----

**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, 2006**

**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**

| **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**                   |
| **5.00%                Corporate Units**                | **New                York Stock Exchange**                   |
|                                                    |                                                         |

**P**
** **

**P**

**P**

**P**

**P**

**P**

**DOCUMENTS      INCORPORATED BY REFERENCE**

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**FORM      10-K**

**DECEMBER      31, 2006**

**Table      of Contents**

|                                                           |                                                                                                                                                 | Page   |
|----------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                           | **PART                I**                                                                                                                            |   |
| ITEM                1.                                         | Business.                                                                                                                                            | 1      |
| ITEM                1A.                                        | Risk                Factors.                                                                                                                         | 15     |
| ITEM                1B.                                        | Unresolved                Staff Comments.                                                                                                            | 23     |
| ITEM                2.                                         | Properties.                                                                                                                                          | 23     |
| ITEM                3.                                         | Legal                Proceedings.                                                                                                                    | 24     |
| ITEM                4.                                         | Submission                of Matters to a Vote of Security Holders.                                                                                  | 24     |
|                                                           |                                                                                                                                                 |   |
|                                                           | **PART                II**                                                                                                                           |   |
| ITEM                5.                                         | Market                for the Registrant’s Common Stock, Related Stockholder Matters and Issuer                Purchases of Equity Securities. | 24     |
| ITEM                6.                                         | Selected                Financial Data.                                                                                                              | 26     |
| ITEM                7.                                         | Management's                Discussion and Analysis of Financial Condition and Results of                Operations*.*                               | 26     |
| ITEM                7A.                                        | Quantitative                and Qualitative Disclosures About Market Risk.                                                                           | 51     |
| ITEM                8.                                         | Financial                Statements and Supplementary Data.                                                                                          | 54     |
| ITEM                9.                                         | Changes                in and Disagreements with Accountants on Accounting and Financial                Disclosure.                                  | 54     |
| ITEM                9A.                                        | Controls                and Procedures.                                                                                                              | 54     |
| ITEM                9B.                                        | Other                Information.                                                                                                                    | 55     |
|                                                           |                                                                                                                                                 |   |
|                                                           | **PART                III**                                                                                                                          |   |
| ITEM                10.                                        | Directors,                Executive Officers and Corporate Governance.                                                                               | 55     |
| ITEM                11.                                        | Executive                Compensation.                                                                                                               | 56     |
| ITEM                12.                                        | Security                Ownership of Certain Beneficial Owners and Management and Related                Stockholder Matters.                        | 56     |
| ITEM                13.                                        | Certain                Relationships and Related Transactions, and Director                Independence.                                             | 56     |
| ITEM                14.                                        | Principal                Accountant Fees and Services.                                                                                               | 56     |
|                                                           |                                                                                                                                                 |   |
|                                                           | **PART                IV**                                                                                                                           |   |
| ITEM                15.                                        | Exhibits,                Financial Statement Schedules.                                                                                              | 56     |
|                                                           |                                                                                                                                                 |
| Signatures.                                                    | 60                                                                                                                                                   |
|                                                           |                                                                                                                                                 |
| Index                to the Consolidated Financial Statements. | F-1                                                                                                                                                  |

----

**PART      I**

**ITEM      1. Business.**

**OUR      BUSINESS**

**Introduction**

*Southern      Union*
*Company*

***Recent      Acquisitions and Dispositions***

***CCE      Holdings Transactions.***
*Florida      Gas*
*Transwestern*
*Energy      Transfer*
*CCE      Holdings*
*Redemption      Agreement*
*Citrus*

*LNG      Holdings*
*PEPL*
*CrossCountry      Citrus*
*2006      Term Loan*
*Transwestern      Holding*

***Sale      of PG Energy.***
*Sid      Richardson Energy Services*

***Sale      of the Rhode Island Operations of New England Gas Company.***

***Acquisition      of Sid Richardson Energy Services.***
*Sid      Richardson Bridge Loan*
*Junior      Subordinated Notes*
*Item      8. Financial Statements and Supplementary Data*
*Note      13 - Debt Obligations.*

*1*

----

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

**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 and from the Gulf Coast to Florida,                and                LNG terminalling and regasification services. Its operations are                currently                conducted through PEPL and its subsidiaries (collectively*Panhandle*)                and Florida Gas; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                Gathering and Processing segment, which is primarily engaged in the                gathering, transmission, treating, processing and redelivery of natural                gas and natural gas liquids in Texas and New Mexico. Its operations                are                conducted through Southern Union Gas Services;                and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                Distribution segment, which is primarily engaged in the local distribution                of natural gas in Missouri and Massachusetts. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

***Transportation      and Storage Segment***

***Services***

*Earnings      from unconsolidated investments*

*2*

----

*EBIT*
*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.*

***Panhandle.***
*Trunkline*
*Sea      Robin*
*Southwest      Gas Storage*
*Trunkline      LNG*
*Bcf/d*

***Citrus      and CCE Holdings.***

*3*

----

*Earnings      from unconsolidated investments*

*TBtu*

|                                                                                                                                                                         |   |   |   | **Year                    Ended**        |   |   |   | **Year                    Ended**        |   |  **Six                    Months Ended**  |   | **Year                    Ended**    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------------------------------------|--------|--------|--------|------------------------------------------|--------|------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                                                         |   |   |   | **December                    31, 2006** |   |   |   | **December                    31, 2005** |   |  **December                    31, 2004** |   | **June                    30, 2004** |   |
|                                                                                                                                                                         |   |   |   |                                     |   |   |   |                                     |   |                                      |   |                                 |   |
| **Panhandle**                                                                                                                                                                |   |   |   |                                     |   |   |   |                                     |   |                                           |   |                                 |   |   |   |   |   |   |   |
| PEPL                                                                                                                                                                         |   |   |   |                                     |   | 579    |   |                                     |   |                                           |   | 609                                  |   |   | 269 |   |   | 576 |   |
| Trunkline                                                                                                                                                                    |   |   |   |                                     |   | 486    |   |                                     |   |                                           |   | 459                                  |   |   | 267 |   |   | 564 |   |
| Sea                    Robin                                                                                                                                                 |   |   |   |                                     |   | 115    |   |                                     |   |                                           |   | 146                                  |   |   | 94 |   |   | 182 |   |
| Trunkline                    LNG Usage Volumes                                                                                                                               |   |   |   |                                     |   | 149    |   |                                     |   |                                           |   | 108                                  |   |   | 92 |   |   | 217 |   |
|                                                                                                                                                                         |   |   |   |                                     |   |   |   |                                     |   |                                           |   |                                 |   |   |   |   |   |   |   |
| **Citrus                    and CCE Holdings**(1)                                                                                                                            |   |   |   |                                     |   |   |   |                                     |   |                                           |   |                                 |   |   |   |   |   |   |   |
| Florida                    Gas                                                                                                                                               |   |   |   |                                     |   | 737    |   |                                     |   |                                           |   | 699                                  |   |   | N/A |   |   | N/A |   |
| Transwestern                                                                                                                                                                 |   |   |   |                                     |   | 572    | (2     | )                                        |   |                                           |   | 589                                  |   |   | N/A |   |   | N/A |   |
| _______________________                                                                                                                                                      |   |   |   |                                     |   |   |   |                                     |   |                                           |   |                                 |   |   |   |   |   |   |   |
| (1)Represents                    100 percent of Transwestern and Florida Gas versus the Company's                    effective                    equity ownership interest. |   |   |   |
| The                    Company's effective equity interests in Transwestern and Florida                    Gas were                    50 percent and 25 percent,            |   |   |   |                                     |   |
| respectively,                    until December 1, 2006, when the Company's interest in Transwestern                    was                    redeemed by Energy            |   |   |   |                                     |
| Transfer,                    increasing the Company's effective interest in Florida Gas to                    50                    percent.                                 |   |   |   |                                     |   |   |   |                                     |   |                                           |
| (2)                    Represents transportation volumes for Transwestern for the eleven-month                    period ended November 30, 2006.                            |   |   |   |                                     |

