 |   |
|                                                                           |   |                                |   |                              |   | 4,367,703 |   |   | 4,106,504 |   |
| Less                  accumulated depreciation and amortization (a)            |   |                                |   |                              |   | (881,763 | ) |   | (778,876 | ) |
| Net                  property, plant and equipment                             |   |                                |   |                              | $      | 3,485,940 |   | $ | 3,327,628 |   |
|                                                                           |   |                                |   |                              |   |   |   |   |   |   |
| (a)                  Includes capitalized computerized software cost totaling: |   |                                |   |                              |   |   |   |   |   |   |
|                                                                           |   |                                |   |                              |   |   |   |   |   |   |
| Unamortized                  computer software cost                            |   |                                | 3-15   |                              | $      | 119,471 |   | $ | 118,596 |   |
| Less                  accumulated amortization                                 |   |                                |   |                              |   | (44,588 | ) |   | (40,378 | ) |
| Net                  capitalized computer software costs                       |   |                                |   |                              | $      | 74,883 |   | $ | 78,218 |   |
|                                                                           |   |                                |   |                              |   |   |   |   |   |   |

*Accounting      for the Costs of Computer Software Developed or Obtained for Internal      Use*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**7.      Goodwill and Intangibles**

| **Goodwill                  Analysis**           |   | **Amounts**                           |     |
|--------------------------------------------------|--------|---------------------------------------|----------|
|                                             |   | (In                  thousands)  |     |
|                                             |   |                                  |     |
| Balance                  as of July 1, 2002      |   | $                                     | 642,921  |   |
| Impairment                  losses               |   |                                  | -        |   |
| Balance                  as of June 30, 2003     |   |                                  | 642,921  |   |
| Impairment                  losses               |   |                                  | -        |   |
| Reversal                  of income tax reserve  |   |                                  | (2,374   | ) |
| Balance                  as of June 30, 2004     |   |                                  | 640,547  |   |
| Impairment                  losses               |   |                                  | -        |   |
| Balance                  as of December 31, 2004 |   |                                  | 640,547  |   |
| Impairment                  losses               |   |                                  | (175,000 | ) |
| Balance                  as of December 31, 2005 |   | $                                     | 465,547  |   |
|                                             |   |                                  |     |   |

*Note      19 - Discontinued Operations*

*Property,      plant and equipment*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**8.      Regulatory Assets and Liabilities**

|                                                  |   | **December                  31,** |    |
|-------------------------------------------------------|--------|-----------------------------------|---------|
| **Regulatory                  Assets**                |   | **2005**                          |    | **2004** |   |
|                                                  |   | (In                  thousands)   |    |
|                                                  |   |                              |    |   |   |
| Pension                  and Post-retirement Benefits |   | $                                 | 32,627  |   | $ | 26,809 |   |
| Deferred                  Income Tax                  |   |                              | 28,076  |   |   | 28,958 |   |
| Environmental                                         |   |                              | 23,656  |   |   | 16,332 |   |
| Missouri                  Safety Program              |   |                              | 11,956  |   |   | 15,161 |   |
| Other                                                 |   |                              | 16,648  |   |   | 15,695 |   |
|                                                  |   | $                                 | 112,963 |   | $ | 102,955 |   |
|                                                  |   |                              |    |   |   |   |   |

|                                        |   | **December                  31,** |   |
|---------------------------------------------|--------|-----------------------------------|--------|
| **Regulatory                  Liabilities** |   | **2005**                          |   | **2004** |   |
|                                        |   | (In                  thousands)   |   |
|                                        |   |                              |   |   |   |
| Environmental                               |   | $                                 | 8,817  |   | $ | 8,740 |   |
| Other                                       |   |                              | 1,253  |   |   | 2,145 |   |
|                                        |   | $                                 | 10,070 |   | $ | 10,885 |   |
|                                        |   |                              |   |   |   |   |   |

*Accounting      for the Effects of Certain Types of Regulation. *

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**9.      Unconsolidated Investments**

|                                            |   | **December                  31,** |    |
|-------------------------------------------------|--------|-----------------------------------|---------|
| **Unconsolidated                  Investments** |   | **2005**                          |    | **2004** |   |
|                                            |   | (In                  thousands)   |    |
| Equity                  investments:            |   |                              |    |   |   |
| CCE                  Holdings                   |   | $                                 | 668,985 |   | $ | 615,861 |   |
| Other                                           |   |                              | 13,074  |   |   | 12,919 |   |
| Investments                  at cost            |   |                              | 775     |   |   | 3,113 |   |
|                                            |   |                              |    |   |   |   |   |
|                                            |   | $                                 | 682,834 |   | $ | 631,893 |   |
|                                            |   |                              |    |   |   |   |   |

***Equity      Investments.***
*Earnings      from unconsolidated investments*
*The      Equity Method of Accounting for Investments in Common Stock,*
*Goodwill      and Other Intangible Assets*

***CCE      Holdings.***
*GE*

*Manager*
*Management      Agreement*

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Earnings      from unconsolidated investments*

*Transfer      Restriction Period*

***Other***
***.***
** **

|                                     |   | **At                  December 31, 2005** |      | **At                  December 31, 2004** |   |
|------------------------------------------|--------|-------------------------------------------|-----------|-------------------------------------------|--------|
|                                     |   | **CCE**                                   |      | **Other                  Equity**         |   | **CCE** |   | **Other                  Equity** |   |
|                                     |   | **Holdings**                              |      | **Investments**                           |   | **Holdings** |   | **Investments** |   |
|                                     |   | (In                  thousands)           |      |
| Balance                  Sheet Data:     |   |                                      |      |                                      |   |   |   |   |   |
| Current                  assets          |   | $                                         | 69,983    |                                      | $      | 2,122 |   | $ | 54,078 |   | $ | 1,255 |   |
| Non-current                  assets      |   |                                      | 2,313,874 |                                      |   | 28,832 |   |   | 2,257,899 |   |   | 22,847 |   |
| Current                  liabilities     |   |                                      | 49,428    |                                      |   | 2,955 |   |   | 64,468 |   |   | 833 |   |
| Non-current                  liabilities |   |                                      | 1,034,092 |                                      |   | 356 |   |   | 1,057,907 |   |   | 2,625 |   |
|                                     |   |                                      |      |                                      |   |   |   |   |   |   |   |   |   |

|                                    |   | **For                  the Year Ended December 31, 2005** |    |  **For                  the Six Months Ended December 31, 2004** |   |
|-----------------------------------------|--------|-----------------------------------------------------------|---------|-----------------------------------------------------------------------|--------|
|                                    |   | **CCE**                                                   |    | **Other                  Equity**                                     |   |  **CCE** |   | **Other                  Equity** |   |
|                                    |   | **Holdings**                                              |    | **Investments**                                                       |   |  **Holdings** |   | **Investments** |   |
|                                    |   | (In                  thousands)                 |    |
| Income                  Statement Data: |   |                                                      |    |                                                                  |   |    |   |   |   |
| Revenues                                |   | $                                                         | 236,359 |                                                                  | $      | 6,942 |   | $ | 27,194 |   | $ | 1,919 |   |
| Operating                  income       |   |                                                      | 121,000 |                                                                  |   | 1,230 |   |   | 6,576 |   |   | 394 |   |
| Equity                  earnings        |   |                                                      | 72,492  |                                                                  |   | - |   |   | 7,549 |   |   | - |   |
| Net                  income             |   |                                                      | 140,735 |                                                                  |   | 1,058 |   |   | 8,602 |   |   | 295 |   |
|                                    |   |                                                      |    |                                                                  |   |   |   |   |   |   |   |   |   |

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Investments      at Cost*.**
*Advent*
*PointServe*

*Bankruptcy      Court*
*Other      income, net*

***Contingent      Matters Potentially Impacting the Company’s Investment in CCE      Holdings.***

***Environmental      Matters.***

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*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***CCE      Holdings Goodwill Evaluation.***
*Goodwill      and Other Intangible Assets*

***Regulatory      Assets and Liabilities.***
*Accounting      for the Effects of Certain Types of Regulation, *
*.      *

***Federal      Pipeline Integrity Rules.***
*HCAs*

***Florida      Gas Pipeline Relocation Costs***
**.      **
*FDOT/FTE*

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*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Phoenix      Expansion Project***

***Litigation.***

***Jack      Grynberg.***
*Note      18 - Commitments and Contingencies - Litigation*

**10.      Stockholders’ Equity**

***Dividends.***
** **

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*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Common      Stock.***
*Amended      2003 Plan*

*1992      Plan*

*Pennsylvania      Option Plan*
*Pennsylvania      Incentive Plan*
*the      Pennsylvania Plans*

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*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                           |   | **Amended                  2003 Plan** |      | **1992                  Plan** |   |
|------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------|--------|
|                                           |   |                                   |      | **Weighted**                   |   |   |   | **Weighted** |   |
|                                           |   | **Shares**                             |      | **Average**                    |   | **Shares** |   | **Average** |   |
|                                           |   | **Under**                              |      | **Exercise**                   |   | **Under** |   | **Exercise** |   |
|                                           |   | **Option**                             |      | **Price**                      |   | **Option** |   | **Price** |   |
|                                           |   |                                   |      |                           |   |   |   |   |   |
| Outstanding                  July 1, 2002      |   |                                   | -         |                           |   | - |   |   | 4,027,675 |   |   | 11.10 |   |
| Granted                                        |   |                                   | -         |                           |   | - |   |   | - |   |   | - |   |
| Exercised                                      |   |                                   | -         |                           |   | - |   |   | (696,164 | ) |   | 4.43 |   |
| Canceled                                       |   |                                   | -         |                           |   | - |   |   | (188,576 | ) |   | 13.94 |   |
| Outstanding                  June 30, 2003     |   |                                   | -         |                           |   | - |   |   | 3,142,935 |   |   | 12.41 |   |
| Granted                                        |   |                                   | 765,779   |                           |   | 16.83 |   |   | - |   |   | - |   |
| Exercised                                      |   |                                   | -         |                           |   | - |   |   | (370,128 | ) |   | 9.44 |   |
| Canceled                                       |   |                                   | (2,206    | )                              |   | 16.83 |   |   | (6,134 | ) |   | 14.65 |   |
| Outstanding                  June 30, 2004     |   |                                   | 763,573   |                           |   | 16.83 |   |   | 2,766,673 |   |   | 12.81 |   |
| Granted                                        |   |                                   | -         |                           |   | - |   |   | - |   |   | - |   |
| Exercised                                      |   |                                   | -         |                           |   | - |   |   | (357,081 | ) |   | 12.69 |   |
| Canceled                                       |   |                                   | (65,051   | )                              |   | 16.83 |   |   | (18,887 | ) |   | 14.63 |   |
| Outstanding                  December 31, 2004 |   |                                   | 698,522   |                           |   | 16.83 |   |   | 2,390,705 |   |   | 12.81 |   |
| Granted                                        |   |                                   | 941,252   |                           |   | 18.27 |   |   | 136,608 |   |   | 12.75 |   |
| Exercised                                      |   |                                   | (62,976   | )                              |   | 16.83 |   |   | (794,105 | ) |   | 12.47 |   |
| Canceled                                       |   |                                   | (77,385   | )                              |   | 16.83 |   |   | (473,584 | ) |   | 12.45 |   |
| Outstanding                  December 31, 2005 |   |                                   | 1,499,413 |                           |   | 17.73 |   |   | 1,259,624 |   |   | 13.15 |   |

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

| **Options                Outstanding** |   | **Options                Exercisable** |      |
|----------------------------------------|--------|----------------------------------------|-----------|
|                                   |   |                                   |      | **            Weighted                Average** |   | **Weighted** |   |   |   | **Weighted** |   |
| **Range                of**            |   | **Number                of**           |      |   |   | **Remaining** |   | **Average** |   | **Number                of** |   | **Average** |   |
| **Exercise                Prices**     |   | **Options**                            |      |   |   | **Contractual                Life** |   | **Exercise                Price** |   | **Options** |   | **Exercise                Price** |   |
|                                   |   |                                   |      |   |   |   |   |   |   |   |   |   |   |
| **Amended                2003 Plan:**  |   |                                   |      |   |   |   |   |   |   |
| $0.00                - $7.49           |   |                                   | 209,903   |   |   |   |   | 9.67                years |   | $ | - |   |   | - |   | $ | - |   |
| 12.50                - 14.99           |   |                                   | 558,161   |   |   |   |   | 7.99                years |   |   | 16.83 |   |   | 92,759 |   |   | 16.83 |   |
| 22.50                - 24.99           |   |                                   | 731,349   |   |   |   |   | 9.67                years |   |   | 23.52 |   |   | 262,500 |   |   | 23.62 |   |
|                                   |   |                                   | 1,499,413 |   |   |   |   |   |   |   |   |   |   | 355,259 |   |   |   |   |
|                                   |   |                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **1992                Plan:**          |   |                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| $7.50                - $9.99           |   |                                   | 166,543   |   |   |   |   | 1.41                years |   | $ | 9.70 |   |   | 166,543 |   | $ | 9.70 |   |
| 10.00                - 12.49           |   |                                   | 5,134     |   |   |   |   | 1.11                years |   |   | 10.07 |   |   | 5,134 |   |   | 10.07 |   |
| 12.50                - 14.99           |   |                                   | 1,085,449 |   |   |   |   | 3.71                years |   |   | 13.69 |   |   | 973,971 |   |   | 13.64 |   |
| 15.00                - 17.49           |   |                                   | 2,498     |   |   |   |   | 3.72                years |   |   | 15.95 |   |   | 2,254 |   |   | 16.01 |   |
|                                   |   |                                   | 1,259,624 |   |   |   |   |   |   |   |   |   |   | 1,147,902 |   |   |   |   |

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                   |   |  **Amended**          |    |           |   |  **Pennsylvania** |   |  **Pennsylvania** |    |
|----------------------------------------|--------|----------------------------|---------|----------------|--------|------------------------|--------|------------------------|---------|
|                                   |   |  **2003**             |    |  **1992** |   |  **Option**       |   |  **Incentive**    |    |
|                                   |   |  **Plan  ** |    |  **Plan** |   |  **Plan**         |   |  **Plan**         |    |
|                                   |   |                       |    |           |   |                   |   |                   |    |
| Options                exercisable at: |   |                       |    |           |   |                   |   |                   |    |
| December                31, 2005       |   |                       | 355,259 |           |   | 1,147,902              |   |                   | -       |   |   | - |   |
| December                31, 2004       |   |                       | 22,050  |           |   | 2,122,795              |   |                   | 466,127 |   |   | 231,668 |   |
| June                30, 2004           |   |                       | -       |           |   | 2,132,852              |   |                   | 466,127 |   |   | 228,451 |   |
| June                30, 2003           |   |                       | -       |           |   | 2,089,161              |   |                   | 466,127 |   |   | 225,234 |   |

| Weighted                average exercise price at: |                   |                   |                                                         |                                                               |
|----------------------------------------------------|------------------------|------------------------|--------------------------------------------------------------|--------------------------------------------------------------------|
| December                31, 2005                   | $                21.85 | $                13.06 | $                       - | $                        - |
| December                31, 2004                   | 16.83                  | 12.67                  | 8.77                                                         | 10.19                                                              |
| June                30, 2004                       | -                      | 12.52                  | 8.77                                                         | 10.14                                                              |
| June                30, 2003                       | -                      | 11.74                  | 8.77                                                         | 10.09                                                              |

***Warrant.***

***February      2005 Equity Issuances***
**.      **
*Note      13 - Debt and Capital Leases*

***July      2004 Equity Issuances.***

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*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***June      2003 Equity Issuances.***

*Note      13 - Debt and Capital Leases*

**11.      Derivative Instruments and Hedging Activities**

***Cash      Flow Hedges***
**.**
*Note      13 - Debt and Capital Leases*
*Accumulated      other comprehensive loss*

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*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

*Accumulated      other comprehensive loss*

*Accumulated      other comprehensive loss *

***Fair      Value Hedges.***
*Accounting      for Derivative Instruments and Hedging Activities,*

***Trading      and Non-Hedging Activities.***

***Natural      Gas Put Options.***
*2006      Put Options*
*2007      Put Options*
*Prepayments      and other assets*
*Deferred      charges*
*Accounting      for Derivative Instruments and Hedging Activities*

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**12.      Preferred Securities **

*Subsidiary      Trust*
*Preferred      Securities*
*Subordinated      Notes*

**13.      Debt and Capital Leases**

|                                                                    |   | **Carrying                  Value** |      | **Fair                  Value**   |   | **Carrying                  Value** |   | **Fair                  Value**   |      |
|-------------------------------------------------------------------------|--------|-------------------------------------|-----------|-----------------------------------|--------|-------------------------------------|--------|-----------------------------------|-----------|
|                                                                    |   | **December                  31,**   |      | **December                  31,** |   | **December                  31,**   |   | **December                  31,** |      |
|                                                                    |   | **2005**                            |      | **2005**                          |   | **2004**                            |   | **2004**                          |      |
|                                                                    |   | (In                  thousands)     |
| **Southern                  Union Company**                             |   |                                |      |                              |   |                                |   |                              |      |
| 7.60%                  Senior Notes due 2024                            |   | $                                   | 359,765   |                              | $      | 411,931                             |   | $                                 | 359,765   |   | $ | 406,524 |   |
| 8.25%                  Senior Notes due 2029                            |   |                                | 300,000   |                              |   | 360,723                             |   |                              | 300,000   |   |   | 364,365 |   |
| 2.75%                  Senior Notes due 2006                            |   |                                | 125,000   |                              |   | 125,000                             |   |                              | 125,000   |   |   | 125,000 |   |
| Term                  Note due 2005                                     |   |                                | -         |                              |   | -                                   |   |                              | 76,087    |   |   | 76,087 |   |
| 6.50%                  to 10.25% First Mortgage Bonds, due 2006 to 2029 |   |                                | 111,419   |                              |   | 111,165                             |   |                              | 112,421   |   |   | 112,421 |   |
| 4.375%                  Senior Notes, due 2008                          |   |                                | 100,000   |                              |   | 100,000                             |   |                              | -         |   |   | - |   |
| Capital                  lease and other, due 2006 to 2007              |   |                                | 71        |                              |   | 71                                  |   |                              | 117       |   |   | 117 |   |
|                                                                    |   |                                | 996,255   |                              |   | 1,108,890                           |   |                              | 973,390   |   |   | 1,084,514 |   |
|                                                                    |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| **Panhandle                  Energy**                                   |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| 2.75%                  Senior Notes due 2007                            |   |                                | 200,000   |                              |   | 200,000                             |   |                              | 200,000   |   |   | 200,000 |   |
| 4.80%                  Senior Notes due 2008                            |   |                                | 300,000   |                              |   | 300,000                             |   |                              | 300,000   |   |   | 305,214 |   |
| 6.05%                  Senior Notes due 2013                            |   |                                | 250,000   |                              |   | 254,450                             |   |                              | 250,000   |   |   | 268,450 |   |
| 6.50%                  Senior Notes due 2009                            |   |                                | 60,623    |                              |   | 63,228                              |   |                              | 60,623    |   |   | 66,024 |   |
| 8.25%                  Senior Notes due 2010                            |   |                                | 40,500    |                              |   | 45,135                              |   |                              | 40,500    |   |   | 47,430 |   |
| 7.00%                  Senior Notes due 2029                            |   |                                | 66,305    |                              |   | 73,521                              |   |                              | 66,305    |   |   | 73,492 |   |
| Term                  Loan due 2007                                     |   |                                | 255,626   |                              |   | 255,626                             |   |                              | 258,433   |   |   | 258,433 |   |
| Net                  premiums on long-term debt                         |   |                                | 12,205    |                              |   | 12,205                              |   |                              | 14,688    |   |   | 14,688 |   |
|                                                                    |   |                                | 1,185,259 |                              |   | 1,204,165                           |   |                              | 1,190,549 |   |   | 1,233,731 |   |
|                                                                    |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| Total                  consolidated debt and capital lease              |   |                                | 2,181,514 |                              | $      | 2,313,055                           |   |                              | 2,163,939 |   | $ | 2,318,245 |   |
| Less                  current portion                                   |   |                                | 126,648   |                              |   |                                |   |                              | 89,650    |   |   |   |   |
| Less                  fair value swaps of Panhandle Energy              |   |                                | 5,725     |                              |   |                                |   |                              | 3,936     |   |   |   |   |
| Total                  consolidated long-term debt and capital lease    |   | $                                   | 2,049,141 |                              |   |                                |   | $                                 | 2,070,353 |   |   |   |   |

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                    |   |                            |    |     |   |     |   |     |    |     |   | **2011                  and** |   |
|-----------------------------------------|--------|---------------------------------|---------|----------|--------|----------|--------|----------|---------|----------|--------|-------------------------------|--------|
|                                    |   | **2006**                        |    | **2007** |   | **2008** |   | **2009** |    | **2010** |   | **thereafter**                |   |
|                                    |   | (In                  thousands) |    |
|                                    |   |                            |    |     |   |     |   |     |    |     |   |                          |   |
| Southern                  Union Company |   | $                               | 126,648 |     | $      | 1,648    |   | $        | 101,646 |     | $      | 1,375                         |   | $ | 1,375 |   | $ | 763,492 |   |
| Panhandle                  Energy       |   |                            | -       |     |   | 455,626  |   |     | 300,000 |     |   | 60,623                        |   |   | 40,500 |   |   | 316,305 |   |
|                                    |   |                            |    |     |   |     |   |     |    |     |   |                          |   |   |   |   |   |   |   |
| **Total**                               |   | $                               | 126,648 |     | $      | 457,274  |   | $        | 401,646 |     | $      | 61,998                        |   | $ | 41,875 |   | $ | 1,079,797 |   |
|                                    |   |                            |    |     |   |     |   |     |    |     |   |                          |   |   |   |   |   |   |   |

***Term      Note.***
*      2002      Term Note*

***Additional      Debt.***

***Panhandle      Energy Refinancing.***

*Panhandle      Tender Offer*
*Panhandle      Calls*

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Notes      Payable.***
*Long-Term      Facility*
*Uncommitted      Facilities*
*Senior      Notes*

***Bridge      Loan.***
*Bridge      Loan*

***Restrictive      Covenants***
**.      **

|   | (a)   | Under                the Company’s Long-Term Facility, the consolidated debt to total                capitalization ratio, as defined therein, cannot exceed 65                percent.                                                                                                                                                           |
|--------|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (b)   | Under                the Company’s Long-Term Facility, the Company must maintain an EBITDA                interest coverage ratio of at least 2.00 times.                                                                                                                                                                                         |
|   | (c)   | Under                the Company’s First Mortgage Bond indentures for the former Providence Gas                and Fall River Gas territories, the Company’s consolidated debt to total                capitalization ratio, as defined therein, cannot exceed 70 percent                at the                end of any calendar quarter. |
|   | (d)   | All                of the Company’s major borrowing agreements contain cross-defaults if the                Company defaults on an agreement involving at least $3 million of                principal.                                                                                                                                           |
|   |            |                                                                                                                                                                                                                                                                                                                                                    |

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**14.      Employee Benefits **

***Pension      and Other Postretirement Benefits.***
*Plans*
*Panhandle      Energy*

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*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                   |   | **Pension                  Benefits At** |     | **Post-Retirement                  Benefits At** |   |
|------------------------------------------------------------------------|--------|------------------------------------------|----------|--------------------------------------------------|--------|
|                                                                   |   | **December                  31,**        |     | **December                  31,**                |   |
|                                                                   |   | **2005**                                 |     | **2004**                                         |   | **2005** |   | **2004** |   |
|                                                                   |   | (In                  thousands)          |     |
| Change                  in Benefit Obligation:                         |   |                                     |     |                                             |   |   |   |   |   |
| Benefit                  obligation at beginning of period             |   | $                                        | 398,516  |                                             | $      | 386,493 |   | $ | 168,953 |   | $ | 152,425 |   |
| Service                  cost                                          |   |                                     | 7,614    |                                             |   | 3,689 |   |   | 3,631 |   |   | 2,091 |   |
| Interest                  Cost                                         |   |                                     | 22,396   |                                             |   | 11,412 |   |   | 7,594 |   |   | 4,607 |   |
| Benefits                  paid                                         |   |                                     | (20,816  | )                                                |   | (10,217 | ) |   | (5,121 | ) |   | (3,346 | ) |
| Actuarial                  (gain) loss                                 |   |                                     | 19,956   |                                             |   | 9,095 |   |   | (31,701 | ) |   | 14,484 |   |
| Plan                  amendments                                       |   |                                     | -        |                                             |   | 446 |   |   | (28,208 | ) |   | (1,308 | ) |
| Curtailment                  recognition                               |   |                                     | 103      |                                             |   | - |   |   | - |   |   | - |   |
| Settlement                  recognition                                |   |                                     | (12,431  | )                                                |   | (2,402 | ) |   | - |   |   | - |   |
| Benefit                  obligation at end of period                   |   | $                                        | 415,338  |                                             | $      | 398,516 |   | $ | 115,148 |   | $ | 168,953 |   |
|                                                                   |   |                                     |     |                                             |   |   |   |   |   |   |   |   |   |
| Change                  in Plan Assets:                                |   |                                     |     |                                             |   |   |   |   |   |   |   |   |   |
| Fair                  value of plan assets at beginning of period      |   | $                                        | 276,835  |                                             | $      | 276,154 |   | $ | 37,962 |   | $ | 34,004 |   |
| Return                  on plan assets                                 |   |                                     | 35,936   |                                             |   | 1,980 |   |   | 1,487 |   |   | 160 |   |
| Employer                  contributions                                |   |                                     | 18,765   |                                             |   | 11,320 |   |   | 11,181 |   |   | 7,144 |   |
| Benefits                  paid                                         |   |                                     | (20,816  | )                                                |   | (10,217 | ) |   | (5,121 | ) |   | (3,346 | ) |
| Settlement                  recognition                                |   |                                     | (12,431  | )                                                |   | (2,402 | ) |   | - |   |   | - |   |
| Fair                  value of plan assets at end of period            |   | $                                        | 298,289  |                                             | $      | 276,835 |   | $ | 45,509 |   | $ | 37,962 |   |
|                                                                   |   |                                     |     |                                             |   |   |   |   |   |   |   |   |   |
| Funded                  Status:                                        |   |                                     |     |                                             |   |   |   |   |   |   |   |   |   |
| Funded                  status at end of period                        |   | $                                        | (117,049 | )                                                | $      | (121,680 | ) | $ | (69,639 | ) | $ | (130,991 | ) |
| Unrecognized                  net actuarial loss                       |   |                                     | 128,930  |                                             |   | 130,164 |   |   | 9,404 |   |   | 41,017 |   |
| Unrecognized                  prior service cost                       |   |                                     | 9,085    |                                             |   | 13,439 |   |   | (23,940 | ) |   | 3,409 |   |
| Prepaid/                  (accrued) at measurement date                |   |                                     | 20,966   |                                             |   | 21,923 |   |   | (84,175 | ) |   | (86,565 | ) |
| Contributions                  subsequent to measurement date          |   |                                     | 1,184    |                                             |   | 1,044 |   |   | 3,787 |   |   | 1,815 |   |
| Net                  asset (liability) recognized at end of period     |   | $                                        | 22,150   |                                             | $      | 22,967 |   | $ | (80,388 | ) | $ | (84,750 | ) |
|                                                                   |   |                                     |     |                                             |   |   |   |   |   |   |   |   |   |
| Amounts                  recognized in the Consolidated Balance Sheet: |   |                                     |     |                                             |   |   |   |   |   |   |   |   |   |
| Prepaid                  benefit cost                                  |   | $                                        | 29,456   |                                             | $      | 28,705 |   | $ | - |   | $ | - |   |
| Accrued                  benefit liability                             |   |                                     | (100,838 | )                                                |   | (101,487 | ) |   | (80,388 | ) |   | (84,750 | ) |
| Intangible                  asset                                      |   |                                     | 8,249    |                                             |   | 10,923 |   |   | - |   |   | - |   |
| Accumulated                  other comprehensive loss                  |   |                                     | 85,283   |                                             |   | 84,826 |   |   | - |   |   | - |   |
| Net                  asset (liability) recognized                      |   | $                                        | 22,150   |                                             | $      | 22,967 |   | $ | (80,388 | ) | $ | (84,750 | ) |
|                                                                   |   |                                     |     |                                             |   |   |   |   |   |   |   |   |   |

*Employers’      Accounting for Pensions*
*Accumulated      other comprehensive loss*

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                            |   | **Pension                  Benefits** |    |                              |   | **Post-Retirement                  Benefits** |   |
|-------------------------------------------------|--------|---------------------------------------|---------|-----------------------------------|--------|-----------------------------------------------|--------|
|                                            |   | **December                  31,**     |    | **December                  31,** |   |                                          |   | **December                  31,** |   | **December                  31,** |   |
|                                            |   | **2005**                              |    | **2004**                          |   |                                          |   | **2005** |   | **2004** |   |
|                                            |   | ( In                  thousands) |    |
|                                            |   |                                  |    |                              |   |                                          |   |   |   |   |   |
| Projected                  benefit obligation   |   | $                                     | 379,474 |                              | $      | 365,101                                       |   |   |   |   |   | N/A |   |   | N/A |   |
| Accumulated                  benefit obligation |   |                                  | 348,593 |                              |   | 332,329                                       |   |   |   |   | $ | 115,148  |   | $ | 168,953  |   |
| Fair                  value of plan assets      |   |                                  | 246,571 |                              |   | 229,799                                       |   |   |   |   |   | 45,509 |   |   | 37,962 |   |

*Accumulated      other comprehensive loss*

|                                           |   | **Pension                  Benefits** |   | **Post-retirement                  Benefits** |   |
|------------------------------------------------|--------|---------------------------------------|--------|-----------------------------------------------|--------|
|                                           |   | **Year**                              |   | **Six                  Months**               |   | **Years** |   | **Year** |   | **Six                  Months** |   | **Years** |   |
|                                           |   | **Ended**                             |   | **Ended**                                     |   | **Ended** |   | **Ended** |   | **Ended** |   | **Ended** |   |
|                                           |   | **December                  31,**     |   | **December                  31,**             |   | **June                  30,** |   | **December                  31,** |   | **December                  31,** |   | **June                  30,** |   |
|                                           |   | **2005**                              |   | **2004**                                      |   | **2004** |   | **2003** |   | **2005** |   | **2004** |   | **2004** |   | **2003** |   |
| Discount                  rate:                |   |                                  |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning                  of year             |   |                                  | 5.75   | %                                             |   | 6.00 | % |   | 6.50 | % |   | 7.50 | % |   | 5.75 | % |   | 6.00 | % |   | 6.50 | % |   | 7.50 | % |
| End                  of year                   |   |                                  | 5.50   | %                                             |   | 5.75 | % |   | 6.00 | % |   | 6.50 | % |   | 5.50 | % |   | 5.75 | % |   | 6.00 | % |   | 6.50 | % |
| Rate                  of compensation increase |   |                                  |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (average)                                      |   |                                  | 3.24   | %                                             |   | 3.40 | % |   | 3.60 | % |   | 4.00 | % |   | N/A |   |   | N/A |   |   | N/A |   |   | N/A |   |
| Health                  care cost trend rate   |   |                                  | N/A    |                                          |   | N/A |   |   | N/A |   |   | N/A |   |   | 12.00 | % |   | 13.00 | % |   | 13.00 | % |   | 13.00 | % |

|                                                                |   | **December                  31,** |   | **June                  30,** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|-------------------------------|--------|
|                                                                |   | **2005**                          |   | **2004**                      |   | **2004** |   | **2003** |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |
| Health                  care cost trend rate assumed for next year  |   |                              | 12.00  | %                             |   | 13.00 | % |   | 13.00 | % |   | 13.00 | % |
| Ultimate                  trend rate                                |   |                              | 4.65   | %                             |   | 4.75 | % |   | 4.75 | % |   | 5.00 | % |
| Year                  that the rate reaches the ultimate trend rate |   |                              | 2012   |                          |   | 2012 |   |   | 2012 |   |   | 2011 |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |   |   |   |   |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                |   | **Pension                  Benefits** |    | **Post-retirement                  Benefits** |   |
|-----------------------------------------------------|--------|---------------------------------------|---------|-----------------------------------------------|--------|
|                                                |   | **Year**                              |    | **Six                  Months**               |   | **Years** |   | **Year** |   | **Six                  Months** |   | **Years** |   |
|                                                |   | **Ended**                             |    | **Ended**                                     |   | **Ended** |   | **Ended** |   | **Ended** |   | **Ended** |   |
|                                                |   | **December                  31,**     |    | **December                  31,**             |   | **June                  30,** |   | **December                  31,** |   | **December                  31,** |   | **June                  30,** |   |
|                                                |   | **2005**                              |    | **2004**                                      |   | **2004** |   | **2003** |   | **2005** |   | **2004** |   | **2004** |   | **2003** |   |
|                                                |   | (In                  thousands)       |    |
|                                                |   |                                  |    |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service                  cost                       |   | $                                     | 7,614   |                                          | $      | 3,689 |   | $ | 6,533 |   | $ | 5,655 |   | $ | 3,631 |   | $ | 2,091 |   | $ | 3,993 |   | $ | 1,177 |   |
| Interest                  cost                      |   |                                  | 22,396  |                                          |   | 11,412 |   |   | 22,591 |   |   | 22,899 |   |   | 7,594 |   |   | 4,607 |   |   | 8,739 |   |   | 5,579 |   |
| Expected                  return on plan            |   |                                  | (24,211 | )                                             |   | (12,302 | ) |   | (21,477 | ) |   | (24,749 | ) |   | (2,552 | ) |   | (1,100 | ) |   | (1,640 | ) |   | (1,734 | ) |
| Amortization                  of prior service cost |   |                                  | 1,182   |                                          |   | 744 |   |   | 1,145 |   |   | 790 |   |   | (854 | ) |   | 321 |   |   | 266 |   |   | (65 | ) |
| Recognized                  actuarial (gain) loss   |   |                                  | 10,213  |                                          |   | 3,982 |   |   | 8,402 |   |   | 2,433 |   |   | 577 |   |   | 379 |   |   | 485 |   |   | (234 | ) |
| Curtailment                  recognition            |   |                                  | 3,172   |                                          |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Settlement                  recognition             |   |                                  | (644    | )                                             |   | (386 | ) |   | (445 | ) |   | (558 | ) |   | - |   |   | - |   |   | - |   |   | - |   |
| Subtotal                                            |   |                                  | 19,722  |                                          |   | 7,139 |   |   | 16,749 |   |   | 6,470 |   |   | 8,396 |   |   | 6,298 |   |   | 11,843 |   |   | 4,723 |   |
| Regulatory                  adjustment              |   |                                  | 7,521   |                                          |   | - |   |   | - |   |   | - |   |   | 229 |   |   | 222 |   |   | 44 |   |   | - |   |
| Net                  periodic benefit cost          |   | $                                     | 27,243  |                                          | $      | 7,139 |   | $ | 16,749 |   | $ | 6,470 |   | $ | 8,625 |   | $ | 6,520 |   | $ | 11,887 |   | $ | 4,723 |   |

|                                           |   | **Pension                  Benefits** |   | **Post-retirement                  Benefits** |   |
|------------------------------------------------|--------|---------------------------------------|--------|-----------------------------------------------|--------|
|                                           |   | **Year**                              |   | **Six                  Months**               |   | **Years** |   | **Year** |   | **Six                  Months** |   | **Years** |   |
|                                           |   | **Ended**                             |   | **Ended**                                     |   | **Ended** |   | **Ended** |   | **Ended** |   | **Ended** |   |
|                                           |   | **December                  31,**     |   | **December                  31,**             |   | **June                  30,** |   | **December                  31,** |   | **December                  31,** |   | **June                  30,** |   |
|                                           |   | **2005**                              |   | **2004**                                      |   | **2004** |   | **2003** |   | **2005** |   | **2004** |   | **2004** |   | **2003** |   |
| Discount                  rate:                |   |                                  |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning                  of year             |   |                                  | 6.00   | %                                             |   | 6.50 | % |   | 7.50 | % |   | 7.50 | % |   | 6.00 | % |   | 6.50 | % |   | 7.50 | % |   | 7.50 | % |
| End                  of year                   |   |                                  | 5.75   | %                                             |   | 6.00 | % |   | 6.50 | % |   | 7.50 | % |   | 5.75 | % |   | 6.00 | % |   | 6.50 | % |   | 7.50 | % |
| Expected                  return on assets -   |   |                                  |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax                  exempt accounts           |   |                                  | 9.00   | %                                             |   | 9.00 | % |   | 9.00 | % |   | 9.00 | % |   | 7.00 | % |   | 7.00 | % |   | 7.00 | % |   | 9.00 | % |
| Expected                  return on assets -   |   |                                  |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| taxable                  accounts              |   |                                  | N/A    |                                          |   | N/A |   |   | N/A |   |   | N/A |   |   | 5.00 | % |   | 5.00 | % |   | 5.00 | % |   | 5.50 | % |
| Rate                  of compensation increase |   |                                  | 3.40   | %                                             |   | 3.60 | % |   | 4.00 | % |   | 5.00 | % |   | N/A |   |   | N/A |   |   | N/A |   |   | N/A |   |
| Health                  cost trend rate        |   |                                  | N/A    |                                          |   | N/A |   |   | N/A |   |   | N/A |   |   | 13.00 | % |   | 13.00 | % |   | 13.00 | % |   | 12.00 | % |
|                                           |   |                                  |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