*4*

----

|                                                                                                                                |   |   |   |   |   | **As                  of**             |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|----------------------------------------|--------|
|                                                                                                                                |   |   |   |   |   | **December                  31, 2006** |   |
| **Panhandle**                                                                                                                       |   |   |   |   |   |                                   |   |
|  Approximate                  Miles of Pipelines                                                                               |   |   |   |   |   |
| PEPL                                                                                                                                |   |   |   |   |   |                                   |   |   | 6,000 |   |
| Trunkline                                                                                                                           |   |   |   |   |   |                                   |   |   | 3,500 |   |
| Sea                  Robin                                                                                                          |   |   |   |   |   |                                   |   |   | 450 |   |
| Peak                  Day Delivery Capacity (Bcf/d)                                                                                 |   |   |   |   |   |                                   |   |   |   |   |
| PEPL                                                                                                                                |   |   |   |   |   |                                   |   |   | 2.8 |   |
| Trunkline                                                                                                                           |   |   |   |   |   |                                   |   |   | 1.5 |   |
| Sea                  Robin                                                                                                          |   |   |   |   |   |                                   |   |   | 1 |   |
| Trunkline                  LNG                                                                                                      |   |   |   |   |   |                                   |   |   | 2.1 |   |
| Trunkline                  LNG Sustainable Send-Out Capacity (Bcf/d)                                                                |   |   |   |   |   |                                   |   |   | 1.8 |   |
| Underground                  Storage Capacity-Owned (Bcf)                                                                           |   |   |   |   |   |                                   |   |   | 72 |   |
| Underground                  Storage Capacity-Leased (Bcf)                                                                          |   |   |   |   |   |                                   |   |   | 16 |   |
| Trunkline                  LNG Terminal Storage Capacity (Bcf)                                                                      |   |   |   |   |   |                                   |   |   | 9 |   |
| Average                  Number of Transportation Customers                                                                         |   |   |   |   |   |                                   |   |   | 500 |   |
| Weighted                  Average Remaining Life in Years of Firm Transportation                  Contracts                         |   |   |   |   |   |                                   |   |   |   |   |
| PEPL                                                                                                                                |   |   |   |   |   |                                   |   |   | 4.6 |   |
| Trunkline                                                                                                                           |   |   |   |   |   |                                   |   |   | 9.9 |   |
| Sea                  Robin                               (1)       |   | N/A    |   |
| Weighted                  Average Remaining Life in Years of Firm Storage Contracts                                                 |   |   |   |   |   |                                   |   |   |   |   |
| PEPL                                                                                                                                |   |   |   |   |   |                                   |   |   | 6.3 |   |
| Trunkline                                                                                                                           |   |   |   |   |   |                                   |   |   | 1.7 |   |
|                                                                                                                                |   |   |   |   |   |                                   |   |   |   |   |
| **Florida                  Gas                **(2) |   |   |   |   |   |                                   |   |   |   |   |
| Approximate                  Total Miles of Pipelines                                                                               |   |   |   |   |   |                                   |   |   | 5,000 |   |
| Peak                  Day Delivery Capacity (Bcf/d)                                                                                 |   |   |   |   |   |                                   |   |   | 2.1 |   |
| Average                  Number of Transportation Customers                                                                         |   |   |   |   |   |                                   |   |   | 136 |   |
| Weighted                  Average Remaining Life of Firm Transportation Contracts                                                   |   |   |   |   |   |                                   |   |   | 10 |   |
| ___________________                                                                                                                 |   |   |   |   |   |                                   |   |   |   |   |
| (1)Sea                  Robin contracts are interruptible without any firm contracts in                  place.                     |   |   |   |   |   |                                   |   |
| (2)Represents                  100 percent of Florida Gas versus the Company's effective                                            |   |   |   |   |   |                                   |
| equity                  ownership interest of 50 percent at December 31, 2006.                                                      |   |   |   |   |   |                                   |   |   |   |   |

***Recent      System Enhancements - Completed or Under Construction***

***LNG      Expansion Projects.***
*Construction      work-in-progress*

*5*

----

*Item      7. Management Discussion and Analysis of Financial Condition *
*      Results of Operations -*
*Liquidity      and Capital Resources.*

***Significant      Customers***

|                                    |   | **Percent                  of**             |   |   |   | **Weighted**                                 |   |
|-----------------------------------------|--------|--------------------------------------------------|--------|--------|--------|----------------------------------------------|--------|
|                                    |   | **Segment                  Revenues**       |   |   |   | **Average                  Life**            |   |
|                                    |   | **For                  Year Ended**         |   |        |   |  **of                  Contracts at**   |   |
| **Customer**                            |   | **December                  31, 2006 (3)**  |   |        |   |  **December                  31, 2006** |   |
|                                    |   |                                             |   |   |   |                                         |   |   |   |   |   |   |
| BG                  LNG Services (1)    |   |                                             | 24     | %      |   |                                         |   |   | 17 |  Years |   |
| ProLiance                               |   |                                             | 12     |   |   |                                         |   |   | 7.8 |  Years |   |
| Ameren                  Corp. (2)       |   |                                             | 10     |   |   |                                         |   |   | 7.1 |  Years |   |
| Other                  top 10 customers |   |                                             | 19     |   |   |                                         |   |   |   |  N/A |   |   |
| Remaining                  customers    |   |                                             | 35     |   |   |                                         |   |   |   |  N/A |   |   |
| Total                  percentage       |   |                                             | 100    | %      |   |                                         |   |   |   |   |   |   |
|                                    |   |                                             |   |   |   |                                         |   |   |   |   |   |   |
|                                    |   |                                             |   |   |   |                                         |   |   |   |   |   |   |

| (1)   | BG                LNG Services’ contracts were extended with the completion of Phase I and                Phase II in the second and third quarters of 2006, respectively.                For                additional information, see *Item                8. Financial Statements and Supplementary Data, Note 16 - Regulation                and                Rates*. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Includes                Ameren Corp. subsidiaries such as Union Electric, Central Illinois                Light                Company, Illinois Power and Central Illinois Public Service. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Panhandle                has no single customer, or group of customers under common control,                that                accounted for ten percent or more of the Company’s total consolidated                operating revenues. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                        |   | **Percent                  of**            |   |   |                                         |   |   |   |
|---------------------------------------------|--------|--------------------------------------------|--------|--------|----------------------------------------------|--------|--------|--------|
|                                        |   | **Florida                  Gas'**          |   |   |                                         |   |   |   |
|                                        |   | **Total                  Operating**       |   |   | Weighted                                |   |   |
|                                        |   | **Revenues**                               |   |   | **Average                  Life**       |   |   |
|                                        |   | **For                  Year Ended**        |   |   | **of                  Contracts at**    |   |   |
| **Customer**                                |   | **December                  31, 2006 (1)** |   |   | **December                  31, 2006**  |   |   |
|                                        |   |                                       |   |   |                                         |   |   |   |
| Florida                  Power & Light  |   |                                       | 41     | %      |                                         |   |   |   | 8.3 |  Years |   |
| Tampa                  Electric/Peoples Gas |   |                                       | 17     |   |                                         |   |   |   | 11.2 |  Years |   |
| Other                  top 10 customers     |   |                                       | 26     |   |                                         |   |   |   | N/A |   |   |
| Remaining                  customers        |   |                                       | 16     |   |                                         |   |   |   | N/A |   |   |   |   |
| Total                  percentage           |   |                                       | 100    | %      |                                         |   |   |   |   |   |   |   |   |

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

***Regulation      and Rates***

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

*6*

----

|                                                                                                                                                                               |   | **Date                  of Last** |   |                                                                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| **Company**                                                                                                                                                                        |   | **Rate                  Filing**  |   | **Status**                                                                                                                                        |
|                                                                                                                                                                               |   |                              |   |                                                                                                                                              |
| PEPL                                                                                                                                                                               |   | 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 (1)                                                                                            |
| Florida                  Gas                                                                                                                                                       |   | October                  2003     |   | Settlement                  effective March 2005; rate moratorium in effect until October 2007,                  required to file by October 2009 |
| ____________________                                                                                                                                                               |   |                              |   |                                                                                                                                              |
| (1)                  For information related to a complaint filed with FERC against                  Southwest                  Gas Storage under Section 5 of the                 |
| Natural                  Gas Act, see *Item                  8. Financial Statements and Supplementary Data*,                  *Note                  16 - Regulation and Rates -* |
| *Panhandle.*                                                                                                                                                                       |   |                              |   |

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

***Competition***

*7*

----

***Gathering      and Processing Segment***

***Services***

*Cost      of gas and other energy costs *
*Item      7. Management’s Discussion and Analysis of Financial Condition and Results of      Operations -*
*Results      of Operations*

*8*

----

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

***Significant      Customers***

|                                        |   | **Percent                  of**        |    | **Weighted**                           |
|---------------------------------------------|--------|----------------------------------------|---------|----------------------------------------|
|                                        |   | **Segment                  Revenues**  |    | **Average                  Life**      |
|                                        |   | **For                  Year Ended**    |    | **of                  Contracts at**   |
| **Customer**                                |   | **December                  31, 2006** |    | **December                  31, 2006** |
|                                        |   |                                   |    |                                   |   |
| ConocoPhillips                  Company (1) |   | 22                                     |  % |                                   | 20                  Months |
| BP                  Energy Company          |   | 11                                     |    |                                   | Month                  to Month |
| Constellation                  Power Source |   | 10                                     |    |                                   | Month                  to Month |
| Other                  top 10 customers     |   | 22                                     |    |                                   | N/A |
| Remaining                  customers        |   | 35                                     |    |                                   | N/A |
| Total                  percentage           |   | 100                                    |  % |                                   |   |
|                                        |   |                                   |    |                                   |   |

*Operating        revenues *

***Natural      Gas Connections***

*Item      8. Financial Statements and Supplementary Data - Note 10 - Unconsolidated      Investments*

***Regulation***

*U.S.      EPA*
*OSHA*

*9*

----

***Competition***

| ·   | producer                drilling activity, |
|--------------------|--------------------------------------------|

| ·   | contract                fees charged, |
|--------------------|---------------------------------------|

| ·   | pressures                maintained on the gathering                systems, |
|--------------------|------------------------------------------------------------------------------|

| ·   | location                of the gathering systems relative to competitors and drilling                activity, |
|--------------------|----------------------------------------------------------------------------------------------------------------|

| ·   | efficiency                and reliability of the operations,                and |
|--------------------|---------------------------------------------------------------------------------|

| ·   | delivery                capabilities in each system and plant                location. |
|--------------------|----------------------------------------------------------------------------------------|