*Table            of Contents*

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                |   | **December                  31,** |   | **June                  30,** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|-------------------------------|--------|
|                                                                |   | **2005**                          |   | **2004**                      |   | **2004** |   | **2003** |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |
| Health                  care cost trend rate assumed for next year  |   |                              | 13.00  | %                             |   | 13.00 | % |   | 13.00 | % |   | 12.00 | % |
| Ultimate                  trend rate                                |   |                              | 4.75   | %                             |   | 4.75 | % |   | 5.00 | % |   | 6.00 | % |
| Year                  that the rate reaches the ultimate trend rate |   |                              | 2012   |                          |   | 2012 |   |   | 2011 |   |   | 2006 |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |   |   |   |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |   |   |   |   |

|                                                                      |   |   |   | **One                  Percentage Point**    |   | **One                  Percentage Point**    |   |
|---------------------------------------------------------------------------|--------|--------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
|                                                                      |   |   |   | **Increase                  in Health Care** |   | **Decrease                  in Health Care** |   |
|                                                                      |   |   |   | **Trend                  Rate**              |   | **Trend                  Rate**              |   |
|                                                                      |   |   |   |  (In                  thousands)        |   |
|                                                                      |   |   |   |                                         |   |                                         |   |
| Effect                  on total service and interest cost components     |   |   |   |                                         | $      | 1,192                                        |   | $ | (894 | ) |
| Effect                  on accumulated post-retirement benefit obligation |   |   |   |                                         | $      | 12,019                                       |   | $ | (9,527 | ) |
|                                                                      |   |   |   |                                         |   |                                         |   |   |   |   |

***Discount      Rate Selection.***
*** ***

***Pension      Plan Asset Information.***
*** ***

***Postretirement      Health and Life Plans’ Asset Information.***
*Postretirement      Plans*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                      |   | **Pension                  Benefits**   |   |   |   | **Post-retirement                  Benefits **** **  |   |   |   |
|-------------------------------------------|--------|-----------------------------------------|--------|--------|--------|---------------------------------------------------------------------|--------|--------|--------|
|                                      |   | **October                  1, 2004 to** |   |   |   | **April                  1, 2004 to**                               |   |   |   | **October                  1, 2004 to** |   |   |   | **April                  1, 2004 to** |   |   |   |
| **Asset                  Category**       |   | **September                  30, 2005** |   |   |   | **September                  30, 2004**                             |   |   |   | **September                  30, 2005** |   |   |   | **September                  30, 2004** |   |   |   |
|                                      |   |                                    |   |   |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
| Equity                  securities        |   |                                    | 74     | %      |   |                                                                |   |   | 66     | % |   |   |   |   | 15 | % |   |   |   |   | 18 | % |
| Debt                  securities          |   |                                    | 19     | %      |   |                                                                |   |   | 28     | % |   |   |   |   | 37 | % |   |   |   |   | 47 | % |
| Other                  - cash equivalents |   |                                    | 7      | %      |   |                                                                |   |   | 6      | % |   |   |   |   | 48 | % |   |   |   |   | 35 | % |
| Total                                     |   |                                    | 100    | %      |   |                                                                |   |   | 100    | % |   |   |   |   | 100 | % |   |   |   |   | 100 | % |
|                                      |   |                                    |   |   |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|      |   |                                        |    | **Post-retirement**                   |   |  **Post-retirement**                   |   |
|-----------|--------|---------------------------------------------|---------|---------------------------------------|--------|---------------------------------------------|--------|
|      |   |                                        |    | **Benefits**                          |   |  **Benefits**                          |   |
|      |   | **Pension**                                 |    | **(Gross,                  Before**   |   |  **(Medicare                  Part D** |   |
| **Years** |   | **Benefits**                                |    | **Medicare                  Part D)** |   |  **Subsidy)**                          |   |
|      |   | (In                  thousands)   |    |
|      |   |                                        |    |                                  |   |                                   |   |
| 2006      |   | $                                           | 20,762  |                                  | $      | 7,212                                       |   | $ | 669 |   |
| 2007      |   |                                        | 21,633  |                                  |   | 7,008                                       |   |   | 760 |   |
| 2008      |   |                                        | 21,692  |                                  |   | 7,120                                       |   |   | 862 |   |
| 2009      |   |                                        | 22,779  |                                  |   | 7,545                                       |   |   | 971 |   |
| 2010      |   |                                        | 23,779  |                                  |   | 7,843                                       |   |   | 1,089 |   |
| 2011-2015 |   |                                        | 135,265 |                                  |   | 47,658                                      |   |   | 6,150 |   |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Recently      Enacted Legislation.***

***Defined      Contribution Plan.***
*Savings      Plan*

***Panhandle      Energy.***
*OPEB*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

***Common      Stock Held in Trust.***

***Benefit      Plan Termination.***
*Supplemental      Plan*

**15.      Taxes on Income **

|                                           |   | **Year**                          |   | **Six                  Months**   |   | **Years**                     |   |
|------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-------------------------------|--------|
|                                           |   | **Ended**                         |   | **Ended**                         |   | **Ended**                     |   |
|                                           |   | **December                  31,** |   | **December                  31,** |   | **June                  30,** |   |
| **Income                  Tax Expense**        |   | **2005**                          |   | **2004**                          |   | **2004**                      |   | **2003** |   |
|                                           |   | (In                  thousands)   |   |
| Current:                                       |   |                              |   |                              |   |                          |   |   |   |
| Federal                                        |   | $                                 | 7,155  |                              | $      | 1,761                         |   | $ | 1,497 |   | $ | (15,258 | ) |
| State                                          |   |                              | 2,511  |                              |   | 84                            |   |   | 151 |   |   | (6,563 | ) |
|                                           |   |                              | 9,666  |                              |   | 1,845                         |   |   | 1,648 |   |   | (21,821 | ) |
|                                           |   |                              |   |                              |   |                          |   |   |   |   |   |   |   |
| Deferred:                                      |   |                              |   |                              |   |                          |   |   |   |   |   |   |   |
| Federal                                        |   |                              | 56,402 |                              |   | 10,953                        |   |   | 60,380 |   |   | 38,926 |   |
| State                                          |   |                              | 4,809  |                              |   | 1,129                         |   |   | 7,075 |   |   | 7,168 |   |
|                                           |   |                              | 61,211 |                              |   | 12,082                        |   |   | 67,455 |   |   | 46,094 |   |
|                                           |   |                              |   |                              |   |                          |   |   |   |   |   |   |   |
| Total                  income tax expense from |   |                              |   |                              |   |                          |   |   |   |   |   |   |   |
| continuing                  operations         |   | $                                 | 70,877 |                              | $      | 13,927                        |   | $ | 69,103 |   | $ | 24,273 |   |
|                                           |   |                              |   |                              |   |                          |   |   |   |   |   |   |   |

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                   |   | **December                  31,**     |     |   |   | **December                  31,** |   |
|--------------------------------------------------------|--------|---------------------------------------|----------|--------|--------|-----------------------------------|--------|
| **Deferred                  Income Tax Analysis**      |   | **2005**                              |     |   |   | **2004**                          |   |
|                                                   |   | (In                  thousands)  |     |
| Deferred                  income tax assets:           |   |                                  |     |   |   |                              |   |
| Alternative                  minimum tax credit        |   | $                                     | 26,089   |   |   |                              |   | $ | 24,352 |   |
| Insurance                  accruals                    |   |                                  | 3,024    |   |   |                              |   |   | 2,268 |   |
| Bad                  debt reserves                     |   |                                  | 4,952    |   |   |                              |   |   | 4,866 |   |
| Post-retirement                  benefits              |   |                                  | 21,198   |   |   |                              |   |   | 17,326 |   |
| Minimum                  pension liability             |   |                                  | 34,017   |   |   |                              |   |   | 39,909 |   |
| NOL                  carry-forward                     |   |                                  | -        |   |   |                              |   |   | 12,434 |   |
| Unconsolidated                  investments            |   |                                  | -        |   |   |                              |   |   | 11,942 |   |
| Other                                                  |   |                                  | 45,913   |   |   |                              |   |   | 58,419 |   |
| Total                  deferred income tax assets      |   |                                  | 135,193  |   |   |                              |   |   | 171,516 |   |
| Valuation                  allowance                   |   |                                  | -        |   |   |                              |   |   | (11,942 | ) |
| Net                  deferred income tax assets        |   |                                  | 135,193  |   |   |                              |   |   | 159,574 |   |
|                                                   |   |                                  |     |   |   |                              |   |   |   |   |
| Deferred                  income tax liabilities:      |   |                                  |     |   |   |                              |   |   |   |   |
| Property,                  plant and equipment         |   |                                  | (448,359 | )      |   |                              |   |   | (427,380 | ) |
| Unconsolidated                  investments            |   |                                  | (7,961   | )      |   |                              |   |   | - |   |
| Unamortized                  debt expense              |   |                                  | (5,686   | )      |   |                              |   |   | (5,991 | ) |
| Regulatory                  liability                  |   |                                  | (14,620  | )      |   |                              |   |   | (15,358 | ) |
| Other                                                  |   |                                  | (45,622  | )      |   |                              |   |   | (48,341 | ) |
| Total                  deferred income tax liabilities |   |                                  | (522,248 | )      |   |                              |   |   | (497,070 | ) |
| Net                  deferred income tax liability     |   |                                  | (387,055 | )      |   |                              |   |   | (337,496 | ) |
| Less                  current income tax assets        |   |                                  | 9,435    |   |   |                              |   |   | 27,998 |   |
| Accumulated                  deferred income taxes     |   | $                                     | (396,490 | )      |   |                              |   | $ | (365,494 | ) |

*Deferred      credits*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                   |   | **Year**                          |    | **Six                  Months**   |   | **Years**                     |   |
|------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|-------------------------------|--------|
|                                                                   |   | **Ended**                         |    | **Ended**                         |   | **Ended**                     |   |
|                                                                   |   | **December                  31,** |    | **December                  31,** |   | **June                  30,** |   |
| **Effective                  Income Tax Rate Analysis**                |   | **2005**                          |    | **2004**                          |   | **2004**                      |   | **2003** |   |
|                                                                   |   | (In                  thousands)   |    |
| Computed                  statutory income tax expense                 |   |                              |    |                              |   |                          |   |   |   |
| from                  continuing operations at 35%                     |   | $                                 | 32,046  |                              | $      | 10,044                        |   | $ | 64,095 |   | $ | 23,780 |   |
| Changes                  in income taxes resulting from:               |   |                              |    |                              |   |                          |   |   |   |   |   |   |   |
| Goodwill                  impairment charge                            |   |                              | 61,250  |                              |   | -                             |   |   | - |   |   | - |   |
| Valuation                  allowance                                   |   |                              | (11,942 | )                                 |   | 11,942                        |   |   | - |   |   | - |   |
| Dividend                  received deduction                           |   |                              | (8,731  | )                                 |   | (9,800                        | )      |   | - |   |   | - |   |
| State                  income taxes, net of federal income tax benefit |   |                              | 4,757   |                              |   | 788                           |   |   | 4,697 |   |   | 326 |   |
| Analysis                  of deferred tax accounts                     |   |                              | (4,757  | )                                 |   | -                             |   |   | - |   |   | - |   |
| Investment                  Tax Credit amortization                    |   |                              | (422    | )                                 |   | (210                          | )      |   | (424 | ) |   | (421 | ) |
| Other                                                                  |   |                              | (1,324  | )                                 |   | 1,163                         |   |   | 735 |   |   | 588 |   |
| Actual                  income tax expense from continuing operations  |   | $                                 | 70,877  |                              | $      | 13,927                        |   | $ | 69,103 |   | $ | 24,273 |   |

**16.      Regulation and Rates**

***Panhandle      Energy.***
*Phase      I*
*Phase      II*
*Construction      work-in-progress*

*HCA*

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Missouri      Gas Energy.***

***New      England Gas Company.***
*RIPUC*

*DAC*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**17.      Leases**

**18.      Commitments and Contingencies **

**Environmental**

*Environmental      Remediation Liabilities,*

|                                             |   | **December                  31,** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|
|                                             |   | **2005**                          |   | **2004** |   |
|                                             |   | (In                  thousands)   |   |
|                                             |   |                              |   |   |   |
| Current                                          |   | $                                 | 6,541  |   | $ | 4,421 |   |
| Noncurrent                                       |   |                              | 27,274 |   |   | 25,919 |   |
| Total                  Environmental Liabilities |   | $                                 | 33,815 |   | $ | 30,340 |   |

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**Transportation      and Storage Segment Environmental Matters.**

***Gas      Transmission Systems***
***.***
*PCBs*

*U.S.      EPA*
*PRP*

*Illinois      EPA*

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Air      Quality Control.***
*NOX      SIP Call*
*NOx*

*HAPs*

***Spill      Control.***

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**D**
**istribution      Segment Environmental Matters.**

*MGPs)*

**Litigation.**
*** ***

*Accounting      for Contingencies*

***Bay      Street, Tiverton, Rhode Island Site.***
*Bay      Street Area*

***Mercury      Release.***

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Hope      Land***
***.***
*Hope      Land*

***Jack      Grynberg.***

***Southwest      Gas Litigation.***
*Southwest*
*Ninth      Circuit*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Other      Commitments and Contingencies. **

*Taxing      Authorities*
*TIF      Plan*
*TIF      Debt*

*MMS*

----

*Table            of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**19.      Discontinued Operations **

*D*
*iscontinued      operations*

*D*
*iscontinued      operations*

|                                                         |   | **Year                Ended** |    |
|--------------------------------------------------------------|--------|-------------------------------|---------|
|                                                         |   | **June                30,**   |    |
|                                                         |   | **2003**                      |    |
|                                                         |   | (In                thousands) |    |
|                                                         |   |                          |    |
| Operating                revenues                            |   | $                             | 144,490 |   |
| Operating                income                              |   | $                             | 21,602  |   |
| Net                earnings from discontinued operations (a) |   | $                             | 32,520  |   |

**20.       Quarterly Operations (Unaudited)**

|                                                            |   | **Quarters                  Ended**                       |    |
|-----------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                            |   | **March                  31**                             |    | **June                  30** |   | **September                  30** |   | **December                  31** |   |
|                                                            |   | (In                  thousands, except per share amounts) |    |
|                                                            |   |                                                      |    |   |   |   |   |   |   |
| Operating                  revenues                             |   | $                                                         | 767,556 |   | $ | 305,164 |   | $ | 255,047 |   | $ | 691,663 |   |
| Operating                  income (loss)                        |   |                                                      | 155,582 |   |   | 31,076 |   |   | 40,289 |   |   | (63,903 | ) |
| Net                  earnings (loss) from continuing operations |   |                                                      | 92,196  |   |   | 15,676 |   |   | 19,590 |   |   | (106,779 | ) |
| Net                  earnings (loss) available for common       |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| stockholders                                                    |   |                                                      | 87,855  |   |   | 11,335 |   |   | 15,249 |   |   | (111,121 | ) |
| Diluted                  net earnings (loss) per share          |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| available                  for common stockholders: (1)         |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| Continuing                  operations                          |   |                                                      | 0.81    |   |   | 0.10 |   |   | 0.13 |   |   | (1.00 | ) |
| Available                  for common stockholders              |   |                                                      | 0.81    |   |   | 0.10 |   |   | 0.13 |   |   | (1.00 | ) |
|                                                            |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |

** **
** **

|                                                    |   | **Quarters                  Ended**                       |    |
|---------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                    |   | **September                  30**                         |    | **December                  31** |   |
|                                                    |   | (In                  thousands, except per share amounts) |    |
|                                                    |   |                                                      |    |   |   |
| Operating                  revenues                     |   | $                                                         | 234,576 |   | $ | 559,762 |   |
| Operating                  income                       |   |                                                      | 18,794  |   |   | 88,137 |   |
| Net                  earnings (loss) from continuing    |   |                                                      |    |   |   |   |   |
| operations                                              |   |                                                      | (7,140  | ) |   | 21,911 |   |
| Net                  earnings (loss) available for      |   |                                                      |    |   |   |   |   |
| common                  stockholders                    |   |                                                      | (11,481 | ) |   | 17,569 |   |
| Diluted                  net earnings (loss) per share  |   |                                                      |    |   |   |   |   |
| available                  for common stockholders: (1) |   |                                                      |    |   |   |   |   |
| Continuing                  operations                  |   |                                                      | (0.14   | ) |   | 0.19 |   |
| Available                  for common stockholders      |   |                                                      | (0.14   | ) |   | 0.19 |   |

----

*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                    |   | **Quarters                  Ended**                       |    |
|---------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                    |   | **September                  30**                         |    | **December                  31** |   | **March                  30** |   | **June                  30** |   |
|                                                    |   | (In                  thousands, except per share amounts) |    |
|                                                    |   |                                                      |    |   |   |   |   |   |   |
| Operating                  revenues                     |   | $                                                         | 231,351 |   | $ | 507,066 |   | $ | 774,551 |   | $ | 286,806 |   |
| Operating                  income                       |   |                                                      | 23,936  |   |   | 95,330 |   |   | 150,337 |   |   | 35,724 |   |
| Net                  earnings (loss) from continuing    |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| operations                                              |   |                                                      | (3,707  | ) |   | 38,422 |   |   | 75,367 |   |   | 3,943 |   |
| Net                  earnings (loss) available for      |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| common                  stockholders                    |   |                                                      | (3,707  | ) |   | 34,418 |   |   | 71,026 |   |   | (398 | ) |
| Diluted                  net earnings (loss) per share  |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| available                  for common stockholders: (1) |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| Continuing                  operations                  |   |                                                      | (0.05   | ) |   | 0.42 |   |   | 0.87 |   |   | - |   |
| Available                  for common stockholders      |   |                                                      | (0.05   | ) |   | 0.42 |   |   | 0.87 |   |   | - |   |
|                                                    |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |

**21.      Reportable Segments**

*ProvEnergy      Power*
*Note      23, Related Party Transactions*

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*EBIT*
*Earnings      from unconsolidated investments*
*Net      earnings available for common stockholders*

| ·   | items                that do not impact net earnings from continuing operations, such                as                extraordinary items, discontinued operations and the impact of accounting                changes; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | income                taxes; |
|--------------------|------------------------------|

| ·   | interest;                and |
|--------------------|------------------------------|

| ·   | dividends                on preferred stock. |
|--------------------|----------------------------------------------|

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*Table          of Contents*

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                         |   | **Year**                          |      | **Six                  Months**   |   | **Years**                     |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|-------------------------------|--------|
|                                                                         |   | **Ended**                         |      | **Ended**                         |   | **Ended**                     |   |
|                                                                         |   | **December                  31,** |      | **December                  31,** |   | **June                  30,** |   |
| **Segment                  Data**                                            |   | **2005**                          |      | **2004**                          |   | **2004**                      |   | **2003** |   |
|                                                                         |   | (In                  thousands)   |      |
| Revenues                  from external customers:                           |   |                              |      |                              |   |                          |   |   |   |
| Transportation                  and Storage                             |   | $                                 | 505,233   |                              | $      | 242,743                       |   | $ | 490,883 |   | $ | 24,522 |   |
| Distribution                                                            |   |                              | 1,503,272 |                              |   | 549,346                       |   |   | 1,304,405 |   |   | 1,158,964 |   |
| Total                  segment operating revenues                       |   |                              | 2,008,505 |                              |   | 792,089                       |   |   | 1,795,288 |   |   | 1,183,486 |   |
| Corporate                  and other                                    |   |                              | 10,925    |                              |   | 2,249                         |   |   | 4,486 |   |   | 5,014 |   |
|                                                                         |   | $                                 | 2,019,430 |                              | $      | 794,338                       |   | $ | 1,799,774 |   | $ | 1,188,500 |   |
|                                                                         |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Depreciation                  and amortization:                              |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Transportation                  and Storage                             |   | $                                 | 62,171    |                              | $      | 30,159                        |   | $ | 59,988 |   | $ | 3,197 |   |
| Distribution                                                            |   |                              | 63,278    |                              |   | 32,511                        |   |   | 57,601 |   |   | 56,396 |   |
| Total                  segment depreciation and amortization            |   |                              | 125,449   |                              |   | 62,670                        |   |   | 117,589 |   |   | 59,593 |   |
| Corporate                  and other                                    |   |                              | 944       |                              |   | 706                           |   |   | 1,166 |   |   | 1,049 |   |
|                                                                         |   | $                                 | 126,393   |                              | $      | 63,376                        |   | $ | 118,755 |   | $ | 60,642 |   |
|                                                                         |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Earnings                  (loss) from unconsolidated investments:            |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Transportation                  and Storage                             |   | $                                 | 70,618    |                              | $      | 4,761                         |   | $ | 200 |   | $ | 7 |   |
| Corporate                  and other                                    |   |                              | 124       |                              |   | (16                           | )      |   | - |   |   | 415 |   |
|                                                                         |   | $                                 | 70,742    |                              | $      | 4,745                         |   | $ | 200 |   | $ | 422 |   |
|                                                                         |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Other                  income (expense), net:                                |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Transportation                  and Storage                             |   | $                                 | 571       |                              | $      | 89                            |   | $ | 7,210 |   | $ | 64 |   |
| Distribution                                                            |   |                              | (1,452    | )                                 |   | (66                           | )      |   | 1,944 |   |   | 2,209 |   |
| Total                  segment other income (expense), net              |   |                              | (881      | )                                 |   | 23                            |   |   | 9,154 |   |   | 2,273 |   |
| Corporate                  and other                                    |   |                              | (6,188    | )                                 |   | (18,103                       | )      |   | (3,686 | ) |   | 15,706 |   |
|                                                                         |   | $                                 | (7,069    | )                                 | $      | (18,080                       | )      | $ | 5,468 |   | $ | 17,979 |   |
|                                                                         |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Segment                  performance:                                        |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Transportation                  and Storage EBIT                        |   | $                                 | 281,344   |                              | $      | 94,971                        |   | $ | 200,912 |   | $ | 9,699 |   |
| Distribution                  EBIT                                      |   |                              | (43,928   | )                                 |   | 19,330                        |   |   | 120,838 |   |   | 144,971 |   |
| Total                  segment EBIT                                     |   |                              | 237,416   |                              |   | 114,301                       |   |   | 321,750 |   |   | 154,670 |   |
| Corporate                  and other                                    |   |                              | (10,699   | )                                 |   | (20,705                       | )      |   | (10,755 | ) |   | 6,095 |   |
| Interest                                                                |   |                              | 135,157   |                              |   | 64,898                        |   |   | 127,867 |   |   | 83,343 |   |
| Dividends                  on preferred securities of subsidiary trust  |   |                              | -         |                              |   | -                             |   |   | - |   |   | 9,480 |   |
| Federal                  and state income taxes                         |   |                              | 70,877    |                              |   | 13,927                        |   |   | 69,103 |   |   | 24,273 |   |
| Net                  earnings from discontinued operations              |   |                              | -         |                              |   | -                             |   |   | - |   |   | 32,520 |   |
| Preferred                  stock dividends                              |   |                              | 17,365    |                              |   | 8,683                         |   |   | 12,686 |   |   | - |   |
| Net                  earnings                                                |   | $                                 | 3,318     |                              | $      | 6,088                         |   | $ | 101,339 |   | $ | 76,189 |   |
|                                                                         |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                  |   | **Year**                          |      | **Six                  Months**   |   | **Years**                     |   |
|-------------------------------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|-------------------------------|--------|
|                                                  |   | **Ended**                         |      | **Ended**                         |   | **Ended**                     |   |
|                                                  |   | **December                  31,** |      | **December                  31,** |   | **June                  30,** |   |
| **Segment                  Data**                     |   | **2005**                          |      | **2004**                          |   | **2004**                      |   | **2003** |   |
|                                                  |   | (In                  thousands)   |      |
| Total                  assets:                        |   |                              |      |                              |   |                          |   |   |   |
| Transportation                  and Storage      |   | $                                 | 3,155,549 |                              | $      | 2,348,354                     |   | $ | 2,197,289 |   | $ | 2,212,467 |   |
| Distribution                                     |   |                              | 2,490,164 |                              |   | 2,448,750                     |   |   | 2,231,970 |   |   | 2,243,257 |   |
| Total                  segment assets            |   |                              | 5,645,713 |                              |   | 4,797,104                     |   |   | 4,429,259 |   |   | 4,455,724 |   |
| Corporate                  and other             |   |                              | 191,106   |                              |   | 771,185                       |   |   | 143,199 |   |   | 135,214 |   |
| Total                  consolidated assets            |   | $                                 | 5,836,819 |                              | $      | 5,568,289                     |   | $ | 4,572,458 |   | $ | 4,590,938 |   |
|                                                  |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Expenditures                  for long-lived assets:  |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| Transportation                  and Storage      |   | $                                 | 189,415   |                              | $      | 111,886                       |   | $ | 131,378 |   | $ | 5,128 |   |
| Distribution                                     |   |                              | 84,896    |                              |   | 56,442                        |   |   | 78,791 |   |   | 67,327 |   |
| Total                  segment expenditures for  |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
|    long-lived                  assets       |   |                              | 274,311   |                              |   | 168,328                       |   |   | 210,169 |   |   | 72,455 |   |
| Corporate                  and other             |   |                              | 2,306     |                              |   | 10,109                        |   |   | 15,884 |   |   | 7,275 |   |
| Total                  consolidated expenditures for  |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |
| long-lived                  assets                    |   | $                                 | 276,617   |                              | $      | 178,437                       |   | $ | 226,053 |   | $ | 79,730 |   |
|                                                  |   |                              |      |                              |   |                          |   |   |   |   |   |   |   |

***Significant      Customers and Credit Risk.***
* *

|                                       |   | **Percent                  of**           |   |  **Percent                  of**      |   |
|--------------------------------------------|--------|-----------------------------------------------------|--------|------------------------------------------------------|--------|
|                                       |   | **Transportation                  and**   |   |  **Company                  Total**   |   |
|                                       |   | **Storage                  Segment**      |   |  **Operating**                        |   |
|                                       |   | **Revenues**                              |   |  **Revenues**                         |   |
|                                       |   | **For                  Year**                       |   |  **For                  Six**                   |   |  **For                  Year** |   |  **For                  Six** |   |
|                                       |   | **Ended**                                           |   |  **Months                  Ended**              |   |  **Ended** |   |  **Months                  Ended** |   |
|                                       |   | **December                  31,**                   |   |  **December                  31,**              |   |  **December                  31,** |   |  **December                  31,** |   |
| **Customer**                               |   | **2005**                                            |   |  **2004**                                       |   |  **2005** |   |  **2004** |   |
|                                       |   |                                                |   |                                            |   |    |   |    |   |
| BG                  LNG Services           |   |                                                | 17     | %                                                    |   | 16 | % |   | 4 | % |   | 5 | % |
| ProLiance                                  |   |                                                | 16     |                                                 |   | 17 |   |   | 4 |   |   | 5 |   |
| Ameren                  Corp               |   |                                                | 11     |                                                 |   | 11 |   |   | 3 |   |   | 3 |   |
| CMS                  Energy and affiliates |   |                                                | 8      |                                                 |   | 9 |   |   | 2 |   |   | 3 |   |
| Other                  top 10 customers    |   |                                                | 14     |                                                 |   | 14 |   |   | 4 |   |   | 5 |   |
| Remaining                  customers       |   |                                                | 34     |                                                 |   | 33 |   |   | 8 |   |   | 10 |   |
| Total                  percentage          |   |                                                | 100    | %                                                    |   | 100 | % |   | 25 | % |   | 31 | % |
|                                       |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |

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*Table            of Contents*

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**22.      Transition Period Comparative Data **

|                                                                       |   | **Six                  Months Ended December 31,**                        |       |
|----------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|------------|
|                                                                       |   | **2004**                                                                  |       | **2003** |   |
|                                                                       |   | (In                  thousands, except shares and per share amounts) |       |
|                                                                       |   |                                                                      |       | (Unaudited) |   |
|                                                                       |   |                                                                      |       |   |   |
| Operating                  revenues                                        |   | $                                                                         | 794,338    |   | $ | 738,417 |   |
|                                                                       |   |                                                                      |       |   |   |   |   |
| Operating                  income                                          |   |                                                                      | 106,931    |   |   | 119,266 |   |
|                                                                       |   |                                                                      |       |   |   |   |   |
| Earnings                  before income taxes                              |   |                                                                      | 28,698     |   |   | 57,077 |   |
|                                                                       |   |                                                                      |       |   |   |   |   |
| Federal                  and state income taxes                            |   |                                                                      | (13,927    | ) |   | (22,362 | ) |
|                                                                       |   |                                                                      |       |   |   |   |   |
| Net                  earnings                                              |   |                                                                      | 14,771     |   |   | 34,715 |   |
|                                                                       |   |                                                                      |       |   |   |   |   |
| Preferred                  stock dividends                                 |   |                                                                      | (8,683     | ) |   | (4,004 | ) |
|                                                                       |   |                                                                      |       |   |   |   |   |
| Net                  earnings available for common stockholders            |   |  $                                                                   | 6,088      |   |  $ | 30,711 |   |
|                                                                       |   |                                                                      |       |   |   |   |   |
| Net                  earnings available for common stockholders per share: |   |                                                                      |       |   |   |   |   |
| Basic                                                                      |   | $                                                                         | 0.07       |   |  $ | 0.38 |   |
| Diluted                                                                    |   |                                                                      | 0.07       |   |   | 0.37 |   |
|                                                                       |   |                                                                      |       |   |   |   |   |
| Weighted                  average shares outstanding:                      |   |                                                                      |       |   |   |   |   |
| Basic                                                                      |   |                                                                      | 87,313,787 |   |   | 81,649,310 |   |
| Diluted                                                                    |   |                                                                      | 89,717,427 |   |   | 82,531,182 |   |

**23.       Related Party Transactions**

*Manager*

*Accounts      receivable - related parties*

----

*Table          of Contents*

**24.      Subsequent Events**

*Note      3 - Acquisitions and Sales*

----

*Table            of Contents*

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

** **
*Internal        Control - Integrated Framework*
** **
** **
*Internal        Control - Integrated Framework*

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*Table            of Contents*

----

**CCE        Holdings, LLC**

**and        Subsidiaries**

***Year        ended December 31, 2005 and the period from inception (May 14, 2004) to December        31, 2004***

***with        Report of Independent Registered Public Accounting        Firm***

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*Table            of Contents*

**TABLE        OF CONTENTS**

|                                                                                                                                                      |  **Page** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
|  **Report of Independent Registered Public                  Accounting                  Firm**          |  1        |
|                                                                                                                                                      |           |
|                                                                                                                                                      |           |
| **Audited Consolidated Financial                  Statements**                                                                                            |           |
|  Consolidated                    Balance Sheets                                                                                                 |  2        |
|  Consolidated                    Statements of Operations                                                                        |  3        |
|  Consolidated                    Statements of Members’ Equity                                                                  |  4        |
|  Consolidated                    Statements of Cash Flows                                                                        |  5        |
|  Notes                    to Consolidated Financial                    Statements                                           |  6-29     |
|                                                                                                                                                      |           |

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*Table            of Contents*

**Report        of Independent Registered Public Accounting Firm**

** **

** **

*1*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**CONSOLIDATED        BALANCE SHEETS**

**(In        Thousands)**

|                                                                                                                                                    |   | **December                    31,** |      | **December                    31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|-------------------------------------|--------|
|                                                                                                                                                    |   | **2005**                            |      | **2004**                            |   |
| **ASSETS**                                                                                                                                              |   |                                |      |                                |   |
|                                                                                                                                                    |   |                                |      |                                |   |
| **Current                    Assets**                                                                                                                   |   |                                |      |                                |   |
| Cash                    and cash equivalents                                                                                                            |   | $                                   | 31,904    |                                | $      | 5,821 |   |
| Accounts                    receivable - customers, net of allowance of $98 and $0 in 2005                    and 2004,                    respectively |   |                                | 20,357    |                                |   | 20,248 |   |
| Accounts                    receivable - associated companies                                                                                      |   |                                | 4,258     |                                |   | 12,673 |   |
| Transportation                    and exchange gas receivable                                                                                      |   |                                | 4,812     |                                |   | 3,406 |   |
| Other                                                                                                                                                   |   |                                | 8,652     |                                |   | 11,930 |   |
| Total                    Current Assets                                                                                                                 |   |                                | 69,983    |                                |   | 54,078 |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Property,                    Plant and Equipment, at Cost**                                                                                           |   |                                |      |                                |   |   |   |
| Plant                    in service                                                                                                                     |   |                                | 1,092,551 |                                |   | 911,174 |   |
| Construction                    work in progress                                                                                                        |   |                                | 7,419     |                                |   | 100,420 |   |
| Less                    - Accumulated depreciation and amortization                                                                                     |   |                                | (25,627   | )                                   |   | (2,777 | ) |
| Property,                    Plant and Equipment, Net                                                                                                   |   |                                | 1,074,343 |                                |   | 1,008,817 |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Other                    Assets**                                                                                                                     |   |                                |      |                                |   |   |   |
| Investment                    in unconsolidated affiliate                                                                                               |   |                                | 1,010,440 |                                |   | 998,549 |   |
| Goodwill                                                                                                                                                |   |                                | 113,289   |                                |   | 129,042 |   |
| Regulatory                    assets                                                                                                                    |   |                                | 64,869    |                                |   | 63,321 |   |
| Other                                                                                                                                                   |   |                                | 50,933    |                                |   | 58,170 |   |
| Total                    Other Assets                                                                                                                   |   |                                | 1,239,531 |                                |   | 1,249,082 |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Total                    Assets**                                                                                                                     |   | $                                   | 2,383,857 |                                | $      | 2,311,977 |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **LIABILITIES                    AND MEMBERS’ EQUITY**                                                                                            |   |                                |      |                                |   |   |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Current                    Liabilities**                                                                                                              |   |                                |      |                                |   |   |   |
| Accounts                    payable - trade and other                                                                                                   |   | $                                   | 5,419     |                                | $      | 14,700 |   |
| Accounts                    payable - associated companies                                                                                              |   |                                | 11,094    |                                |   | 10,739 |   |
| Transportation                    and exchange gas payable                                                                                              |   |                                | 5,140     |                                |   | 3,106 |   |
| Accrued                    taxes, other than income                                                                                                     |   |                                | 6,008     |                                |   | 6,051 |   |
| Accrued                    interest                                                                                                                     |   |                                | 5,410     |                                |   | 5,188 |   |
| Other                                                                                                                                                   |   |                                | 16,357    |                                |   | 24,684 |   |
| Total                    Current Liabilities                                                                                                            |   |                                | 49,428    |                                |   | 64,468 |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Deferred                    Credits**                                                                                                                 |   |                                | 14,092    |                                |   | 2,907 |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Long-term                    Debt**                                                                                                                   |   |                                | 1,020,000 |                                |   | 1,055,000 |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Commitments                    and Contingencies**                    (Note 10)                                                                       |   |                                |      |                                |   |   |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Members’                    Equity**                                                                                                            |   |                                | 1,300,337 |                                |   | 1,189,602 |   |
|                                                                                                                                                    |   |                                |      |                                |   |   |   |
| **Total                    Liabilities and Members’ Equity**                                                                                      |   | $                                   | 2,383,857 |                                | $      | 2,311,977 |   |