***Distribution      Segment***

***Services***

*MPSC*
*MDTE*

*MMcf*

*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.*

*10*

----

|                                                      |                                                           |                                                                  |                       |                              |                       |                              |                       | **Six**                           |                       |                            |   |
|-----------------------------------------------------------|----------------------------------------------------------------|-----------------------------------------------------------------------|----------------------------|-----------------------------------|----------------------------|-----------------------------------|----------------------------|-----------------------------------|----------------------------|---------------------------------|--------|
|                                                      |                                                           |                                                                  |                       | **Year                  Ended**   |                       | **Year                  Ended**   |                       | **Months                  Ended** |                       | **Year                  Ended** |   |
|                                                      |                                                           |                                                                  |                       | **December                  31,** |                       | **December                  31,** |                       | **December                  31,** |                       | **June                  30,**   |   |
|                                                      |                                                           |                                                                  |                       | **2006**                          |                       | **2005**                          |                       | **2004**                          |                       | **2004**                        |   |
| Average                  number of customers:             |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |
|                                                      | Residential                                                    |                                                                  |                       | 482,882                           |                       | 480,381                           |                       | 479,220                           |                       | 482,146                         |   |
|                                                      | Commercial                                                     |                                                                  |                       | 67,120                            |                       | 66,608                            |                       | 64,940                            |                       | 65,635                          |   |
|                                                      | Industrial                  and irrigation                     |                                                                  | 129                        |                              | 142                        |                              | 140                        |                              | 138                        |                            |
|                                                      |                                                           | Total                  average customers served                       |                       | 550,131                           |                       | 547,131                           |                       | 544,300                           |                       | 547,919                         |   |
|                                                      | Transportation                  customers                      |                                                                  | 1,473                      |                              | 1,383                      |                              | 1,028                      |                              | 938                        |                            |
|                                                      |                                                           | Total                  average gas sales and transportation customers |                       | 551,604                           |                       | 548,514                           |                       | 545,328                           |                       | 548,857                         |   |
|                                                      |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |                            |   |
| Gas                  sales (MMcf):                        |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |                            |
|                                                      |  Residential                                              |                                                                  | 34,946                     |                              | 39,160                     |                              | 12,045                     |                              | 41,361                     |                            |
|                                                      |  Commercial                                               |                                                                  | 14,938                     |                              | 16,633                     |                              | 5,469                      |                              | 17,423                     |                            |
|                                                      |  Industrial                and irrigation                 | 517                                                                   |                       | 525                               |                       | 170                               |                       | 455                               |                       |
|                                                      |  Gas                sales billed                          |                                                                  | 50,401                     |                              | 56,318                     |                              | 17,684                     |                              | 59,239                     |                            |
|                                                      |  Net                change in unbilled gas sales          |                                                                  | 1,149                      |                              | 185                        |                              | 3,935                      |                              | 85                         |                            |
|                                                      |                                                           | Total                  gas sales                                      |                       | 51,550                            |                       | 56,503                            |                       | 21,619                            |                       | 59,324                          |   |
|                                                      |                                                           | Gas                  transported                                      |                       | 26,340                            |                       | 27,609                            |                       | 12,340                            |                       | 27,123                          |   |
|                                                      |                                                           | Total                  gas sales and gas transported                  |                       | 77,890                            |                       | 84,112                            |                       | 33,959                            |                       | 86,447                          |   |
|                                                      |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |                            |   |
|  Gas                sales revenues ($ in thousands): |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |
|                                                      |  Residential                                              |                                                                  | $                  472,926 |                              | $                  500,874 |                              | $                  155,281 |                              | $                  450,824 |                            |
|                                                      |  Commercial                                               |                                                                  | 189,837                    |                              | 201,122                    |                              | 62,775                     |                              | 180,242                    |                            |
|                                                      |  Industrial                and irrigation                 |                                                                  | 11,140                     |                              | 10,499                     |                              | 2,142                      |                              | 5,059                      |                            |
|                                                      |  Gas                revenues billed                       |                                                                  | 673,903                    |                              | 712,495                    |                              | 220,198                    |                              | 636,125                    |                            |
|                                                      |  Net                change in unbilled gas sales revenues |                                                                  | (25,681)                   |                              | 19,561                     |                              | 43,871                     |                              | 1,937                      |                            |
|                                                      |                                                           | Total                  gas sales revenues                             |                       | 648,222                           |                       | 732,056                           |                       | 264,069                           |                       | 638,062                         |   |
|                                                      |                                                           | Gas                  transportation revenues                          |                       | 12,253                            |                       | 12,885                            |                       | 5,223                             |                       | 10,542                          |   |
|                                                      |                                                           | Other                  revenues                                       |                       | 8,246                             |                       | 7,758                             |                       | 4,305                             |                       | 7,092                           |   |
| Total                  operating revenues                 |                                                           | $                  668,721                                            |                       | $                  752,699        |                       | $                  273,597        |                       | $                  655,696        |                       |
|                                                      |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |                            |   |
|                                                      |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |                            |   |
| Weather:                                                  |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |                            |   |
| Massachusetts                  Utility Operations:        |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |
|                                                      | Degree                  days (a)                               |                                                                  | 4,901                      |                              | 5,801                      |                              | 2,004                      |                              | 5,644                      |                            |
|                                                      | Percent                  of 10-year measure (b)                |                                                                  | 90%                        |                              | 106%                       |                              | 98%                        |                              | 102%                       |                            |
|                                                      | Percent                  of 30-year measure (b)                |                                                                  | 85%                        |                              | 101%                       |                              | 96%                        |                              | 98%                        |                            |
|                                                      |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |                            |   |
| Missouri                  Utility Operations:             |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |
|                                                      | Degree                  days (a)                               |                                                                  | 3,996                      |                              | 4,621                      |                              | 1,669                      |                              | 4,770                      |                            |
|                                                      | Percent                  of 10-year measure (b)                |                                                                  | 77%                        |                              | 89%                        |                              | 81%                        |                              | 92%                        |                            |
|                                                      | Percent                  of 30-year measure (b)                |                                                                  | 77%                        |                              | 89%                        |                              | 82%                        |                              | 92%                        |                            |
|                                                      |                                                           |                                                                  |                       |                              |                       |                              |                       |                              |                       |                            |   |

*11*

----

***Gas      Supply***

***Regulation      and Rates***

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

*12*

----

|                                    |   | **Date                  of Last** |   |                                                                                                                                                     |
|-----------------------------------------|--------|-----------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Utility                  Operations** |   | **Rate                  Filing**  |   | **Status**                                                                                                                                               |
|                                    |   |                              |   |                                                                                                                                                     |
| Missouri                                |   | May 2006                     |   | MPSC                  is expected to issue a ruling in first quarter 2007 on proposed                  rate                  increase filed in May 2006. |
|                                    |   |                              |   |                                                                                                                                                     |
| Massachusetts                           |   | May                  1996         |   | Effective                  December 1996; Filed notice of intent with MDTE in June 2006 to                  file rate                  schedules.        |

***Competition***

***OTHE***
***R      MATTERS***

***Environmental***

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

***Insurance***

*13*

----

***Employees***

|                                     |   | **Number                  of employees**   |   | **Expiration                  of**    |
|------------------------------------------|--------|--------------------------------------------|--------|---------------------------------------|
| **Company**                              |   | **Represented                  by Unions** |   | **Current                  Contract** |
|                                     |   |                                       |   |                                  |
| PEPL                                     |   |                                       |   |                                  |
| USW                  Local 348           |   | 218                                        |   | May                  27, 2009         |
| Missouri                  Gas Energy     |   |                                       |   |                                  |
| Gas                  Workers 781         |   | 199                                        |   | April                  30, 2009       |
| IBEW                  Local 53           |   | 99                                         |   | April                  30, 2009       |
| USW Local                  5-267    |   | 25                                         |   | April                  30, 2009       |
| USW                  Local 12561, 14228  |   | 145                                        |   | April                  30, 2009       |
|                                     |   |                                       |   |                                  |
| New                  England Gas Company |   |                                       |   |                                  |
| UWUA                  Local 431          |   | 76                                         |   | April                  30, 2010       |

***Available      Information***

*SEC*

*Code*

*14*

----

*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.***

*15*

----

***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; or |
|--------------------|----------------------------------------------------------------------------------------------------------------------|

| ·   | 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.***

*16*

----

***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.***

***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.***

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

*Section      1031*

*17*

----

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

***The      success of the pipeline and gathering and processing businesses 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.***

***The      pipeline and gathering and processing business revenues are generated under      contracts that must be renegotiated periodically.***

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

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

*18*

----

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

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

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

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

*19*

----

***RISKS      THAT RELATE TO THE COMPANY’S NATURAL GAS GATHERING AND PROCESSING      BUSINESS***

***The      Company’s natural gas gathering and processing business is      unregulated.***

***The      Company’s natural gas gathering and processing business is subject to      competition.***

***The      Company’s profit margin in the natural gas gathering and processing business is      highly dependent on energy commodity prices.***

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

*20*

----

***Operational      risks are involved in operating a natural gas gathering and processing      business.***

***The      Company’s natural gas gathering and processing business accepts some credit risk      in dealing with customers.***

***The      inability to continue to access independently owned and publicly owned lands      could adversely affect the Company’s ability to operate and/or expand its      natural gas gathering and processing business.***

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

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

*21*

----

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

***Operational      risks are involved in operating a natural gas distribution business.***

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

*22*

----

| ·   | changes                in demand for natural gas by the Company’s customers, the composition of                the Company’s customer base and 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 or natural                gas                liquid products 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; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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 exposure to highly competitive commodity                businesses; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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*

***GATHERING      AND PROCESSING***

*Item      1. Business - Business Segments - Gathering and Processing      Segment*

***DISTRIBUTION***

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

***OTHER***

*23*

----

**ITEM      3. Legal Proceedings.**

*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*
*Item      1A. Risk Factors*
*-*
*Cautionary      Factors That May Affect Future Results.*