*2*

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*Table            of Contents*

**CCE          HOLDINGS, LLC AND SUBSIDIARIES**

**CONSOLIDATED          STATEMENT OF OPERATIONS**

**(In          Thousands)**

|                                                            |   | **Year                  Ended**   |    | **From                  Inception****(May                  14, 2004) to** |   |
|-----------------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------------------------------------------------|--------|
|                                                            |   | **December                  31,** |    | **December                  31,**                                         |   |
|                                                            |   | **2005**                          |    | **2004**                                                                  |   |
|                                                            |   |                              |    |                                                                      |   |
| **Revenues**                                                    |   |                              |    |                                                                      |   |
| Transportation                                                  |   | $                                 | 187,274 |                                                                      | $      | 22,361 |   |
| Gas                  and liquids sold and other                 |   |                              | 49,085  |                                                                      |   | 4,833 |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
| Total                  Revenues                                 |   |                              | 236,359 |                                                                      |   | 27,194 |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
| **Costs                  and Expenses**                         |   |                              |    |                                                                      |   |   |   |
| Operating                  and maintenance expenses             |   |                              | 69,474  |                                                                      |   | 15,709 |   |
| Amortization                  of regulatory assets              |   |                              | 4,394   |                                                                      |   | 566 |   |
| Depreciation                  and amortization                  |   |                              | 30,401  |                                                                      |   | 3,414 |   |
| Taxes,                  other than income taxes                 |   |                              | 11,090  |                                                                      |   | 929 |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
| Total                  Costs and Expenses                       |   |                              | 115,359 |                                                                      |   | 20,618 |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
| **Operating                  Income**                           |   |                              | 121,000 |                                                                      |   | 6,576 |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
| **Other                  Income (Expense)**                     |   |                              |    |                                                                      |   |   |   |
| Equity                  in earnings of unconsolidated affiliate |   |                              | 72,492  |                                                                      |   | 7,549 |   |
| Interest                  expense and related charges, net      |   |                              | (58,143 | )                                                                         |   | (5,589 | ) |
| Other,                  net                                     |   |                              | 5,386   |                                                                      |   | 66 |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
| Total                  Other Income                             |   |                              | 19,735  |                                                                      |   | 2,026 |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
| **Net                  Income**                                 |   | $                                 | 140,735 |                                                                      | $      | 8,602 |   |
|                                                            |   |                              |    |                                                                      |   |   |   |
|                                                            |   |                              |    |                                                                      |   |   |   |

*See            accompanying notes.*

*3*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**CONSOLIDATED        STATEMENT OF MEMBERS’ EQUITY**

**(In        Thousands)**

|                                                  |   | Southern |    |     |   | Other                  Class B |   |        |    |
|-------------------------------------------------------|--------|----------|---------|----------|--------|--------------------------------|--------|-------------|---------|
|                                                  |   | Union    |    | GE       |   | Interests                      |   |             |    |
|                                                  |   | (50.00%) |    | (30.02%) |   | (19.98%)                       |   | Total  |    |
|                                                  |   |     |    |     |   |                           |   |        |    |
| Balance,                  at Inception (May 14, 2004) |   | $        | -       |     | $      | -                              |   | $           | -       |   | $ | - |   |
|                                                  |   |     |    |     |   |                           |   |        |    |   |   |   |   |
| Members’                  contributions         |   |     | 590,500 |     |   | 590,500                        |   |        | -       |   |   | 1,181,000 |   |
|                                                  |   |     |    |     |   |                           |   |        |    |   |   |   |   |
| Sale                  to Minority Interests           |   |     | -       |     |   | (235,964                       | )      |        | 235,964 |   |   | - |   |
|                                                  |   |     |    |     |   |                           |   |        |    |   |   |   |   |
| Net                  income                           |   |     | 4,301   |     |   | 2,583                          |   |        | 1,718   |   |   | 8,602 |   |
|                                                  |   |     |    |     |   |                           |   |        |    |   |   |   |   |
| Balance,                  December 31, 2004           |   |     | 594,801 |     |   | 357,119                        |   |        | 237,682 |   |   | 1,189,602 |   |
|                                                  |   |     |    |     |   |                           |   |        |    |   |   |   |   |
| Net                  income                           |   |     | 70,367  |     |   | 42,249                         |   |        | 28,119  |   |   | 140,735 |   |
|                                                  |   |     |    |     |   |                           |   |        |    |   |   |   |   |
| Distribution                  to Members              |   |     | (15,000 | )        |   | (9,006                         | )      |        | (5,994  | ) |   | (30,000 | ) |
|                                                  |   |     |    |     |   |                           |   |        |    |   |   |   |   |
| Balance,                  December 31, 2005           |   | $        | 650,168 |     | $      | 390,362                        |   | $           | 259,807 |   | $ | 1,300,337 |   |
|                                                  |   |     |    |     |   |                           |   |        |    |   |   |   |   |

*See                accompanying notes.*

*4*

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*Table                of Contents*

**CCE            HOLDINGS, LLC AND SUBSIDIARIES**

**CONSOLIDATED            STATEMENTS OF CASH FLOWS**

**(In            Thousands)**

|                                                                                                                        |   | **Year                      Ended**   |    | **From                      Inception**** (May                      14, 2004) to** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|-----------------------------------------------------------------------------------------|--------|
|                                                                                                                        |   | **December                      31,** |    | **December                      31,**                                                   |   |
|                                                                                                                        |   | **2005**                              |    | **2004**                                                                                |   |
| **Cash                      Flows From Operating Activities**                                                               |   |                                  |    |                                                                                    |   |
| Net                      income                                                                                             |   | $                                     | 140,735 |                                                                                    | $      | 8,602 |   |
| Adjustments                      to reconcile net income to net cash provided by operating                      activities: |   |                                  |    |                                                                                    |   |   |   |
| Depreciation                      and amortization                                                                          |   |                                  | 30,401  |                                                                                    |   | 3,414 |   |
| Amortization                      of regulatory assets                                                                      |   |                                  | 4,394   |                                                                                    |   | 566 |   |
| Equity                      in earnings of unconsolidated affiliate                                                         |   |                                  | (72,492 | )                                                                                       |   | (7,549 | ) |
| Distributions                      received from unconsolidated affiliate                                                   |   |                                  | 60,600  |                                                                                    |   | - |   |
| Other                      assets and liabilities, noncash adjustments                                                      |   |                                  | 4,721   |                                                                                    |   | 107 |   |
| Amortization                      of debt costs                                                                             |   |                                  | 3,754   |                                                                                    |   | 481 |   |
| Changes                      in operating assets and liabilities:                                                           |   |                                  |    |                                                                                    |   |   |   |
| Accounts                      receivable                                                                                    |   |                                  | 8,306   |                                                                                    |   | (7,487 | ) |
| Transportation                      and exchange gas receivable                                                             |   |                                  | (1,406  | )                                                                                       |   | (282 | ) |
| Accounts                      payable                                                                                       |   |                                  | (14,716 | )                                                                                       |   | 13,816 |   |
| Transportation                      and exchange gas payable                                                                |   |                                  | 2,034   |                                                                                    |   | (3,190 | ) |
| Accrued                      taxes                                                                                          |   |                                  | (43     | )                                                                                       |   | 246 |   |
| Accrued                      interest                                                                                       |   |                                  | 222     |                                                                                    |   | 4,864 |   |
| Other                      current assets and liabilities                                                                   |   |                                  | 6,066   |                                                                                    |   | 10,233 |   |
| **Net                      Cash Provided by Operating Activities**                                                          |   |                                  | 172,576 |                                                                                    |   | 23,821 |   |
|                                                                                                                        |   |                                  |    |                                                                                    |   |   |   |
| **Cash                      Flows From Investing Activities**                                                               |   |                                  |    |                                                                                    |   |   |   |
| Acquisition                      of CrossCountry Energy, LLC, net of cash acquired                                          |   |                                  | -       |                                                                                    |   | (2,024,147 | ) |
| Other                      capitalized Acquisition costs                                                                    |   |                                  | 10,478  |                                                                                    |   | (5,032 | ) |
| Additions                      to property, plant and equipment                                                             |   |                                  | (88,121 | )                                                                                       |   | (23,048 | ) |
| Other                      capital expenditures                                                                             |   |                                  | (2,472  | )                                                                                       |   | (184 | ) |
| Proceeds                      from sale of subsidiaries                                                                     |   |                                  | -       |                                                                                    |   | 175,000 |   |
| **Net                      Cash Used in Investing Activities**                                                              |   |                                  | (80,115 | )                                                                                       |   | (1,877,411 | ) |
|                                                                                                                        |   |                                  |    |                                                                                    |   |   |   |
| **Cash                      Flows From Financing Activities**                                                               |   |                                  |    |                                                                                    |   |   |   |
| Members’                      contributions                                                                           |   |                                  | -       |                                                                                    |   | 1,181,000 |   |
| Debt                      proceeds                                                                                          |   |                                  | 20,000  |                                                                                    |   | 1,055,000 |   |
| Debt                      repayments                                                                                        |   |                                  | (55,000 | )                                                                                       |   | (352,000 | ) |
| Debt                      issuance costs                                                                                    |   |                                  | (1,378  | )                                                                                       |   | (24,589 | ) |
| Member                      distributions                                                                                   |   |                                  | (30,000 | )                                                                                       |   | - |   |
| **Net                      Cash (Used in) Provided by Financing Activities**                                                |   |                                  | (66,378 | )                                                                                       |   | 1,859,411 |   |
|                                                                                                                        |   |                                  |    |                                                                                    |   |   |   |
| **Increase                      in Cash and Cash Equivalents**                                                              |   |                                  | 26,083  |                                                                                    |   | 5,821 |   |
|                                                                                                                        |   |                                  |    |                                                                                    |   |   |   |
| **Cash                      and Cash Equivalents at Beginning of Period**                                                   |   |                                  | 5,821   |                                                                                    |   | - |   |
|                                                                                                                        |   |                                  |    |                                                                                    |   |   |   |
| **Cash                      and Cash Equivalents, End of Period**                                                           |   | $                                     | 31,904  |                                                                                    | $      | 5,821 |   |
|                                                                                                                        |   |                                  |    |                                                                                    |   |   |   |
|                                                                                                                        |   |                                  |    |                                                                                    |   |   |   |
| **Supplemental                      Disclosure of Cash Flow Information**                                                   |   |                                  |    |                                                                                    |   |   |   |
| Interest                      paid                                                                                          |   | $                                     | 54,736  |                                                                                    | $      | 810 |   |

*5*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(1)**
**Basis        of Presentation and Significant Accounting Policies**

*6*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                     |   | November                  17, |    |
|----------------------------------------------------------|--------|-------------------------------|---------|
|                                                     |   | 2004                          |    |
| Current                  assets, including cash of $85.4 |   | $                             | 119.6   |   |
| Noncurrent                  assets                       |   |                          | 2,377.9 |   |
| Total                  assets acquired                   |   |                          | 2,497.5 |   |
|  Current                  liabilities               |   |                          | (33.1   | ) |
| Noncurrent                  liabilities                  |   |                          | (2.9    | ) |
| Long-term                  debt                          |   |                          | (352.0  | ) |
| Total                  liabilities assumed               |   |                          | (388.0  | ) |
|  Net                  assets acquired               |   | $                             | 2,109.5 |   |

| Fair                  value in excess of book value of                      |   | Estimated                  useful lives |   |   |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|--------|--------|
| investment                  attributable                  to (in millions): |   | (years)                                 |   | Amount |   |
| Property,                  plant and equipment                              |   |                                    | 40     |   | $      | 34.0 |   |
| Long-term                  debt (a)                                         |   |                                    | 4-20   |   |   | (83.3 | ) |
| Deferred                  taxes (a)                                         |   |                                    | 40     |   |   | (13.1 | ) |
| Other                  net liabilities                                      |   |                                    | (b)    |   |   | (21.6 | ) |
| Goodwill                                                                    |   |                                    | (c)    |   |   | 433.8 |   |
| Software                                                                    |   |                                    | 5      |   |   | 2.1 |   |
| Total                                                                       |   |                                    |   |   |   | 351.9 |   |
|  Accumulated                  net accretion                            |   |                                    |   |   |   | 13.4 |   |
| Net                  fair value in excess of book value                     |   |                                    |   |   | $      | 365.3 |   |

*“*

*7*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Principles        of Consolidation**

**Regulatory        Accounting**

**Revenue        Recognition**

**Derivative        Instruments**

*8*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Debt        Issuance Costs**

**Property,        Plant and Equipment **

**Transportation        and Exchange Gas Imbalances, Net**

**Computer        Software**

|   | The                  Company’s accounting policy for the costs of computer software (all of                  which is for internal use by the Company and its affiliates only)                  is to                  capitalize direct costs of materials and services consumed in developing                  or obtaining software, including payroll and payroll-related costs                  for                  employees who are directly associated with and who devote time                  to the                  software project. Costs are capitalized during the application                  development                  stage. All other costs are expensed as incurred. The Company amortizes                  the                  costs at a rate of 10 percent per year. Impairment is evaluated                  based on                  changes in the expected usefulness of the software. Computer software                  is                  included in Property, Plant and Equipment under Intangible Assets                  (see                  Note 5). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*9*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Environmental        Expenditures**

|   | Expenditures                  that relate to an existing condition caused by past operations,                  and do not                  contribute to current or future revenue generation, are expensed.                  Environmental expenditures relating to current or future revenues                  are                  expensed or capitalized as appropriate based on the nature of the                  costs                  incurred. Liabilities are recorded when environmental assessments                  and/or                  clean ups are probable and the costs can be reasonably estimated                  (see                  Note                  10). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Cash        and Cash Equivalents**

**Goodwill        and Other Intangible Assets**

| Line                    pack                             |   | $      | (10.6  | )      |
|----------------------------------------------------------|--------|--------|--------|--------|
| Enron                    working capital settlement      |   |   | (10.2  | )      |
| Lease                    termination and build-out costs |   |   | 3.1    |   |
| Other                    post employment benefits        |   |   | 2.3    |   |
| Miscellaneous                                            |   |   | (0.3   | )      |
|                                                     |   | $      | (15.7  | )      |
|                                                     |   |   |   |   |

*10*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**System        Gas**

**Allowance        for Doubtful Accounts**

**Income        Taxes**

**Recent        Accounting Pronouncements**

*11*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Use        of Estimates**

**Reclassifications**

**(2)**
**Subsidiary        Disposition**

*12*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(3)**
**Long-Term        Debt**

|                                                                                  |   | 2005   |      | 2004   |   |
|---------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|
| TW                    Holdings                                                        |   |   |      |   |   |
| Term                    loan, LIBOR plus 0.875%, maturing November 17, 2009      |   | $      | -         |   | $      | 230,000 |   |
| Revolving                    Credit Facility, LIBOR plus 0.625%, maturing        |   |   |      |   |   |   |   |
|  December                    21, 2010                                            |   |   | 230,000   |   |   | - |   |
| 5.64%                    Notes due November 17, 2014                             |   |   | 125,000   |   |   | 125,000 |   |
| 5.79%                    Notes due November 17, 2016                             |   |   | 100,000   |   |   | 100,000 |   |
|                                                                                  |   |   | 455,000   |   |   | 455,000 |   |
| Transwestern                                                                          |   |   |      |   |   |   |   |
| 5.39%                    Notes due November 17, 2014                             |   |   | 270,000   |   |   | 250,000 |   |
| 5.54%                    Notes due November 17, 2016                             |   |   | 250,000   |   |   | 250,000 |   |
| Term                    loan, LIBOR plus 0.75%, maturing November 17, 2009       |   |   | -         |   |   | 100,000 |   |
| Revolving                    Credit Facility for up to $230.0 million, at LIBOR  |   |   |      |   |   |   |   |
|  plus                    0.45%, maturing December 21, 2010 (the Revolving        |   |   |      |   |   |   |   |
|  Facility)                                                                       |   |   | 45,000    |   |   | - |   |
| Revolving                    loan for up to $130.0 million, at LIBOR plus        |   |   |      |   |   |   |   |
|  0.75%,                    maturing November 17, 2009                            |   |   | -         |   |   | - |   |
|                                                                                  |   |   | 565,000   |   |   | 600,000 |   |
|                                                                                  |   |   |      |   |   |   |   |
| Total                    outstanding                                                  |   |   | 1,020,000 |   |   | 1,055,000 |   |
| Less                    current maturities                                            |   |   | -         |   |   | - |   |
| Long-term                    debt                                                     |   | $      | 1,020,000 |   | $      | 1,055,000 |   |
|                                                                                  |   |   |      |   |   |   |   |

| 2006       |   | $      | -         |   |
|------------|--------|--------|-----------|--------|
| 2007       |   |   | -         |   |
| 2008       |   |   | -         |   |
| 2009       |   |   | -         |   |
| 2010       |   |   | 275,000   |   |
| Thereafter |   |   | 745,000   |   |
|       |   | $      | 1,020,000 |   |

*13*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(4)**
**Derivative        Instruments**

*14*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(5)**
**Property,        Plant and Equipment**

* *

|                                                              |   | Lives   |   |   |   |      |   |
|-------------------------------------------------------------------|--------|---------|--------|--------|--------|-----------|--------|
|                                                              |   | (Years) |   | 2005   |   | 2004      |   |
| Transmission                  Plant                               |   |    | 40-83  |   | $      | 1,055,908 |   | $ | 890,572 |   |
| General                  Plant                                    |   |    | 10     |   |   | 10,843    |   |   | 10,511 |   |
| Intangible                  Assets                                |   |    | 10-12  |   |   | 25,800    |   |   | 10,091 |   |
| Construction                  Work-in-progress                    |   |    | -      |   |   | 7,419     |   |   | 100,420 |   |
| Property,                  Plant and Equipment, at Cost           |   |    |   |   |   | 1,099,970 |   |   | 1,011,594 |   |
| Less                  - Accumulated depreciation and amortization |   |    |   |   |   | (25,627   | )      |   | (2,777 | ) |
| Property,                  Plant and Equipment, Net               |   |    |   |   | $      | 1,074,343 |   | $ | 1,008,817 |   |

|                                                                               |   | Lives   |   |   |   |   |   |
|------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|--------|--------|
|                                                                               |   | (Years) |   | 2005   |   | 2004   |   |
| Intangible                  Assets included in Property, Plant and Equipment:      |   |    |   |   |   |   |   |
| Computer                  software                                                 |   |    | 5-10   |   | $      | 23,281 |   | $ | 10,091 |   |
| Leasehold                  improvement                                             |   |    | 10     |   |   | 2,519  |   |   | - |   |
| Intangible                  Assets                                                 |   |    |   |   |   | 25,800 |   |   | 10,091 |   |
| Less                  - Accumulated depreciation and amortization                  |   |    |   |   |   | (4,255 | )      |   | (342 | ) |
| Intangible                  Assets included in Property, Plant and Equipment - Net |   |    |   |   | $      | 21,545 |   | $ | 9,749 |   |

| Intangible                  Assets included in Other Assets:                       |   |   |   |   |   |   |   |
|------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Customer                  contracts                                                |   |   | 3      |   | $      | 12,600 |   | $ | 12,600 |   |
| Less                  - Accumulated depreciation and amortization                  |   |   |   |   |   | (4,713 | )      |   | (513 | ) |
| Intangible                  Assets included in Other Assets                  - Net |   |   |   |   | $      | 7,887  |   | $ | 12,087 |   |

*15*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(6)**
**Accounts        Receivable and Related Activity**

|                                                     |   | 2005   |   | 2004   |   |
|----------------------------------------------------------|--------|--------|--------|--------|--------|
| Southern                  California Gas Company (SoCal) |   | $      | 44.1   |   | $      | 6.2 |   |
| BP                  Energy Company (BP)                  |   |   | 26.9   |   |   | 5.2 |   |
| Pacific                  Gas and Electric Company (PGE)  |   |   | 20.9   |   |   | 2.8 |   |

**(7)**
**Balance        Sheet Details**

| Other                  Current Assets      |   | 2005   |   | 2004   |   |
|--------------------------------------------|--------|--------|--------|--------|--------|
| Prepaid                  right-of-way      |   | $      | 3,238  |   | $      | 3,238 |   |
| Miscellaneous                  prepayments |   |   | 4,331  |   |   | 7,606 |   |
| Materials                  and supplies    |   |   | 957    |   |   | 936 |   |
| Other                                      |   |   | 126    |   |   | 150 |   |
|                                       |   | $      | 8,652  |   | $      | 11,930 |   |

*16*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

| Other                  Assets                                   |   |  2005 |   |  2004 |   |
|-----------------------------------------------------------------|--------|------------|--------|------------|--------|
| Prepaid                  right-of-way                           |   | $          | 12,628 |       | $      | 15,891 |   |
| Unamortized                  debt costs                         |   |       | 26,675 |       |   | 28,746 |   |
| Intangible                  assets - contracts, net             |   |       | 7,887  |       |   | 12,087 |   |
| Deferred                  development costs                     |   |       | 2,688  |       |   | 365 |   |
| Annual                  regulatory commission costs             |   |       | 799    |       |   | 915 |   |
| Other,                  net                                     |   |       | 256    |       |   | 166 |   |
|                                                            |   | $          | 50,933 |       | $      | 58,170 |   |
|                                                            |   |       |   |       |   |   |   |
| Other                  Current Liabilities                      |   |       |   |       |   |   |   |
| Capital                  and expense accruals (1)               |   | $          | 3,542  |       | $      | 13,091 |   |
| Transition                  costs                               |   |       | 334    |       |   | 5,319 |   |
| Incentive                  plan accruals                        |   |       | 3,506  |       |   | - |   |
| Labor                  and related benefit accruals             |   |       | 2,270  |       |   | 652 |   |
| Reserve                  for regulatory and other contingencies |   |       | 3,591  |       |   | 2,244 |   |
| Customer                  deposits                              |   |       | 637    |       |   | 1,560 |   |
| Other                                                           |   |       | 2,477  |       |   | 1,819 |   |
|                                                            |   | $          | 16,357 |       | $      | 24,685 |   |

| Deferred                  Credits                       |   |   |   |   |   |
|---------------------------------------------------------|--------|--------|--------|--------|--------|
| Environmental                  liabilities              |   | $      | 10,175 |   | $      | 2,907 |   |
| Asset                  retirement obligation - asbestos |   |   | 865    |   |   | - |   |
| Retiree                  medical liabilities            |   |   | 3,026  |   |   | - |   |
| Other                  miscellaneous                    |   |   | 26     |   |   | - |   |
|                                                    |   | $      | 14,092 |   | $      | 2,907 |   |

**(8)**
**Employee        Benefit Plans**

**s        **
**s        **

*17*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Employee        Retirement Benefits**

*Lou        Geiler et al v. Robert W. Jones*
*et        al., *

*18*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                     |   |                                |   |
|------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                     |   | **Year                    ended**   |   |
|                                                                                     |   | **December                    31,** |   |
| ** OPEB**(in                    thousands)                                          |   | **2005**                            |   |
|                                                                                     |   |                                |   |
| Change                    in Benefit Obligation                                          |   |                                |   |   |
| Benefit                    obligation at plan adoption                    (1)            |   | $                                   | 6,734  |   |
| Service                    cost                                                          |   |                                | 90     |   |
| Interest                    cost                                                         |   |                                | 316    |   |
| Actuarial                    gain                                                        |   |                                | (2,917 | ) |
| Retiree                    premiums                                                      |   |                                | 726    |   |
| Benefits                    paid                                                         |   |                                | (833   | ) |
| Benefit                    obligation at end of year                                     |   | $                                   | 4,116  |   |
|                                                                                     |   |                                |   |   |
| Change                    in Plan Assets                                                 |   |                                |   |   |
| Fair                    value of plan assets at plan adoption (1)                    (2) |   | $                                   | 2,862  |   |
| Return                    on plan assets                                                 |   |                                | 162    |   |
| Employer                    contributions                                                |   |                                | 939    |   |
| Retiree                    premiums                                                      |   |                                | 726    |   |
| Benefits                    paid                                                         |   |                                | (833   | ) |
| Fair                    value of plan assets at end of year                              |   | $                                   | 3,856  |   |
|                                                                                     |   |                                |   |   |
| Funded                    Status                                                         |   |                                |   |   |
| Funded                    status at end of year                                          |   | $                                   | (260   | ) |
| Unrecognized                    net actuarial gain                                       |   |                                | (2,766 | ) |
| Net                    liability recognized at December 31, 2005                         |   | $                                   | (3,026 | ) |
|                                                                                     |   |                                |   |   |

| (1)   | For                purposes of this reconciliation, the plan adoption date is considered                to                be January 1, 2005. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

|                                              |   |   |   |
|---------------------------------------------------|--------|--------|--------|
| **As                    of December 31, 2005**    |   |   |   |
|                                              |   |   |   |
| Discount                    rate                  |   |   | 5.50   | % |
| Rate                    of compensation increase  |   |   | N/A    |   |
|                                              |   |   |   |   |
| Health                    care cost trend rates   |   |   |   |   |
| (graded                    to 4.65% by year 2012) |   |   | 12.00  | % |

*19*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                  |   |                                |   |
|-------------------------------------------------------|--------|-------------------------------------|--------|
|                                                  |   | **Year                    Ended**   |   |
|                                                  |   | **December                    31,** |   |
| **OPEB**(in                    thousands)             |   | **2005**                            |   |
|                                                  |   |                                |   |
|                                                  |   |                                |   |   |
| Service                    cost                       |   | $                                   | 89     |   |
| Interest                    cost                      |   |                                | 316    |   |
| Expected                    return on plan assets     |   |                                | (162   | ) |
| Amortization                    of prior service cost |   |                                | -      |   |
| Recognized                    actuarial gain          |   |                                | (151   | ) |
|                                                  |   |                                |   |   |
| Net                    periodic benefit cost          |   | $                                   | 92     |   |

| **Year                    Ended December 31, 2005**         |   |   |
|-------------------------------------------------------------|--------|--------|
|                                                        |   |   |
| Discount                    rate                            |   | 5.75%  |
| Rate                    of compensation increase            |   | N/A    |
| Expected                    long-term return on plan assets |   | 5.00%  |
|                                                        |   |   |
| Health                    care cost trend rates             |   |   |
| (graded                    to 4.75% by year 2012)           |   | 12.00% |

|                                                                    |   | 1                    Point Increase |   | 1                    Point Decrease |   |
|-------------------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
| (in                    thousands)                                       |   |                                |   |                                |   |
| Effect                    on total service and interest cost components |   | $                                   | 7      |                                | $      | (6 | ) |
| Effect                    on postretirement benefit obligation          |   | $                                   | 125    |                                | $      | (111 | ) |
|                                                                    |   |                                |   |                                |   |   |   |

**Discount        Rate Selection**
***-***

*20*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Plan        Asset Information**
**        - **

|                                         |   |   |   | **Year                    Ended**    |   |
|----------------------------------------------|--------|--------|--------|-------------------------------------------|--------|
|                                         |   |   |   | **December                    31,**  |   |
|                                         |   |   |   | **2005**                                  |   |
|                                         |   |   |   |                                      |   |   |   |
| Equity                    securities         |   |   |   |                                      |   | 0 | % |
| Debt                    securities           |   |   |   |                                      |   | 0 | % |
| Cash                    and cash equivalents |   |   |   |                                      |   | 100 | % |
| Total                                        |   |   |   |                                      |   | 100 | % |

**(9)**
**Rate        Matters and Regulatory Issues**

|                                                                |   | 2005    |   | 2004   |    |
|---------------------------------------------------------------------|--------|---------|--------|--------|---------|
| Regulatory                  assets:                                 |   |    |   |   |    |
| Accumulated                  reserve adjustment                     |   |  $ | 43,799 |   |  $ | 44,387 |   |
| AFUDC                  gross-up                                     |   |    | 9,191  |   |    | 7,978 |   |
| Environmental                  costs (see Note 10)                  |   |    | 4,902  |   |    | - |   |
| South                  Georgia deferred tax receivable              |   |    | 2,638  |   |    | 2,686 |   |
| Other                  post-retirement benefits (see Note 8)        |   |    | 1,135  |   |    | - |   |
| Deferred                  contract reformation costs                |   |    | 505    |   |    | 1,909 |   |
| Deferred                  loss on receivables                       |   |    | 722    |   |    | 1,482 |   |
| Litigation                  costs                                   |   |    | 633    |   |    | 1,500 |   |
| Purchase                  gas adjustments alternative rate recovery |   |    | 447    |   |    | 984 |   |
| Other                                                               |   |    | 897    |   |    | 2,395 |   |
|                                                                |   | $       | 64,869 |   | $       | 63,321 |   |

*21*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(10)**
**Commitments        and Contingencies**

**Legal        Proceedings **

*22*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

*Enron        Corp. et al. v. Citigroup, Inc. et al.*

**Phoenix        Expansion Project**

*23*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Rates        and Regulatory Matters**

**Environmental        Matters**

*24*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Capital        Commitments and Purchase Obligations**

| Year                  Ending  |   | Operating |   |
|-------------------------------|--------|-----------|--------|
| December                  31, |   | Leases    |   |
| 2006                          |   | $         | 3.2    |   |
| 2007                          |   |      | 3.3    |   |
| 2008                          |   |      | 3.3    |   |
| 2009                          |   |      | 3.3    |   |
| 2010                          |   |      | 0.3    |   |
| Thereafter                    |   |      | 3.3    |   |
| Total                         |   | $         | 16.7   |   |

*25*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(11)**
**Related        Party Transactions**

*26*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(12)**
**Unconsolidated        Affiliate**

|                                                            |   | **Year                  Ended**   |    | **Year                  Ended**   |   |
|-----------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
|                                                            |   | **December                  31,** |    | **December                  31,** |   |
|                                                            |   | **2005**                          |    | **2004**                          |   |
| **Statement                  of Income Data**                   |   |                              |    |                              |   |
| Operating                  revenues                             |   | $                                 | 476,049 |                              | $      | 512,418 |   |
| Natural                  gas purchased                          |   |                              | -       |                              |   | 48,921 |   |
| Net                  revenues                                   |   |                              | 476,049 |                              |   | 463,497 |   |
| Operations,                  maintenance and other taxes        |   |                              | 113,135 |                              |   | 110,871 |   |
| Depreciation                  and amortization                  |   |                              | 91,125  |                              |   | 68,053 |   |
| Operating                  income                               |   |                              | 271,789 |                              |   | 284,573 |   |
| Income                  before income tax                       |   |                              | 199,030 |                              |   | 206,064 |   |
| Net                  income                                     |   |                              | 123,944 |                              |   | 126,844 |   |
|                                                            |   |                              |    |                              |   |   |   |
| The                  Company’s Interest:                  |   |                              |    |                              |   |   |   |
| Allocated                  income (a)                           |   | $                                 | 61,972  |                              | $      | 5,488 |   |
| Adjustments                  (b)                                |   |                              | 10,520  |                              |   | 2,061 |   |
| Equity                  in earnings of unconsolidated affiliate |   | $                                 | 72,492  |                              | $      | 7,549 |   |

*27*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                |   | **December                  31,** |      | **December                  31,** |   |
|-----------------------------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|
|                                                |   | **2005**                          |      | **2004**                          |   |
| **Balance                  Sheet Data**             |   |                              |      |                              |   |
| Current                  assets                     |   | $                                 | 68,119    |                              | $      | 59,115 |   |
| Property,                  plant and equipment, net |   |                              | 2,916,548 |                              |   | 2,966,747 |   |
| Other                  assets                       |   |                              | 104,720   |                              |   | 116,074 |   |
| Total                  assets                       |   | $                                 | 3,089,387 |                              | $      | 3,141,936 |   |
|                                                |   |                              |      |                              |   |   |   |
| Current                  liabilities                |   | $                                 | 76,350    |                              | $      | 87,396 |   |
| Long-term                  debt                     |   |                              | 922,355   |                              |   | 1,010,825 |   |
| Other                  liabilities                  |   |                              | 800,894   |                              |   | 759,309 |   |
| Total                  liabilities                  |   | $                                 | 1,799,599 |                              | $      | 1,857,530 |   |

|   | (a) | Represents                  the Company’s equity in Citrus’ earnings for the year ended December 31,                  2005 and the period from the date of Acquisition, November 17,                  2004,                  through December 31, 2004. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b)   | Reflects                (i) net accretion of $11.9 million and $1.5 million for 2005 and                2004,                respectively, pursuant to APB Opinion No. 18, related to the fair                value                in                excess of book value of the Company’s investment in certain underlying                Citrus tangible and intangible assets and liabilities. See table                below for                further breakdown of accretion; (ii) $0.4 million for 2004, related                to a                deferred compensation plan settlement recognized as expense by Citrus,                which was capitalized by the Company as a component of purchase                accounting, under the line item “other net liabilities;” (iii) $(2.7)                million for 2005, related to items recognized as income or expense                by                Citrus, which were capitalized by the Company as a component of purchase                accounting, under the line item “goodwill” and (iv) $1.3 million and $0.2                million for 2005 and 2004, respectively, related to reversal of Citrus                amortization of other comprehensive income, the remaining pro rata                balance                of which the Company capitalized as a component of purchase accounting                (see Note 1). |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Adjustments                  to the Company’s Equity                  in Citrus earnings (in millions): |
|---------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                    |   | 2005   |   | 2004   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Net                    Accretion                                                                                                                        |   |   |   |   |   |
| Property,                    plant and equipment……………………                                                |   | $      | (0.8   | )      | $      | (0.1 | ) |
| Long-term                    debt……………………………………                     |   |   | 12.8   |   |   | 1.6 |   |
| Deferred                    taxes……………………………………                     |   |   | 0.3    |   |   | 0.1 |   |
| Intangibles                    - software……………………………                                  |   |   | (0.4   | )      |   | (0.1 | ) |
| Total                    Net Accretion…………………………………………. |   |   | 11.9   |   |   | 1.5 |   |
| Citrus                    (income) expense offset (ii)(iii)(iv)………………….                                       |   |   | (1.4   | )      |   | 0.6 |   |
| Total                    Adjustments……………………………………                  |   | $      | 10.5   |   | $      | 2.1 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |

**Contingent        Matters Potentially Impacting the Company’s Investment in Citrus        Corp**

**Environmental        Matters**
***.        -***

*28*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Regulatory        Assets and Liabilities**
*Accounting        for the Effects of Certain Types of Regulation, *
*.*

**Federal        Pipeline Integrity Rules**

*29*

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*Table            of Contents*

**CCE        HOLDINGS, LLC AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Other        Litigation**

**FGT        Pipeline Relocation Costs - **

*30*

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*Table            of Contents*

----

**Citrus        Corp. and Subsidiaries **

**Consolidated        Financial Statements**

***Years        ended December 31, 2005, 2004 and 2003***
*** ***

***with        Report of Independent Registered Public Accounting        Firm***

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*Table            of Contents*

**TABLE        OF CONTENTS**

|                                                                         | **Page** |
|------------------------------------------------------------------------------|----------|
|                                                                         |     |
|                                                                         |     |
|                                                                         |     |
| **Report                  of Independent Registered Public Accounting Firm** | 2        |
|                                                                         |     |
|                                                                         |     |
| **Audited                  Consolidated Financial Statements**               |     |
|                                                                         |     |
| Consolidated                  Balance Sheets                                 | 3        |
| Consolidated                  Statements of Income                           | 4        |
| Consolidated                  Statements of Stockholders’ Equity       | 5        |
| Consolidated                  Statements of Comprehensive Income             | 5        |
| Consolidated                  Statements of Cash Flow                        | 6        |
| Notes                  to Consolidated Financial Statements                  | 7-25     |