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

**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 February 16, 2007 |   | 29.43       |   | 26.81 |   |
|                                            |   |        |   |   |   |
| (Quarter                  Ended)                |   |        |        |   |   |   |   |
| December                  31, 2006              |   |        | 29.76  |   |   | 26.19 |   |
| September                  30, 2006             |   |        | 27.75  |   |   | 25.83 |   |
| June                  30, 2006                  |   |        | 27.22  |   |   | 22.76 |   |
| March                  31, 2006                 |   |        | 25.55  |   |   | 22.90 |   |
|                                            |   |        |   |   |   |   |   |
| (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 |   |
|                                            |   |        |   |   |   |   |   |

***HOLDERS***

*24*

----

***DIVIDENDS***

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

*Retained      earnings (deficit) *
*Premium      on capital stock*

***EQUITY      COMPENSATION PLANS***

*Second      Amended 2003 Plan*
*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 |  1,859,285                (1)      |  18.49                            |  7,247,810                              |

*25*

----

**ITEM      6. SELECTED FINANCIAL DATA. **

|                                                           |   |                                                                   |      |                                    |   | **For                    the**                           |   |     |      |                            |   |      |   |   |      |
|----------------------------------------------------------------|--------|------------------------------------------------------------------------|-----------|-----------------------------------------|--------|----------------------------------------------------------|--------|----------|-----------|---------------------------------|--------|-----------|--------|--------|-----------|
|                                                           |   | **For                    the years ended**                             |      | **six                    months ended** |   | **For                    the years ended**               |   |     |      |
|                                                           |   | **December                    31,**                                    |      | **December                    31,**     |   | **June                    30,**                          |   |     |      |
|                                                           |   | **                      2006  (a)**                     |      | **2005**                                |   | **                       2004  (a)** |   | **2004** |      | **2003                    (b)** |   | **2002**  |   |   |      |
|                                                           |   | (In                    thousands of dollars, except per share amounts) |      |                                    |   |
|                                                           |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |
| Total                    operating revenues                    |   | $                                                                      | 2,340,144 |                                    | $      | 1,266,882                                                |   | $        | 517,849   |                            | $      | 1,149,268 |   | $      | 596,330   |   | $ | 495,281 |   |   |   |   |
| Earnings                    from unconsolidated                |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |   |   |   |   |   |   |   |
| investments                                                    |   |                                                                   | 141,370   |                                    |   | 70,742                                                   |   |     | 4,745     |                            |   | 200       |   |   | 422       |   |   | 1,420 |   |   |   |   |
| Net                    earnings:                               |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |   |   |   |   |   |   |   |
|  Continuing                    operations (c)             |   |                                                                   | 199,718   |                                    |   | 135,731                                                  |   |     | (1,635    | )                               |   | 51,729    |   |   | (12,425   | ) |   | (51,130 | ) |   |   |   |
|  Discontinued                    operations (d)           |   |                                                                   | (152,952  | )                                       |   | (132,413                                                 | )      |     | 7,723     |                            |   | 49,610    |   |   | 88,614    |   |   | 70,754 |   |   |   |   |
|  Available                    for common stockholders     |   |                                                                   | 46,766    |                                    |   | 3,318                                                    |   |     | 6,088     |                            |   | 101,339   |   |   | 76,189    |   |   | 19,624 |   |   |   |   |
| Net                    earnings per diluted                    |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |   |   |   |   |   |   |   |
|  common                    share (e):                     |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |   |   |   |   |   |   |   |
|  Continuing                    operations                 |   |                                                                   | 1.70      |                                    |   | 1.20                                                     |   |     | (0.02     | )                               |   | 0.63      |   |   | (0.19     | ) |   | (0.80 | ) |   |   |   |
|  Discontinued                    operations               |   |                                                                   | (1.30     | )                                       |   | (1.17                                                    | )      |     | 0.09      |                            |   | 0.61      |   |   | 1.36      |   |   | 1.11 |   |   |   |   |
|  Available                    for common stockholders     |   |                                                                   | 0.40      |                                    |   | 0.03                                                     |   |     | 0.07      |                            |   | 1.24      |   |   | 1.17      |   |   | 0.31 |   |   |   |   |
| Total                    assets                                |   |                                                                   | 6,782,790 |                                    |   | 5,836,819                                                |   |     | 5,568,289 |                            |   | 4,572,458 |   |   | 4,590,938 |   |   | 2,680,064 |   |   |   |   |
| Stockholders’                    equity                  |   |                                                                   | 2,050,408 |                                    |   | 1,854,069                                                |   |     | 1,497,557 |                            |   | 1,261,991 |   |   | 920,418   |   |   | 685,346 |   |   |   |   |
| Current                    portion of long-term debt and       |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |   |   |   |   |   |   |   |
|  capital                    lease obligation              |   |                                                                   | 461,011   |                                    |   | 126,648                                                  |   |     | 89,650    |                            |   | 99,997    |   |   | 734,752   |   |   | 108,203 |   |   |   |   |
| Long-term                    debt and capital lease            |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |   |   |   |   |   |   |   |
|  obligation,                    excluding current portion |   |                                                                   | 2,689,656 |                                    |   | 2,049,141                                                |   |     | 2,070,353 |                            |   | 2,154,615 |   |   | 1,611,653 |   |   | 1,082,210 |   |   |   |   |
| Company-obligated                    mandatorily               |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |   |   |   |   |   |   |   |
|  redeemable                    preferred securities       |   |                                                                   |      |                                    |   |                                                     |   |     |      |                            |   |      |   |   |      |   |   |   |   |   |   |   |
|  of                    subsidiary trust                   |   |                                                                   | -         |                                    |   | -                                                        |   |     | -         |                            |   | -         |   |   | 100,000   |   |   | 100,000 |   |   |   |   |
| Common                    stock dividends (f)                  |   |                                                                   | 46,289    |                                    |   | -                                                        |   |     | -         |                            |   | -         |   |   | -         |   |   | - |   |   |   |   |

| (a)   | Includes                the impact of significant acquisitions and sales of assets. See                *Item                8. Financial Statements and Supplementary Data, Note 3 - Acquisitions                and                Sales*and*Note 19 - Discontinued Operations*for                information related to the acquisitions and                sales. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b)   | Panhandle                was acquired on June 11, 2003 and was accounted for as a purchase.                The                Panhandle 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)   | Net                earnings from continuing operations are net of dividends on preferred                stock of $17.4                million, $17.4 million, $8.7 million and $12.7 million for                the years ended December 31, 2006 |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (d) | On                August 24, 2006, the Company completed the sales of the assets of                its PG                Energy natural gas distribution division to UGI Corporation and the                Rhode                Island operations of its New England Gas Company natural gas distribution                division to National Grid USA.  On January 1, 2003, ONEOK acquired                the Company’s Southern Union Gas natural gas operating division and                related assets.  These dispositions were accounted for as                discontinued operations in the Consolidated Statement of                Operations. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (e) | 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                and July 15, 2002. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (f) | No                cash dividends on common stock were paid during the reporting periods                prior to 2006. See *Item                5. Market for Registrant’s Common Equity, Related Stockholder Matters and                Issuer Purchases of Equity Securities*and                *Note                10 - Stockholders’ Equity -- Dividends*. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

***INTRODUCTION***

*26*

----

***BUSINESS      STRATEGY***

| ·   | *Expanding                  through development of the Company’s existing businesses.*                  The Company will continue to pursue growth opportunities through                  the                  expansion of its existing asset base, while maintaining its focus                  on                  providing safe and reliable service to its customers. In each of                  its                  business segments, the Company identifies opportunities for organic                  growth                  through incremental volumes and system enhancements to generate                  operating                  efficiencies. In its interstate transmission and distribution businesses,                  the Company seeks rate increases and/or improved rate design as                  appropriate to achieve a fair return on its investment. See *Item                  7. Management’s Discussion and Analysis of Financial Condition and Results                  of Operations - Liquidity and Capital Resources - Investing                  Activities*                  for information related to the Company’s principal capital expenditure                  projects. *See                  Item 8. Financial Statements and Supplementary Data, Note 16 -                  Regulation                  and Rates*                  for information related to ratemaking activities. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | *New                  initiatives.*The                  Company regularly assesses strategies to enhance                  stockholder value. Examples of new initiatives include creation of a                  master limited partnership and potential further diversification                  of                  earning sources through strategic acquisitions or joint ventures                  in the                  North American diversified natural gas industry. In this regard,                  Southern                  Union diversified the Company’s regulated and non-regulated cash flow and                  earnings sources in 2006 with its acquisition of Sid Richardson                  Energy                  Services, its increased equity interests in Citrus as a result                  of the                  transactions under the Redemption Agreement and the sales of the                  assets of                  the PG Energy natural gas distribution division and the Rhode Island                  operations of its New England Gas Company natural gas distribution                  division. See *Item                  1. Business - Our Business - Introduction*. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | *Disciplined                  capital expenditures and cost containment programs.*The                  Company will continue to focus on system optimization and cost                  savings                  while making prudent capital expenditures across its base of energy                  infrastructure assets. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*27*

----

***RESULTS      OF OPERATIONS***

***Overview***

*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. |
|--------------------|----------------------------------------------|

*28*

----

*Net      earnings available for common stockholders*

|                                                              |   |                                          |     |                              |   |            |   | **Six                  Months Ended** |    |
|-------------------------------------------------------------------|--------|-----------------------------------------------|----------|-----------------------------------|--------|-----------------|--------|---------------------------------------|---------|
|                                                              |   | **Years                  Ended December 31,** |     | **December                  31,** |   |
|                                                              |   |                                          |     |                              |   | **2004**        |   |                                  |    | **2003** |   |
|                                                              |   | **2006**                                      |     | **2005**                          |   | **(Unaudited)** |   | **2004**                              |    | **(Unaudited)** |   |
|                                                              |   | **(In                  thousands)**           |     |
| EBIT:                                                             |   |                                          |     |                              |   |            |   |                                  |    |   |   |
| Transportation                  and storage segment               |   | $                                             | 417,536  |                              | $      | 281,344         |   | $                                     | 198,422 |   | $ | 94,971 |   | $ | 96,212 |   |
| Gathering                  and processing segment                 |   |                                          | 62,630   |                              |   | -               |   |                                  | -       |   |   | - |   |   | - |   |
| Distribution                  segment                             |   |                                          | 41,883   |                              |   | 61,698          |   |                                  | 32,435  |   |   | 4,266 |   |   | 12,405 |   |
| Corporate                  and other                              |   |                                          | 14,324   |                              |   | (11,424         | )      |                                  | (24,642 | ) |   | (20,686 | ) |   | (8,438 | ) |
| Total                  EBIT                                       |   |                                          | 536,373  |                              |   | 331,618         |   |                                  | 206,215 |   |   | 78,551 |   |   | 100,179 |   |
| Interest                                                          |   |                                          | 210,043  |                              |   | 128,470         |   |                                  | 119,722 |   |   | 61,597 |   |   | 63,250 |   |
| Earnings                  from continuing operations before       |   |                                          |     |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |
| income                  taxes                                     |   |                                          | 326,330  |                              |   | 203,148         |   |                                  | 86,493  |   |   | 16,954 |   |   | 36,929 |   |
| Federal                  and state income taxes                   |   |                                          | 109,247  |                              |   | 50,052          |   |                                  | 36,919  |   |   | 9,906 |   |   | 15,040 |   |
| Net                  earnings from continuing operations          |   |                                          | 217,083  |                              |   | 153,096         |   |                                  | 49,574  |   |   | 7,048 |   |   | 21,889 |   |
|                                                              |   |                                          |     |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |
| Discontinued                  operations:                         |   |                                          |     |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |
| Earnings                  (loss) from discontinued operations     |   |                                          |     |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |
| before                  income taxes                              |   |                                          | (2,369   | )                                 |   | (111,588        | )      |                                  | 68,257  |   |   | 11,744 |   |   | 20,148 |   |
| Federal                  and state income taxes                   |   |                                          | 150,583  |                              |   | 20,825          |   |                                  | 23,750  |   |   | 4,021 |   |   | 7,322 |   |
| Net                  earnings (loss) from discontinued operations |   |                                          | (152,952 | )                                 |   | (132,413        | )      |                                  | 44,507  |   |   | 7,723 |   |   | 12,826 |   |
| Preferred                  stock dividends                        |   |                                          | 17,365   |                              |   | 17,365          |   |                                  | 17,365  |   |   | 8,683 |   |   | 4,004 |   |
|                                                              |   |                                          |     |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |
| Net                  earnings available for common stockholders   |   | $                                             | 46,766   |                              | $      | 3,318           |   | $                                     | 76,716  |   | $ | 6,088 |   | $ | 30,711 |   |
|                                                              |   |                                          |     |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |

***Year      ended December 31, 2006 versus the year ended December 31,      2005.***

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

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

*29*

----

***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.*

|                                                    |   |                                          |    |                              |   |            |   |                                  |    |            |   |
|---------------------------------------------------------|--------|-----------------------------------------------|---------|-----------------------------------|--------|-----------------|--------|---------------------------------------|---------|-----------------|--------|
|                                                    |   |                                          |    |                              |   |            |   | **Six                  Months Ended** |    |
|                                                    |   | **Years                  Ended December 31,** |    | **December                  31,** |   |
|                                                    |   |                                          |    |                              |   | **2004**        |   |                                  |    | **2003**        |   |
| **Transportation                  and Storage Segment** |   | **2006**                                      |    | **2005**                          |   | **(Unaudited)** |   | **2004**                              |    | **(Unaudited)** |   |
|                                                    |   | **(In                  thousands)**           |    |
|                                                    |   |                                          |    |                              |   |            |   |                                  |    |            |   |   |   |   |   |   |
| Operating                  revenues                     |   | $                                             | 577,182 |                              | $      | 505,233         |   | $                                     | 489,164 |            | $      | 242,743 |   | $ | 244,473 |   |
|                                                    |   |                                          |    |                              |   |            |   |                                  |    |            |   |   |   |   |   |   |
| Operating                  expenses                     |   |                                          | 206,181 |                              |   | 204,711         |   |                                  | 212,106 |            |   | 109,796 |   |   | 107,796 |   |
| Depreciation                  and amortization          |   |                                          | 72,724  |                              |   | 62,171          |   |                                  | 56,989  |            |   | 30,159 |   |   | 33,158 |   |
| Taxes                  other than on income             |   |                                          |    |                              |   |            |   |                                  |    |            |   |   |   |   |   |   |
| and                  revenues                           |   |                                          | 25,405  |                              |   | 28,196          |   |                                  | 26,867  |            |   | 12,667 |   |   | 13,089 |   |
| Total                  operating income                 |   |                                          | 272,872 |                              |   | 210,155         |   |                                  | 193,202 |            |   | 90,121 |   |   | 90,430 |   |
| Earnings                  from unconsolidated           |   |                                          |    |                              |   |            |   |                                  |    |            |   |   |   |   |   |   |
| investments                                             |   |                                          | 141,310 |                              |   | 70,618          |   |                                  | 4,861   |            |   | 4,761 |   |   | 90 |   |
| Other                  income, net                      |   |                                          | 3,354   |                              |   | 571             |   |                                  | 359     |            |   | 89 |   |   | 5,692 |   |
| EBIT                                                    |   | $                                             | 417,536 |                              | $      | 281,344         |   | $                                     | 198,422 |            | $      | 94,971 |   | $ | 96,212 |   |
|                                                    |   |                                          |    |                              |   |            |   |                                  |    |            |   |   |   |   |   |   |
|                                                    |   |                                          |    |                              |   |            |   |                                  |    |            |   |   |   |   |   |   |

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

***Year      ended December 31, 2006 versus the year ended December 31,      2005.***

*30*

----

| ·   | Higher                operating revenues of $71.9 million primarily due                to: |
|--------------------|--------------------------------------------------------------------------------------------|

| o   | A                $49.3 million                increase in LNG terminalling revenue primarily due to expanded                vaporization capacity, a base capacity increase on the BG LNG Services                contract and higher volumes resulting from an increase in LNG                cargoes; |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Increased                transportation and storage revenue of $17 million                due to higher reservation revenues of $15.6                million, which were primarily driven by higher average rates on contracts,                higher parking revenues of $1.6 million and higher storage revenues                of                $4.7 million due                to increased contracted capacity. These increases were partially                offset by                lower usage revenues of $4.9 million,                of which $3.1 million resulted                from the impact on Sea Robin in 2006 of the hurricanes that occurred                in                the third quarter of 2005 and $1.8 million                resulted from lower overall capacity utilization at Trunkline;                and |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Increased                other revenue of $5.7 million primarily due to $3.7 million of                non-recurring operational sales of gas in 2006 and $1.1 million                of                higher liquids revenue. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                operating expenses of $1.5 million                primarily due to: |
|--------------------|-------------------------------------------------------------------------------------------|

| o   | Approximately                $3.2 million                of higher pipeline integrity assessment                costs; |
|---------------|------------------------------------------------------------------------------------------------------------------------|

| o   | Approximately                $1.6 million                of higher maintenance project                costs; |
|---------------|--------------------------------------------------------------------------------------------------------------|

| o   | $1.3                million in                2006 for inspections of facilities due to Hurricane Rita; |
|---------------|---------------------------------------------------------------------------------------------------------|

| o   | $2.1                million of                higher LNG fuel and electric power tracker costs associated with                greater                LNG cargo activity; |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | A                $3.8 million nonrecurring                adjustment in 2005 for lower vacation accruals due to a change in                vacation                pay practice; and |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Favorable                offsetting impact of a $9.7 million decrease                in insurance related costs due to accrued losses recorded in 2005                associated with the hurricanes and lower 2006 premiums and a $4.4                million                decrease in benefit costs primarily related to lower postretirement                benefit expenses including the impact of enactment of Medicare Part                D                reimbursements and benefit plan                changes; |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                depreciation and amortization expense of $10.6 million                due to an increase in property, plant and equipment placed in service                in                2006, including the Trunkline LNG Phase I and Phase II expansions; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Decreased                taxes other than on income of $2.8 million                primarily due to refunds of franchise and sales taxes received in                2006;                and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A                $2.8 million                increase in other income, net primarily due to a gain on sale of                certain                Trunkline assets in 2006. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A                nonrecurring gain of $74.8                million resulting from the transfer of Transwestern pursuant to the                Redemption Agreement; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                earnings from Florida Gas of $5.5                million, $2.8 million of which related to the December 2006 incremental                earnings resulting from the Company’s additional 25 percent ownership                interest in Florida Gas as a result of the transactions under the                Redemption Agreement; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Lower                earnings from discontinued operations of $10.6 million (adjusted                to                reflect the Company’s 50 percent share) related to Transwestern primarily                due to: |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Lower                net revenues of $4.8                million primarily related to an $8 million impact from a decrease                in                transportation volumes associated with the replacement of expired                contracts at discounted rates, partially offset by $3.2 million of                increased operational gas sales                revenue; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                operating expense of $5.5                million primarily related to higher system balancing expenses of                $3.7                million and $2 million of higher electricity costs due to the addition                of                San Juan compression; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A                decrease of $1.9                million in net earnings attributable to Transwestern due to 2006                containing only 11 months versus a full year of operations in 2005                due to                the redemption of Transwestern on December 1, 2006;                and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                favorable offsetting impact of lower depreciation expense of $2.4                million due to the cessation of depreciation on Transwestern following                the                execution of the Redemption Agreement with Energy                Transfer. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*31*