----

*Table            of Contents*

**Report        of Independent Registered Public Accounting Firm**

** **

** **

*1*

----

*Table            of Contents*

| **CITRUS                  CORP. AND SUBSIDIARIES**                                                                         |
|-------------------------------------------------------------------------------------------------------------------------------------------|
|  **CONSOLIDATED                  BALANCE SHEETS**                                                                          |
| **(In                  Thousands)**                                                                                             |
|                                                                                                                                      |   |    |   |   |   |
|                                                                                                                                      |   |    |   |   |   |
|                                                                                                                                      |   |  **December                  31,** |   | **December                  31,** |   |
|                                                                                                                                      |   |  **2005** |   | **2004** |   |
| **ASSETS**                                                                                                                                |   |    |   |   |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Current                  Assets**                                                                                                       |   |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                                                |   | **$** | 21,406 |   | $ | 11,645 |   |
| Accounts                  receivable - customers, net of allowance for doubtful accounts                  of $23 and                  $33 |   |   | 41,072 |   |   | 41,475 |   |
| Income                  tax receivable                                                                                                    |   |   | 872 |   |   | - |   |
| Materials                  and supplies                                                                                                   |   |   | 3,077 |   |   | 3,113 |   |
| Exchange                  gas receivable                                                                                                  |   |   | 508 |   |   | 1,273 |   |
| Other                                                                                                                                     |   |   | 1,184 |   |   | 1,609 |   |
| Total                  Current Assets                                                                                                     |   |   | 68,119 |   |   | 59,115 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Property,                  Plant and Equipment, at Cost**                                                                               |   |   |   |   |   |   |   |
| Plant                  in service                                                                                                         |   |   | 4,118,518 |   |   | 4,085,138 |   |
| Construction                  work in progress                                                                                            |   |   | 9,693 |   |   | 12,202 |   |
| Less                  - accumulated depreciation and amortization                                                                         |   |   | (1,211,663 | ) |   | (1,130,593 | ) |
| Property,                  Plant and Equipment, Net                                                                                       |   |   | 2,916,548 |   |   | 2,966,747 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Other                  Assets**                                                                                                         |   |   |   |   |   |   |   |
| Unamortized                  debt expense                                                                                                 |   |   | 5,735 |   |   | 6,788 |   |
| Regulatory                  assets                                                                                                        |   |   | 24,092 |   |   | 22,840 |   |
| Other                                                                                                                                     |   |   | 74,893 |   |   | 86,446 |   |
| Total                  Other Assets                                                                                                       |   |   | 104,720 |   |   | 116,074 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Total                  Assets**                                                                                                         |   | **$** | 3,089,387 |   | $ | 3,141,936 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS' EQUITY**                                                                                 |   |   |   |   |   |   |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Current                  Liabilities**                                                                                                  |   |   |   |   |   |   |   |
| Long-term                  debt due within one year                                                                                       |   | **$** | 14,000 |   | $ | 14,000 |   |
| Accounts                  payable - trade and other                                                                                       |   |   | 21,325 |   |   | 19,753 |   |
| Accounts                  payable - affiliated companies                                                                                  |   |   | 5,501 |   |   | 13,471 |   |
| Accrued                  interest                                                                                                         |   |   | 15,091 |   |   | 15,415 |   |
| Accrued                  income taxes                                                                                                     |   |   | - |   |   | 6,332 |   |
| Accrued                  taxes, other than income                                                                                         |   |   | 9,090 |   |   | 8,792 |   |
| Exchange                  gas payable                                                                                                     |   |   | 5,182 |   |   | 6,539 |   |
| Other                                                                                                                                     |   |   | 6,161 |   |   | 3,094 |   |
| Total                  Current Liabilities                                                                                                |   |   | 76,350 |   |   | 87,396 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Deferred                  Credits**                                                                                                     |   |   |   |   |   |   |   |
| Deferred                  income taxes                                                                                                    |   |   | 758,775 |   |   | 746,035 |   |
| Regulatory                  liabilities                                                                                                   |   |   | 9,049 |   |   | 5,303 |   |
| Other                                                                                                                                     |   |   | 33,070 |   |   | 7,971 |   |
| Total                  Deferred Credits                                                                                                   |   |   | 800,894 |   |   | 759,309 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Long-Term                  Debt**                                                                                                       |   |   | 922,355 |   |   | 1,010,825 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Stockholders'                  Equity**                                                                                                 |   |   |   |   |   |   |   |
| Common                  stock, $1 par value; 1,000 shares authorized, issued and                  outstanding                             |   |   | 1 |   |   | 1 |   |
| Additional                  paid-in capital                                                                                               |   |   | 634,271 |   |   | 634,271 |   |
| Accumulated                  other comprehensive loss                                                                                     |   |   | (13,162 | ) |   | (15,800 | ) |
| Retained                  earnings                                                                                                        |   |   | 668,678 |   |   | 665,934 |   |
| Total                  Stockholders' Equity                                                                                               |   |   | 1,289,788 |   |   | 1,284,406 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |
| **Total                  Liabilities and Stockholders' Equity**                                                                           |   | **$** | 3,089,387 |   | $ | 3,141,936 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |

*2*

----

*Table            of Contents*

| **CITRUS                    CORP. AND SUSIDIARIES**          |
|----------------------------------------------------------------------------------|
|                                                                             |   |   |   |    |   |    |   |
| **CONSOLIDATED                    STATEMENTS OF INCOME**     |
| **(In                    Thousands)**                        |   |
|                                                                             |   |   |   |    |   |    |   |
|                                                                             |   |   |   |    |   |    |   |
|                                                                             |   | **Year                    Ended** |   |  **Year                    Ended** |   |  **Year                    Ended** |   |
|                                                                             |   | **December                    31,** |   |  **December                    31,** |   |  **December                    31,** |   |
|                                                                             |   | **2005** |   |  **2004** |   |  **2003** |   |
| **Revenues**                                                                     |   |   |   |   |   |   |   |   |   |   |
| Transportation                    of natural gas                                 |   | $ | 476,049 |   | **$** | 467,422 |   | **$** | 442,010 |   |
| Gas                    sales                                                     |   |   | - |   |   | 44,996 |   |   | 104,370 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| Total                    Revenues                                                |   |   | 476,049 |   |   | 512,418 |   |   | 546,380 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Costs                    and Expenses**                                        |   |   |   |   |   |   |   |   |   |   |
| Natural                    gas purchased                                         |   |   | - |   |   | 48,921 |   |   | 99,130 |   |
| Operations                    and maintenance                                    |   |   | 78,829 |   |   | 81,306 |   |   | 117,086 |   |
| Depreciation                    and amortization                                 |   |   | 91,125 |   |   | 68,053 |   |   | 64,522 |   |
| Taxes,                    other than income taxes                                |   |   | 34,306 |   |   | 29,565 |   |   | 27,436 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| Total                    Costs and Expenses                                      |   |   | 204,260 |   |   | 227,845 |   |   | 308,174 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Operating                    Income**                                          |   |   | 271,789 |   |   | 284,573 |   |   | 238,206 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Other                    Income (Expense)**                                    |   |   |   |   |   |   |   |   |   |   |
| Interest                    expense and related charges, net                     |   |   | (79,290 | ) |   | (93,771 | ) |   | (103,109 | ) |
| Other,                    net                                                    |   |   | 6,531 |   |   | 15,262 |   |   | (10,327 | ) |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| Total                    Other Income (Expense)                                  |   |   | (72,759 | ) |   | (78,509 | ) |   | (113,436 | ) |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Income                    Before Income Taxes**                                |   |   | 199,030 |   |   | 206,064 |   |   | 124,770 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Income                    Tax Expense**                                        |   |   | 75,086 |   |   | 79,220 |   |   | 48,554 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Net                    Income**                                                |   | $ | 123,944 |   | **$** | 126,844 |   | **$** | 76,216 |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |
|                                                                             |   |   |   |   |   |   |   |   |   |   |

*3*

----

*Table            of Contents*

| **CITRUS                    CORP. AND SUSIDIARIES**                                                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                       |   |   |   |    |   |    |   |
| **CONSOLIDATED                    STATEMENTS OF STOCKHOLDERS'                    EQUITY**                                                                                              |
|  **(In                    Thousands)**                                                                                                                        |
|                                                                                                                                                                                                            |
|                                                                                                                                                                                                       |   |   |   |    |   |    |   |
|                                                                                                                                                                                                       |   | **Year                    Ended** |   |  **Year                    Ended** |   |  **Year                    Ended** |   |
|                                                                                                                                                                                                       |   | **December                    31,** |   |  **December                    31,** |   |  **December                    31,** |   |
|                                                                                                                                                                                                       |   | **2005** |   |  **2004** |   |  **2003** |   |
| **Common                    Stock**                                                                                                                                                                        |   |   |   |   |   |   |   |   |   |   |
| Balance,                    beginning and end of period                                                                                                                                                    |   | $ | 1 |   | **$** | 1 |   | **$** | 1 |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **Additional                    Paid-in Capital**                                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Balance,                    beginning and end of period                                                                                                                                                    |   |   | 634,271 |   |   | 634,271 |   |   | 634,271 |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **Accumulated                    Other Comprehensive Income (Loss):**                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |
| Balance,                    beginning of period                                                                                                                                                            |   |   | (15,800 | ) |   | (17,247 | ) |   | (18,453 | ) |
| Recognition                    in earnings of previously deferred net losses related to                    derivative instruments used as                    cash flow hedges                         |   |   | 2,638 |   |   | 1,447 |   |   | 1,206 |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| Balance,                    end of period                                                                                                                                                                  |   |   | (13,162 | ) |   | (15,800 | ) |   | (17,247 | ) |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **Retained                    Earnings**                                                                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Balance,                    beginning of period                                                                                                                                                            |   |   | 665,934 |   |   | 679,090 |   |   | 602,874 |   |
| Net                    income                                                                                                                                                                              |   |   | 123,944 |   |   | 126,844 |   |   | 76,216 |   |
| Dividends                                                                                                                                                                                                  |   |   | (121,200 | ) |   | (140,000 | ) |   | - |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| Balance,                    end of period                                                                                                                                                                  |   |   | 668,678 |   |   | 665,934 |   |   | 679,090 |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **Total                    Stockholders' Equity**                                                                                                                                                          |   | $ | 1,289,788 |   | **$** | 1,284,406 |   | **$** | 1,296,115 |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **CONSOLIDATED                    STATEMENTS OF COMPREHENSIVE INCOME**                                                                                                                                     |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **(In                    Thousands)**                                                                                                                                                                      |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                            |    **Year                    Ended**  |   |   | **Year                    Ended** |   |   | **Year                    Ended** |   |
|                                                                                                                                                                                                            |   |  **December                    31,**  |   |   | **December                    31,** |   |   | **December                    31,** |   |
|                                                                                                                                                                                                       |   |  **2005** |   |   | **2004** |   |   | **2003** |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| Net                    income                                                                                                                                                                              |   | $ | 123,944 |   | **$** | 126,844 |   | **$** | 76,216 |   |
| Recognition                    in earnings of previously deferred net losses related to                    derivative instruments used                    as cash flow                    hedges |   |   | 2,638 |   |   | 1,447 |   |   | 1,206 |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **Total                    Comprehensive Income**                                                                                                                                                          |   | $ | 126,582 |   | **$** | 128,291 |   | **$** | 77,422 |   |
|                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |

*4*

----

*Table            of Contents*

| **CITRUS                    CORP. AND SUBSIDIARIES**                                       |
|----------------------------------------------------------------------------------------------------------------|
|                                                                                                           |   |   |   |   |   |    |   |    |   |
| **CONSOLIDATED                    STATEMENTS OF CASH FLOWS**                               |
| **(In                    Thousands)**                                                      |
|                                                                                                           |   |   |   |   |   |    |   |    |   |
|                                                                                                           |   |   |   |   |   |    |   |    |   |
|                                                                                                           |   |   |   | **Year                    Ended** |   |  **Year                    Ended** |   |  **Year                    Ended** |   |
|                                                                                                           |   |   |   | **December                    31,** |   |  **December                    31,** |   |  **December                    31,** |   |
|                                                                                                           |   |   |   | **2005** |   |  **2004** |   |  **2003** |   |
|                                                                                                           |   |   |   |   |   |    |   |    |   |
| **Cash                      Flows From Operating Activities**                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                      Net income                                                                           |   |   |   |   | $ | 123,944 |   | **$** | 126,844 |   | **$** | 76,216 |   |
| Adjustments                    to reconcile net income to net cash provided by                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operating                    activities:                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                    and amortization                                                          |   |   |   |   |   | 91,125 |   |   | 68,053 |   |   | 64,522 |   |
| Amortization                    of hedge loss in other comprehensive income                               |   |   |   |   |   | 2,638 |   |   | 1,447 |   |   | 1,206 |   |
| Amortization                    of discount and swap hedge loss in long term debt                         |   |   |   |   |   | 530 |   |   | 535 |   |   | 392 |   |
| Amortization                    of regulatory assets and other deferred charges                           |   |   |   |   |   | 3,380 |   |   | 5,205 |   |   | 12,000 |   |
| Amortization                    of debt costs                                                             |   |   |   |   |   | 1,053 |   |   | 922 |   |   | 1,840 |   |
| Deferred                    income taxes                                                                  |   |   |   |   |   | 12,740 |   |   | 69,694 |   |   | 24,271 |   |
| Price                    risk management fair market valuation revaluation                                |   |   |   |   |   | - |   |   | 10,980 |   |   | 20,599 |   |
| Price                    risk management gain on buy out of gas sales contract                            |   |   |   |   |   | - |   |   | (19,884 | ) |   | - |   |
| Allowance                    for funds used during construction                                           |   |   |   |   |   | (1,441 | ) |   | (1,136 | ) |   | (5,804 | ) |
| Gain                    on sale of assets                                                                 |   |   |   |   |   | (1,236 | ) |   | - |   |   | - |   |
| Changes                    in operating assets and liabilities:                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  Accounts                    receivable                                                                   |   |   |   |   |   | 403 |   |   | (1,762 | ) |   | 9,443 |   |
|  Materials                    and supplies                                                                |   |   |   |   |   | 36 |   |   | (198 | ) |   | 422 |   |
|  Accounts                    payable                                                                      |   |   |   |   |   | (10,567 | ) |   | (17,258 | ) |   | (7,029 | ) |
|  Accrued                    interest                                                                      |   |   |   |   |   | (324 | ) |   | (3,639 | ) |   | (2,291 | ) |
|  Accrued                    income tax                                                                    |   |   |   |   |   | (7,204 | ) |   | 5,183 |   |   | 4,796 |   |
|  Accrued                    other tax                                                                     |   |   |   |   |   | 298 |   |   | (1,556 | ) |   | 1,241 |   |
|  Other                    current assets and liabilities                                                  |   |   |   |   |   | 2,900 |   |   | (7,926 | ) |   | 9,863 |   |
| Price                    risk management assets and liabilities                                           |   |   |   |   |   | - |   |   | (23,162 | ) |   | 7,150 |   |
| Other                    assets and liabilities                                                           |   |   |   |   |   | 36,140 |   |   | 2,169 |   |   | 14,561 |   |
| **Net                    Cash Provided by Operating Activities**                                               |   |   |   |   |   | 254,415 |   |   | 214,511 |   |   | 233,398 |   |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cash                    Flows From Investing Activities**                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additions                    to property, plant and equipment                                             |   |   |   |   |   | (37,306 | ) |   | (47,694 | ) |   | (142,334 | ) |
| Allowance                    for funds used during construction                                           |   |   |   |   |   | 1,441 |   |   | 1,136 |   |   | 5,804 |   |
| Retirements                    and disposition of property, plant and equipment, net                      |   |   |   |   |   | (304 | ) |   | (1,288 | ) |   | (1,074 | ) |
| Proceeds                    from sale of assets                                                           |   |   |   |   |   | 1,715 |   |   | - |   |   | - |   |
| **Net                    Cash Used in Investing Activities**                                                   |   |   |   |   |   | (34,454 | ) |   | (47,846 | ) |   | (137,604 | ) |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cash                    Flows From Financing Activities**                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                                                                                                 |   |   |   |   |   | (121,200 | ) |   | (140,000 | ) |   | - |   |
| Borrowings                    under the revolving credit facility                                         |   |   |   |   |   | 223,000 |   |   | 155,000 |   |   | - |   |
| Payments                    on the revolving credit facility                                              |   |   |   |   |   | (298,000 | ) |   | (38,000 | ) |   | - |   |
| Long-term                    debt finance costs                                                           |   |   |   |   |   | - |   |   | (746 | ) |   | - |   |
| Payments                    on long-term debt                                                             |   |   |   |   |   | (14,000 | ) |   | (256,500 | ) |   | (85,250 | ) |
| **Net                    Cash Used in Financing Activities**                                                   |   |   |   |   |   | (210,200 | ) |   | (280,246 | ) |   | (85,250 | ) |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net                    Increase (Decrease) in Cash and Cash Equivalents**                                    |   |   |   |   |   | 9,761 |   |   | (113,581 | ) |   | 10,544 |   |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cash                    and Cash Equivalents, Beginning of Period**                                          |   |   |   |   |   | 11,645 |   |   | 125,226 |   |   | 114,682 |   |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cash                    and Cash Equivalents, End of Period**                                                |   |   |   |   | $ | 21,406 |   | **$** | 11,645 |   | **$** | 125,226 |   |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Supplemental                    Disclosure of Cash Flow Information**                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                    paid (net of amounts capitalized)                                             |   |   |   |   | $ | 74,714 |   | **$** | 95,770 |   | **$** | 105,641 |   |
| Income                    tax paid                                                                        |   |   |   |   | $ | 67,018 |   | **$** | 4,432 |   | **$** | 19,488 |   |
|                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |

*5*

----

*Table            of Contents*

**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

| **(1)** | **Reporting                  Entity** |
|---------|---------------------------------------|

| **(2)  ** | **Significant                Accounting Policies** |
|---------------------|----------------------------------------------------|