----

***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 PEPL, 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; |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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 LNG                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; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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 in benefit costs primarily                due to                headcount reductions and lower postretirement costs including the                impact                of the enactment of Medicare Part D reimbursements and benefit plan                changes; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------|

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

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

| ·   | Higher                depreciation and amortization of $5.2 million primarily due to                depreciation associated with 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 in 2005 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 LNG                cargo                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; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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                relating to the Panhandle acquisition 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. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Gathering      and Processing Segment.***

*32*

----

|                                                                                                                                                  |   |   |   | **Inception                  Through**        |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------------------------------|--------|
| **Gathering                  and Processing Segment**                                                                                                 |   |   |   | **December                  31, 2006****(1)** |   |
|                                                                                                                                                  |   |   |   | (In                  thousands)          |   |
|                                                                                                                                                  |   |   |   |                                          |   |
| Operating                  revenues                                                                                                                   |   |   |   |                                          | $      | 1,090,216 |   |
| Cost                  of gas and other energy                                                                                                         |   |   |   |                                          |   | (918,064 | ) |
| Operating                  expenses                                                                                                                   |   |   |   |                                          |   | 61,428 |   |
| Depreciation                  and amortization                                                                                                        |   |   |   |                                          |   | 47,321 |   |
| Taxes                  other than on income and revenues                                                                                              |   |   |   |                                          |   | 2,156 |   |
| Total                  operating income                                                                                                               |   |   |   |                                          |   | 61,247 |   |
| Earnings                  (loss) from unconsolidated investments                                                                                      |   |   |   |                                          |   | (188 | ) |
| Other                  income, net                                                                                                                    |   |   |   |                                          |   | 1,571 |   |
| EBIT                                                                                                                                                  |   |   |   |                                          | $      | 62,630 |   |
|                                                                                                                                                  |   |   |   |                                          |   |   |   |
| (1)                  Represents results from operations for the period subsequent to                  the March                  1, 2006 acquisition. |   |   |   |                                          |   |

*Accounting      for Derivative Instruments and Hedging Activities*
*Statement      No. 133*
*Accumulated      other comprehensive loss*
*Operating      revenues*
*Accumulated      other comprehensive loss*
*Accumulated      other comprehensive loss *

*33*

----

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

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

|                                                                                                                                                                                            |   |                                          |    |                              |   |            |   | **Six                  Months Ended** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|-----------------------------------|--------|-----------------|--------|---------------------------------------|---------|
|                                                                                                                                                                                            |   | **Years                  Ended December 31,** |    | **December                  31,** |   |
|                                                                                                                                                                                            |   |                                          |    |                              |   | **2004**        |   |                                  |    | **2003** |   |
| **Distribution                  Segment**                                                                                                                                                       |   | **2006**                                      |    | **2005**                          |   | **(Unaudited)** |   | **2004**                              |    | **(Unaudited)** |   |
|                                                                                                                                                                                            |   | **(In                  thousands)**           |    |
|                                                                                                                                                                                            |   |                                          |    |                              |   |            |   |                                  |    |   |   |
| Net                  operating revenues (1)                                                                                                                                                     |   | $                                             | 174,584 |                              | $      | 184,257         |   | $                                     | 171,923 |   | $ | 75,266 |   | $ | 68,743 |   |
|                                                                                                                                                                                            |   |                                          |    |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |
| Operating                  expenses                                                                                                                                                             |   |                                          | 90,178  |                              |   | 87,306          |   |                                  | 92,763  |   |   | 45,353 |   |   | 38,024 |   |
| Depreciation                  and amortization                                                                                                                                                  |   |                                          | 30,353  |                              |   | 29,447          |   |                                  | 29,866  |   |   | 16,527 |   |   | 13,243 |   |
| Taxes                  other than on income                                                                                                                                                     |   |                                          |    |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |
| and                  revenues                                                                                                                                                                   |   |                                          | 10,040  |                              |   | 3,208           |   |                                  | 14,071  |   |   | 7,723 |   |   | 5,508 |   |
| Total                  operating income                                                                                                                                                         |   |                                          | 44,013  |                              |   | 64,296          |   |                                  | 35,223  |   |   | 5,663 |   |   | 11,968 |   |
| Other                  income (expenses), net                                                                                                                                                   |   |                                          | (2,130  | )                                 |   | (2,598          | )      |                                  | (2,788  | ) |   | (1,397 | ) |   | 437 |   |
| EBIT                                                                                                                                                                                            |   | $                                             | 41,883  |                              | $      | 61,698          |   | $                                     | 32,435  |   | $ | 4,266 |   | $ | 12,405 |   |
|                                                                                                                                                                                            |   |                                          |    |                              |   |            |   |                                  |    |   |   |   |   |   |   |   |
| (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, 2006 versus the year ended December 31,      2005.***

| ·   | Net                operating revenues were $9.7 million lower                primarily due to a 9 percent reduction                in consumption volumes resulting from the warmer than normal weather,                as                evidenced by a 15 percent reduction in degree days; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                taxes other than on income and revenues of $6.8 million primarily                due to refunds received for Missouri property tax settlements in                2005;                and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                operating expenses of $2.9 million primarily                due to higher bad debt expenses of $900,000 due to the residual effects                of                higher gas prices in the 2005 to 2006 winter season and higher general                expenses in 2006 of $1.3 million primarily due to higher corrosion                control                costs resulting from drier weather in 2006 compared to                2005. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*34*

----

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

| ·   | Net                operating revenue increased by approximately $12.3 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 $5.5 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 $2.1 million of lower bad debt expense primarily as                a result                of more aggressive collection efforts in 2005, partially offset by                approximately $1.7 million of insurance costs primarily due to higher                claims in 2005; and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes                other than on income and revenues were approximately $10.9 million                lower                primarily due to property tax refunds for the years 2002 to 2004                received                by Missouri Gas Energy during 2005. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | Bad                debt expense increased $2.6 million resulting from higher uncollected                customer receivables due to rising gas prices during                2004; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Pension                and other postretirement benefit costs increased $1.6 million in                the 2004                period primarily due to the impact of stock market volatility on                plan                assets; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Outside                service costs increased $1.2 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 $1 million in other net operating costs in the 2004 period                primarily due to general wage increases, increased overtime costs                associated with distribution system maintenance and Sarbanes-Oxley                related                costs; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Higher                depreciation and amortization expense of $3.3 million principally                related                to a charge taken in the 2004 period to write off certain capitalized                software costs, in addition to normal plant growth;                and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes                other than on income and revenues, principally consisting of property,                payroll and state franchise taxes, increased $2.2 million, primarily                due                to a $2 million increase in the 2004 period in property taxes in                the                Company’s Missouri service                territory. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Corporate      and Other***

***Year      ended December 31, 2006 versus the year ended December 31, 2005.***

| ·   | A                mark-to-market gain of $37.2 million on                put options for the pre-acquisition period associated with the March                1,                2006 acquisition of Sid Richardson Energy                Services; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Negative                impact of $12.8 million of                executive bonus compensation awarded and paid in                2006; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Negative                impact of a $6.5 million write-down                in the carrying value of the Scranton corporate building recorded                in 2006; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Negative                impact of $1.4 million of                corporate stock-based compensation costs resulting from the implementation                of and accounting under Statement No. 123R in                2006; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Impact                of $3.8 million of                non-cash compensation expense in the third quarter of 2005 related                to                separation agreements with former executives of the Company;                and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Charges                of $6.3 million in                the first quarter of 2005 to: (i) reserve for an other-than-temporary                impairment in the Company’s investment in a technology company, and (ii)                record a liability for the guarantee by a subsidiary of the Company                of a                line of                credit between the technology company and a                bank. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*35*

----

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

| ·   | Recognition                of a $4.3 million management                fee for services provided under a 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. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***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. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Interest      Expense***

***Year      ended December 31, 2006 versus the year ended December 31,      2005.***

| ·   | Interest                expense of $49.2 million and debt issuance cost amortization of $7.8                million associated                with the bridge loan facility entered into to finance the acquisition                of                the Sid Richardson Energy Services                business; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                interest expense of $10.8 million related                to Panhandle debt primarily due to higher average interest rates                in 2006                versus 2005; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Interest                expense of $2.5 million under the $465 million 2006                Term Loan; |
|--------------------|-------------------------------------------------------------------------------------------------------|

| ·   | Interest                expense of $8.3 million related to the $600 million Junior                Subordinated Notes issued in 2006;                and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                interest expense of $4.4 million associated                with borrowings under the Company’s credit agreements primarily due to                higher average outstanding balances and higher interest rates in                2006                compared to 2005. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

*36*

----

***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. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Federal      and State Income Taxes from Continuing Operation***
***s***

***Year      ended December 31, 2006 versus the year ended December 31, 2005.***
*EITR*

| ·   | The                release in 2005 of an $11.9 million valuation allowance, which was                originally established in 2004 for a deferred tax asset related to                the                difference between the book and tax basis of the Company’s investment in                CCE Holdings. The Company determined that this valuation allowance                was no                longer necessary because the book income from CCE Holdings was                substantially greater than the taxable income for 2005 and was expected                to                continue to be higher for the foreseeable                future; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                release in 2006 of $9.4 million of tax reserves for uncertain tax                positions established in prior years due to the completion of the                IRS                audit for the fiscal year ended June 30, 2003 and expiring state                statutes;                and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | $5.4                million of additional taxes resulting from the $14.5 million of                non-deductible executive compensation paid in                2006. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | Establishment                of a valuation allowance of $11.9 million in                2004 for a deferred tax asset related to the difference between the                book                and tax basis of the Company’s investment in CCE Holdings and the release                of this valuation allowance in 2005 as discussed above; and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | An                adjustment of $6.4 million to                lower income tax expense in 2005 resulting from the Company’s analysis of                its deferred income tax accounts. This decrease was primarily due                to bad                debt reserves and property, plant and                equipment. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*37*

----

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

***Internal      Revenue Service Audit.***

***Net      Earnings from Discontinued Operations***

***Year      ended December 31, 2006 versus the year ended December 31,      2005.***
*Earnings      from discontinued operations before income*
*taxes*

| ·   | The                Company incurred $142.4 million of income tax expense in 2006 resulting                from $379.8 million of non-deductible goodwill related to the disposition                of these assets in 2006 compared to $65.6 million of income                tax expense resulting from $175 million of non-deductible goodwill                impairment related to these assets recorded in 2005;                and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                Company incurred income tax expense of $17.6 million in 2006 as a                result                of the write-off of a tax-related regulatory asset of PG                Energy. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*38*

----

***Year      ended December 31, 2005 versus the year ended December 31,      2004.***
*Net      earnings from discontinued operations*
*Earnings      from discontinued operations before income taxes*

**Six-month      period ended December 31, 2004 versus the six-month period ended December 31,      2003. **
*Net      earnings from discontinued operations*
*Earnings      from discontinued operations before income taxes*

***Preferred      Stock Dividends***

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

***LIQUIDITY      AND CAPITAL RESOURCES***

***Operating      Activities***

***Year      ended December 31, 2006 versus the year ended December 31,      2005.***

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

*39*

----

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

***Investing      Activities***

***Summary***

*40*

----

|                                                                                                                                                                            |   |                              |    |                              |   | **Six                  months** |   | **Year** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|---------------------------------|--------|----------|---------|
|                                                                                                                                                                            |   | **Years                  ended**  |    | **Ended**                         |   | **Ended**                       |   |
|                                                                                                                                                                            |   | **December                  31,** |    | **December                  31,** |   | **June                  30,**   |   |
| **Property,                  Plant and Equipment Additions**                                                                                                                    |   | **2006**                          |    | **2005**                          |   | **2004**                        |   | **2004** |    |
|                                                                                                                                                                            |   | (In                  thousands)   |    |
| Transportation                  and Storage Segment                                                                                                                             |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| LNG                  Terminal Expansions                                                                                                                                        |   | $                                 | 57,045  |                              | $      | 75,263                          |   | $        | 51,751  |   | $ | 65,260 |   |
| Trunkline                  LNG Loop                                                                                                                                             |   |                              | 3,173   |                              |   | 25,329                          |   |     | 17,647  |   |   | 3,675 |   |
| Trunkline                  LNG Field Zone Expansion                                                                                                                             |   |                              | 12,314  |                              |   | 169                             |   |     | -       |   |   | - |   |
| Pipeline                  Integrity                                                                                                                                             |   |                              | 20,223  |                              |   | 21,816                          |   |     | 11,278  |   |   | 18,378 |   |
| East                  End Enhancement                                                                                                                                           |   |                              | 52,102  |                              |   | 1,012                           |   |     | -       |   |   | - |   |
| Information                  Technology                                                                                                                                         |   |                              | 14,142  |                              |   | 6,162                           |   |     | 2,762   |   |   | 10,696 |   |
| Hurricanes                                                                                                                                                                      |   |                              | 20,296  |                              |   | 900                             |   |     | -       |   |   | - |   |
| Compression                  Modernization                                                                                                                                      |   |                              | 11,642  |                              |   | -                               |   |     | -       |   |   | - |   |
| Air                  Emission Compliance                                                                                                                                        |   |                              | 15,346  |                              |   | 11,481                          |   |     | 5,015   |   |   | 2,694 |   |
| Other                                                                                                                                                                           |   |                              | 38,538  |                              |   | 47,283                          |   |     | 23,433  |   |   | 30,675 |   |
| Total                                                                                                                                                                      |   |                              | 244,821 |                              |   | 189,415                         |   |     | 111,886 |   |   | 131,378 |   |
|                                                                                                                                                                            |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| Gathering                  and Processing Segment (1)                                                                                                                           |   |                              | 35,101  |                              |   | -                               |   |     | -       |   |   | - |   |
|                                                                                                                                                                            |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| Distribution                  Segment                                                                                                                                           |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| Missouri                  Safety Program                                                                                                                                        |   |                              | 11,592  |                              |   | 11,426                          |   |     | 4,653   |   |   | 6,878 |   |
| Other,                  primarily system replacement                                                                                                                            |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| and                  expansion                                                                                                                                             |   |                              | 36,362  |                              |   | 73,470                          |   |     | 51,789  |   |   | 71,913 |   |
|                                                                                                                                                                            |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| Total                                                                                                                                                                      |   |                              | 47,954  |                              |   | 84,896                          |   |     | 56,442  |   |   | 78,791 |   |
|                                                                                                                                                                            |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| Corporate                  and other                                                                                                                                            |   |                              | 4,798   |                              |   | 2,306                           |   |     | 10,109  |   |   | 15,884 |   |
|                                                                                                                                                                            |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| Total                  (2)                                                                                                                                                 |   | $                                 | 332,674 |                              | $      | 276,617                         |   | $        | 178,437 |   | $ | 226,053 |   |
|                                                                                                                                                                            |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| (1)                  Reflects expenditures for the period subsequent to the March 1,                  2006                  acquisition of Sid Richardson Energy                |   |                              |    |                              |   |                            |   |
| Services                  versus the year ended December 31, 2006.                                                                                                              |   |                              |    |                              |   |                            |   |     |    |   |   |   |   |
| (2)                  Includes net capital accruals totaling $14.9 million, $(3.1) million,                  $7.8                  million and $12.1 million for the years ended |   |                              |    |                              |   |                            |
| 2006                  and 2005, the six months ended December 31, 2004 and the year ended                  June                  30, 2004, respectively.                   |   |                              |    |                              |   |                            |   |     |

***Principal      Capital Expenditure Projects***

***LNG      Terminal Enhancement.***
*Construction      work-in-progress*

***Compression      Modernization.***
*Construction      work-in-progress *

*41*

----

***Trunkline      Field Zone Expansion Project.***
*CIAC*
*Construction      work-in-progress*

***Hurricane-Related      Expenditures.***

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

*42*

----

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

***Financing      Activities***

***Summary***

*Item      8. Financial Statements and Supplementary Data*
*Note      13 - Debt Obligations*

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

*Note      13 - Debt Obligations - Long-Term Debt*
*and      Capital Lease Obligations - Remarketing Obligation*

*CCE      Holdings Bridge Loan*

*43*

----

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

***LNG      Holdings Term Loan.***

***Junior      Subordinated Notes.***
*Item      8. Financial Statements and Supplementary Data, Note 13 - Debt Obligations      -      Long-Term Debt and Capital Lease Obligations - Junior Subordinated      Notes*