**Principles        of Consolidation**

**Reclassifications**
** **

**Regulatory        Accounting**
**        - **
*Accounting        for the Effects of Certain Types of Regulation*

**Revenue        Recognition**

**               **

*6*

----

*Table              of Contents*

**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

*    *
*    *
**Accounting        for Derivative Instruments**
*Accounting for        Derivative Instruments and Hedging Activities *

**              Property, Plant and Equipment**
** **

*Accounting        for Asset Retirement Obligation (ARO)*

*7*

----

*Table              of Contents*

**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

*Accounting        for the Impairment or Disposal of Long-Lived Assets*

**               Gas Imbalances**

**Environmental        Expenditures**

**Cash        and Cash Equivalents**

**Materials        and Supplies**
** **

**                      ****Fuel        Tracker**

**Compressor        Overhaul Expenditures**
**-        **

**Income        Taxes**
*Accounting        for Income Taxes*

**Trade        Receivables**
**        - **

*8*

----

*Table            of Contents*

**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Use        of Estimates**
** **

|   | **Recent                  Accounting Pronouncements** |
|--------|-------------------------------------------------------|

**(3)**
**Long-Term        Debt and Other Financing Arrangements**

|                                                     |   | **2005** |    | **2004** |   |
|----------------------------------------------------------|--------|----------|---------|----------|--------|
| Citrus                                                   |   |     |    |     |   |   |   |
| 8.490%                  Notes due 2007-2009              |   | $        | 90,000  |     | $      | 90,000 |   |
|                                                     |   |     | 90,000  |     |   | 90,000 |   |
| FGT                                                      |   |     |    |     |   |   |   |
| 9.750%                  Notes due 1999-2008              |   |     | 19,500  |     |   | 26,000 |   |
| 10.110%                  Notes due 2009-2013             |   |     | 70,000  |     |   | 70,000 |   |
| 9.190%                  Notes due 2005-2024              |   |     | 142,500 |     |   | 150,000 |   |
| 7.625%                  Notes due 2010                   |   |     | 325,000 |     |   | 325,000 |   |
| 7.000%                  Notes due 2012                   |   |     | 250,000 |     |   | 250,000 |   |
| Revolving                  Credit Agreement due 2007     |   |     | 42,000  |     |   | 117,000 |   |
| Unamortized                  Debt Discount and Swap Loss |   |     | (2,645  | )        |   | (3,175 | ) |
|                                                     |   |     | 846,355 |     |   | 934,825 |   |
|                                                     |   |     |    |     |   |   |   |
| Total                  Outstanding                       |   |     | 936,355 |     |   | 1,024,825 |   |
| Long-Term                  Debt Due Within One Year      |   |     | (14,000 | )        |   | (14,000 | ) |
|                                                     |   | $        | 922,355 |     | $      | 1,010,825 |   |

*9*

----

*Table            of Contents*

**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

| Year       |   |   |    |
|------------|--------|--------|---------|
| 2006       |   | $      | 14,000  |   |
| 2007       |   |   | 86,000  |   |
| 2008       |   |   | 44,000  |   |
| 2009       |   |   | 51,500  |   |
| 2010       |   |   | 346,500 |   |
| Thereafter |   |   | 397,000 |   |
|       |   | $      | 939,000 |   |

** **
** **

**(4)**
**Derivative        Instruments**

** **

*10*

----

*Table            of Contents*

**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(5)        Income Taxes**

|                                                                                       |   | **2005** |        | **2004** |   |
|--------------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|
|                                                                                       |   |     |        |     |   |
| Deferred                  income tax assetsAlternative                  minimum tax credit |   | $        |  -     |     | $      | 9,577 |   |
|                     Regulatory                  and other reserves               |   |     | 8,841  |     |   | 6,295  |   |
|                     Other                                                        |   |     | 176    |     |   | 120  |   |
|                                                                                       |   |     | 9,017       |     |   | 15,992 |   |
|                                                                                       |   |     |        |     |   |   |   |
| Deferred                  income tax liabilities                                           |   |     |        |     |   |   |   |
| Depreciation                  and amortization                                             |   |     | 728,444     |     |   | 717,223 |   |
| Deferred                  charges and other assets                                         |   |     | 27,972      |     |   | 27,295 |   |
| Regulatory                  costs                                                          |   |     | 4,901       |     |   | 13,264 |   |
| Other                                                                                      |   |     | 6,475       |     |   | 4,245 |   |
|                                                                                       |   |     | 767,792     |     |   | 762,027 |   |
|                                                                                       |   |     |        |     |   |   |   |
| Net                  deferred income tax liabilities                                       |   | $        | 758,775     |     | $      | 746,035 |   |

*11*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                      |   | **2005** |   | **2004** |   | **2003** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current                  Tax Provision    |   |     |   |     |   |     |   |   |   |   |
| Federal                                   |   | $        | 53,526 |     | $      | 7,561    |   | $ | 19,215 |   |
| State                                     |   |     | 8,820  |     |   | 1,965    |   |   | 5,068 |   |
|                                      |   |     | 62,346 |     |   | 9,526    |   |   | 24,283 |   |
| Deferred                  Tax Provision   |   |     |   |     |   |     |   |   |   |   |
| Federal                                   |   |     | 11,079 |     |   | 60,808   |   |   | 21,930 |   |
| State                                     |   |     | 1,661  |     |   | 8,886    |   |   | 2,341 |   |
|                                      |   |     | 12,740 |     |   | 69,694   |   |   | 24,271 |   |
|                                      |   |     |   |     |   |     |   |   |   |   |
| Total                  income tax expense |   | $        | 75,086 |     | $      | 79,220   |   | $ | 48,554 |   |

|                                                        |   | **2005** |   | **2004** |   | **2003** |   |
|-------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                        |   |     |   |     |   |     |   |
| Statutory                  federal income tax provision     |   | $        | 69,661 |     | $      | 72,122   |   | $ | 43,670 |   |
| State                  income taxes, net of federal benefit |   |     | 6,813  |     |   | 7,053    |   |   | 4,816 |   |
| Other                                                       |   |     | (1,388 | )        |   | 45       |   |   | 68 |   |
|                                                        |   |     |   |     |   |     |   |   |   |   |
| Income                  tax expense                         |   | $        | 75,086 |     | $      | 79,220   |   | $ | 48,554 |   |
|                                                        |   |     |   |     |   |     |   |   |   |   |
| Effective                  Tax Rate                         |   |     | 37.7   | %        |   | 38.4     | %      |   | 38.9 | % |

**(6)        **
**Employee        Benefit Plans **

*12*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**Other        Post - Employment Benefits**

*13*

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*Table            of Contents*

**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

*Lou          Geiler et al v. Robert W. Jones*
*et          al., *

*14*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                     |   |                                |   |
|------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                     |   | **Year                    ended**   |   |
|                                                                                     |   | **December                    31,** |   |
| ** OPEB**(in                    thousands)                                          |   | **2005**                            |   |
|                                                                                     |   |                                |   |   |
| Change                    in Benefit Obligation                                          |   |                                |   |   |
| Benefit                    obligation at plan adoption                    (1)            |   | $                                   | 9,872  |   |
| Service                    cost                                                          |   |                                | 71     |   |
| Interest                    cost                                                         |   |                                | 490    |   |
| Actuarial                    gain                                                        |   |                                | (3,522 | ) |
| Retiree                    premiums                                                      |   |                                | 757    |   |
| Benefits                    paid                                                         |   |                                | (1,003 | ) |
| Benefit                    obligation at end of year                                     |   | $                                   | 6,665  |   |
|                                                                                     |   |                                |   |   |
| Change                    in Plan Assets                                                 |   |                                |   |   |
| Fair                    value of plan assets at plan adoption (1)                    (2) |   | $                                   | 6,240  |   |
| Return                    on plan assets                                                 |   |                                | 352    |   |
| Employer                    contributions                                                |   |                                | 1,494  |   |
| Retiree                    premiums                                                      |   |                                | 757    |   |
| Benefits                    paid                                                         |   |                                | (1,003 | ) |
| Fair                    value of plan assets at end of year                              |   | $                                   | 7,840  |   |
|                                                                                     |   |                                |   |   |
| Funded                    Status                                                         |   |                                |   |   |
| Funded                    status at end of year                                          |   | $                                   | 1,175  |   |
| Unrecognized                    net actuarial gain                                       |   |                                | (3,348 | ) |
| Net                    liability recognized at December 31, 2005                         |   | $                                   | (2,173 | ) |
|                                                                                     |   |                                |   |   |

| (1)   | For                purposes of this reconciliation, the plan adoption date is considered                to                be January 1, 2005. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

*15*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                              |   |   |
|---------------------------------------------------|--------|--------|
| **As                    of December 31, 2005**    |   |   |
|                                              |   |   |
| Discount                    rate                  |   | 5.50%  |
| Rate                    of compensation increase  |   | N/A    |
|                                              |   |   |
| Health                    care cost trend rates   |   |   |
| (graded                    to 4.65% by year 2012) |   | 12.00% |
|                                              |   |   |

|                                                  |   |                                |   |
|-------------------------------------------------------|--------|-------------------------------------|--------|
|                                                  |   | **Year                    Ended**   |   |
|                                                  |   | **December                    31,** |   |
| **OPEB**(in                    thousands)             |   | **2005**                            |   |
|                                                  |   |                                |   |   |
|                                                  |   |                                |   |   |
| Service                    cost                       |   | $                                   | 71     |   |
| Interest                    cost                      |   |                                | 490    |   |
| Expected                    return on plan assets     |   |                                | (352   | ) |
| Amortization                    of prior service cost |   |                                | -      |   |
| Recognized                    actuarial gain          |   |                                | (174   | ) |
|                                                  |   |                                |   |   |
| Net                    periodic benefit cost          |   | $                                   | 35     |   |

|                                                        |   |   |
|-------------------------------------------------------------|--------|--------|
| **Year                    Ended December 31, 2005**         |   |   |
|                                                        |   |   |
| Discount                    rate                            |   | 5.75%  |
| Rate                    of compensation increase            |   | N/A    |
| Expected                    long-term return on plan assets |   | 5.00%  |
|                                                        |   |   |
| Health                    care cost trend rates             |   |   |
| (graded                    to 4.75% by year 2012)           |   | 12.00% |

*16*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                    |   | **One                    Percentage** |   | **One                    Percentage** |   |
|-------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|
|                                                                    |   | **Point                    Increase** |   | **Point                    Decrease** |   |
| (in                    thousands)                                       |   |                                  |   |                                  |   |   |   |
| Effect                    on total service and interest cost components |   | $                                     | 19     |                                  | $      | (17 | ) |
| Effect                    on postretirement benefit obligation          |   | $                                     | 341    |                                  | $      | (303 | ) |

**Discount        Rate Selection**
***-***

**Plan        Asset Information**
**        - **

|                                         |   |   |   | **Year                    Ended**    |   |
|----------------------------------------------|--------|--------|--------|-------------------------------------------|--------|
|                                         |   |   |   | **December                    31,**  |   |
|                                         |   |   |   | **2005**                                  |   |
|                                         |   |   |   |                                      |   |   |   |
| Equity                    securities         |   |   |   |                                      |   | 0 | % |
| Debt                    securities           |   |   |   |                                      |   | 0 | % |
| Cash                    and cash equivalents |   |   |   |                                      |   | 100 | % |
| Total                                        |   |   |   |                                      |   | 100 | % |

*17*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(7)**
**Major        Customers**

| **Customers**                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** |   |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|--------|
|                                               |       |     |       |     |       |     |   |   |   |   |
| Florida                  Power & Light Company |       | $        | 181.5      |     | $          | 189.5    |   | $ | 186.6 |   |
| Teco                  Energy, Inc.                 |       | $        | 76.1       |     | $          | 69.0     |   | $ | 66.1 |   |

**(8)**
**Related        Party Transactions **

** **

*18*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(9)**
**Regulatory        Matters**

*19*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

*20*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(10)**
**Property,        Plant and Equipment **

|                                                             |   | **2005** | ** ** | **2004** |   |
|------------------------------------------------------------------|--------|----------|------------|----------|--------|
| Transmission                  Plant                              |   | $        | 2,812,586  |     | $      | 2,783,798 |   |
| General                  Plant                                   |   |     | 26,383     |     |   | 25,136 |   |
| Intangible                  Plant                                |   |     | 27,083     |     |   | 23,738 |   |
| Construction                  Work-in-progress                   |   |     | 9,693      |     |   | 12,202 |   |
| Acquisition                  Adjustment                          |   |     | 1,252,466  |     |   | 1,252,466 |   |
|                                                             |   |     | 4,128,211  |     |   | 4,097,340 |   |
| Less:                  Accumulated depreciation and amortization |   |     | (1,211,663 | )        |   | (1,130,593 | ) |
| Property,                  Plant and Equipment, net              |   | $        | 2,916,548  |     | $      | 2,966,747 |   |

**(1**
**1)**
**Other        Assets **

|                                                               |   | **2005** | ** ** | **2004** |   |
|--------------------------------------------------------------------|--------|----------|------------|----------|--------|
| Ramp-up                  assets, net (1)                           |   | $        | 12,240     |     | $      | 12,552 |   |
| Cash                  balance plan settlement (see Note 6)         |   |     | 6,047      |     |   | 7,907 |   |
| OPEB                                                               |   |     | 2,173      |     |   | - |   |
| Environmental                  non-PCB clean-up cost (see Note 13) |   |     | 1,000      |     |   | - |   |
| Other                  miscellaneous                               |   |     | 2,632      |     |   | 2,381 |   |
| Total                  Regulatory Assets                           |   | $        | 24,092     |     | $      | 22,840 |   |

*(1)        Ramp-up assets is a regulatory asset FGT was specifically allowed to establish        in the FERC certificates authorizing the Phase IV and V Expansion        projects.*

|                                        |   | **2005** |   | **2004** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|
| Long-term                  receivables      |   | $        | 72,570 |     | $      | 73,077 |   |
| Fuel                  tracker               |   |     | -      |     |   | 11,165 |   |
| Other                  miscellaneous        |   |     | 2,323  |     |   | 2,204 |   |
| Total                  Other Assets - Other |   | $        | 74,893 |     | $      | 86,446 |   |

**(12)        **
**Deferred        Credits**

*21*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                       |   | **2005** |   | **2004** |   |
|----------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Post                  construction mitigation costs                        |   | $        | 2,600  |     | $      | 3,296 |   |
| Construction                  prepayments                                  |   |     | 4,536  |     |   | - |   |
| Customer                  deposits (see Note 15)                           |   |     | 1,249  |     |   | 1,306 |   |
| Phase                  IV retainage & Phase V surety bond              |   |     | -      |     |   | 1,459 |   |
| Fuel                  Tracker                                              |   |     | 14,477 |     |   | - |   |
| Deferred                  compensation (see Note 6)                        |   |     | 1,425  |     |   | 1,768 |   |
| Environmental                  non-PCB clean-up cost reserve (see Note 13) |   |     | 1,631  |     |   | - |   |
| Tax                  contingency                                           |   |     | 2,594  |     |   | - |   |
| Asset                  retirement obligation (see Note 2)                  |   |     | 493    |     |   | - |   |
| OPEB                  (see Note 6)                                         |   |     | 2,173  |     |   | - |   |
| Miscellaneous                                                              |   |     | 1,892  |     |   | 142 |   |
| Total                  Deferred Credits - Other                            |   | $        | 33,070 |     | $      | 7,971 |   |

**(13)**
**Environmental        Reserve**

**(14)**
**Commitments        and Contingencies **

*Accounting        for Contingencies*

*22*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

*Accounting        for Contingencies*

*23*

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*Table            of Contents*

**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(15)**
**Concentrations        of Credit Risk and Other Financial Instruments**

|                            | **2005**                           |   | **2004**                                |
|---------------------------------|------------------------------------|--------|-----------------------------------------|
|                            | Carrying                    Amount |   | Estimated                    Fair Value |   | Carrying                    Amount |   | Estimated                    Fair Value |
| Long-term                  debt | $                    939,000       |   | $                    1,054,965          |   | $                    1,028,000 |   | $                    1,193,793 |

*24*

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**CITRUS        CORP. AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**(16)        Accumulated Other Comprehensive Income**

| (in                    thousands)                                                   |   | Termination                    Date |                             | Original                    Gain/(Loss) |   | Amortization                    Period |   | Annual                    Amortization |                        | Balance                    at December 31, 2005 |   | Balance                    at December 31, 2004 |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------------|----------------------------------|-----------------------------------------|--------|----------------------------------------|--------|----------------------------------------|-----------------------------|-------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                |   |                                |                             |                                    |   |                                   |   |                                   |                        |                                            |   |                                            |   |
| Interest                    rate lock on 7.625% $325 million note due 2010          |   |                                | December                    2000 |                                    | $      | (18,724                                | )      |                                   | 10                    years |                                            | $      | 1,872                                           |   | $ | 9,206 |   | $ | 11,078 |   |
|                                                                                |   |                                |                             |                                    |   |                                   |   |                                   |                        |                                            |   |                                            |   |   |   |   |   |   |   |
| Interest                    rate swap loss on 7.0% $250 million note due 2012       |   |                                | July                    2002     |                                    |   | (12,280                                | )      |                                   | 10                    years |                                            |   | 1,228                                           |   |   | 8,035 |   |   | 9,263 |   |
|                                                                                |   |                                |                             |                                    |   |                                   |   |                                   |                        |                                            |   |                                            |   |   |   |   |   |   |   |
| Interest                    rate swap gain on 9.19% $150 million note due 2005-2024 |   |                                | November                    1994 |                                    |   | 9,236                                  |   |                                   | 20                    years |                                            |   | (462                                            | )      |   | (4,079 | ) |   | (4,541 | ) |
|                                                                                |   |                                |                             |                                    |   |                                   |   |                                   |                        |                                            | $      | 2,638                                           |   | $ | 13,162 |   | $ | 15,800 |   |
|                                                                                |   |                                |                             |                                    |   |                                   |   |                                   |                        |                                            |   |                                            |   |   |   |   |   |   |   |