***Sid      Richardson Bridge Loan.***

***Credit      Facilities.***
*Long-Term      Facility*
*Senior      Notes*

*44*

----

***Other      Debt Refinancings, Repayments and Issuances.***

*Panhandle      Tender Offer*
*Panhandle      Calls*

*45*

----

***Expected      Refinancing and Other Debt Matters***

***Expected      Refinancing.***
*2007      Expected TLNG Term Loan*

***Credit      Ratings.***

***OTHER      MATTERS***

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

*46*

----

|                                                   |   |                                           |   | **Contractual                  Obligations (In thousands)**    |   |
|--------------------------------------------------------|--------|------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                   |   |                                           |   |                                                           |   |   |   |   |   |   |   |   |   |   |   | **2012                  and** |   |
|                                                   |   |                                           |   | **Total**                                                      |   | **2007** |   | **2008** |   | **2009** |   | **2010** |   | **2011** |   | **thereafter** |   |
| Long-term                  debt,                       |   |                                           |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  including                capital leases (1), (2) |   | $                     3,142,319 |   | $                        462,290 |   | $                        983,336 |   | $                          60,623 |   | $                          40,500 |   | $                                    - |   | $                     1,595,570 |   |
| Short-term                  borrowing,                 |   |                                           |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| including                  credit facilities (1)       |   |                                           |   |                                                           |   | 100,000 |   |   | 100,000 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Gas                  purchases (3)                     |   |                                           |   |                                                           |   | 889,372 |   |   | 284,637 |   |   | 247,682 |   |   | 201,487 |   |   | 155,566 |   |   | - |   |   | - |   |
| Missouri                  Gas Energy Safety Program    |   |                                           |   |                                                           |   | 135,843 |   |   | 9,448 |   |   | 9,542 |   |   | 9,638 |   |   | 9,734 |   |   | 9,831 |   |   | 87,650 |   |
| Transportation                  contracts              |   |                                           |   |                                                           |   | 387,612 |   |   | 78,068 |   |   | 77,557 |   |   | 71,255 |   |   | 54,900 |   |   | 42,702 |   |   | 63,130 |   |
| Storage                  contracts (4)                 |   |                                           |   |                                                           |   | 83,737 |   |   | 14,875 |   |   | 13,389 |   |   | 13,033 |   |   | 10,696 |   |   | 8,944 |   |   | 22,800 |   |
| Trading                  and Marketing                 |   |                                           |   |                                                           |   | 1,609 |   |   | 1,454 |   |   | 155 |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Operating                  lease payments              |   |                                           |   |                                                           |   | 91,192 |   |   | 18,434 |   |   | 13,625 |   |   | 12,617 |   |   | 11,389 |   |   | 11,087 |   |   | 24,040 |   |
| Interest                  payments on debt (5)         |   |                                           |   |                                                           |   | 4,000,571 |   |   | 189,151 |   |   | 154,843 |   |   | 123,948 |   |   | 118,336 |   |   | 116,666 |   |   | 3,297,627 |   |
| Benefit                  plan contributions            |   |                                           |   |                                                           |   | 31,151 |   |   | 31,151 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Non-trading                  derivative liabilities    |   |                                           |   |                                                           |   | 1,265 |   |   | 1,265 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Total                  contractual cash obligations    |   |                                           |   |                                                           | $      | 8,864,671 |   | $ | 1,190,773 |   | $ | 1,500,129 |   | $ | 492,601 |   | $ | 401,121 |   | $ | 189,230 |   | $ | 5,090,817 |   |
|                                                   |   |                                           |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (1)   | The                Company is party to debt agreements containing certain covenants                that, if                not satisfied, would give rise to 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                Obligations*. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | The                long-term debt principal payment obligations exclude $9.6 million                of                unamortized debt premium as of December 31,                2006. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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)   | Represents                charges for third party storage                capacity. |
|-----------------|------------------------------------------------------------------------------------|

| (5)   | Interest                payments on debt are based upon the applicable stated or variable                interest                rates as of December 31, 2006. Includes approximately $2.6 billion                of                interest payments associated with the $600 million Junior Subordinated                Notes due November 1, 2066. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Contingencies***

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

***Inflation***

***Regulatory***

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

***Benefit      Plan Changes***

***Panhandle      Postretirement Benefits.***

***Panhandle      Vacation Plan.***

*47*

----

***Critical      Accounting Policies***

***Summary***

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

***Effects      of Regulation***

*Accounting      for the Effects of Certain Types of Regulation (Statement No.      71)*
*Item      8. Financial Statements and Supplementary Data, Note 16 - Regulation and      Rates*

***Long-Lived      Assets***

*48*

----

*Goodwill      and Other Intangible Assets*

***Purchase      Accounting***

*Business      Combinations*

*Item      8. Financial Statements and Supplementary Data, Note 3 - Acquisitions and Sales      - CCE Holdings Transactions*
*The      Equity Method of Accounting for Investments in Common Stock, *
*Item      8. Financial Statements and Supplementary Data, Note 9 - Unconsolidated      Investments - CCE Holdings Goodwill Evaluation*

***Pensions      and Other Postretirement Benefits***

*Employers’      Accounting for Defined Benefit Pension and Other Postretirement Plans - an      amendment of FASB Statements No. 87, 88, 106, and 132(R)*
*Statement      No. 158*
*Accumulated      other comprehensive loss*

*49*

----

*Employers      Accounting for Pensions*
*Statement      No. 87*
*Employers’      Accounting for Postretirement Benefits Other Than Pensions*
*Statement      No. 106*
*Accumulated      other comprehensive loss*
*Accumulated      other comprehensive loss*

*PBO*

*Item      8. Financial Statements and Supplementary Data, Note 14 -*
*Benefits*

***Derivatives      and Hedging Activities***

*Accumulated      other comprehensive loss*

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

*50*

----

***Commitments      and Contingencies***

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

***New      Accounting Pronouncements***

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

**ITEM      7A. Quantitative and Qualitative Disclosures About Market Risk.**

***Debt      Obligations.***

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

***Commodity      Derivative Activities.***

*51*

----

*Other,      net*

*Accumulated      other comprehensive loss*

*Accumulated      other comprehensive loss*

*Accumulated      other comprehensive loss*
*Prepayments      and other assets*
*Accumulated      other comprehensive loss*
*Operating      revenues*
*Accumulated      other comprehensive loss*

*52*

----

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

***TIF      Debt Guarantee.***
** **
*Taxing      Authorities*
*TIF      Plan*
*TIF      Debt*

***Interest      Rate Swaps.***

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

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

*53*

----

***Distribution Segment Non-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*

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

| ·   | Pertain                to the maintenance of records in reasonable detail to accurately                and                fairly reflect the acquisitions 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. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*54*

----

*Internal      Control-Integrated Framework*
*COSO*

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

**ITEM      9B. Other Information.**

**PART      III**

**ITEM        10. Directors, Executive Officers and Corporate        Governance.**

*Meetings        and Committees of the Board - Board of Directors, 2006 Executive Compensation        -        Named Executive Officers, Section 16(a) Beneficial Ownership Reporting        Compliance, Corporate Governance - Code of Ethics, Meetings and Committees        of        the Board - Board Committees - Corporate Governance Committee *
*-        Audit Committee*

*55*

----

**ITEM        11. Executive Compensation.**

*Compensation        Discussion and Analysis, 2006 Executive Compensation - Summary Compensation        Table - Grants of Plan-Based Awards - Outstanding Equity Awards at December        31,        2006 - Option Exercises and Stock Vested - *
*Non-Qualified        Deferred Compensation *
*-        *
*Potential        Payments Upon Termination or Change of Control, *
*2006        Director Compensation, *
*Meetings        and Committees of the Board - Board Committees - Compensation        Committee*

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

*Security        Ownership of Certain Beneficial Owners and Management*

**ITEM        13. Certain Relationships and Related Transactions, and Director        Independence.**

*Corporate        Governance - Transactions with Related Persons*
*-        Review, Approval or Ratification of Transactions with Related Persons,*
*Corporate        Governance - Director Independence *
*-*
*Independent        Director Chairman*

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

*Meetings        and Committees of the Board - Board Committees and Meetings - Audit        Committee*

**PART      IV**

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

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

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

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

| 2(a) | Purchase                  Agreement among CCE Holdings, LLC, Enron Operations Services, LLC,                  Enron                  Transportation Services, LLC, EOC Preferred, LLC, and Enron Corp.,                  dated                  as of June 24, 2004. (Filed as Exhibit 99.b to Southern Union’s Current                  Report on Form 8-K filed on June 25, 2004 and incorporated herein                  by                  reference.)                              |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2(b) | Amendment                  No. 1 to Purchase Agreement by and among CCE Holdings, LLC, Enron                  Operations Services, LLC, Enron Transportation Services, LLC, EOC                  Preferred, LLC,                  and Enron Corp., dated September 1, 2004. (Filed as Exhibit 10.a                  to                  Southern Union’s Current Report on Form 8-K filed on September 14, 2004                  and incorporated herein                  by reference.) |
| 2(c) | Amendment                  No. 2 to Purchase Agreement by and among CCE Holdings, LLC, Enron                  Operations Services, LLC, Enron Transportation Services, LLC, EOC                  Preferred, LLC,                  and Enron Corp., dated November 10, 2004. (Filed as Exhibit 2.c                  to                  Southern Union’s Current Report on Form 8-K filed on November 22, 2004 and                  incorporated herein                  by reference.)   |
| 2(d) | Purchase                  Agreement between CCE Holdings, LLC and ONEOK, Inc. dated as of                  September                  16, 2004. (Filed as Exhibit 10.a to Southern Union’s Current Report                  on                  Form 8-K filed on September 17, 2004 and incorporated herein by                  reference.)                                                                                                                                              |

*56*

----

*57*

----

4      (g) Subordinated      Debt Securities Indenture between Southern Union Company and JP Morgan Chase      Bank (as successor      to The Chase Manhattan Bank, N.A.), as Trustee. (Filed as Exhibit 4-G to      Southern Union’s Registration Statement on Form S-3 (No. 33-58297) and      incorporated herein by reference.)

*58*

----

|   | 14 |   | Code                of Ethics and Business Conduct. (Filed as Exhibit 14 to Southern                Union’s                Annual Report on Form 10-K filed on March 16, 2006 and incorporated                herein                by reference.) |
|--------|----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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. |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*59*

----

**SIGNATURES**

*60*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**INDEX      TO CONSOLIDATED FINANCIAL STATEMENTS**

| Financial                Statements and Supplementary Data:                                  | Page(s):                 |
|----------------------------------------------------------------------------------------------|--------------------------|
| Consolidated                Statement of Operations                                          | F-2                      |
| Consolidated                Balance Sheet                                                    | F-3                - F-4 |
| Consolidated                Statement of Cash Flows                                          | F-5                      |
| Consolidated                Statement of Stockholders’ Equity and Comprehensive Income | F-6                - F-7 |
| Notes                to Consolidated Financial Statements                                    | F-8                      |
| Report                of Independent Registered Public Accounting Firm                       | F-73                     |
|                                                                                         |                     |
|  Consolidated              Financial Statements of Citrus Corp. and Subsidiaries        |  F-74               |

*F-1*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED        STATEMENT OF OPERATIONS**

|                                                                        |   | **Year                  Ended**                           |      | **Year                  Ended**   |   | **Six                  Months Ended** |   | **Year                  Ended** |    |
|-----------------------------------------------------------------------------|--------|-----------------------------------------------------------|-----------|-----------------------------------|--------|---------------------------------------|--------|---------------------------------|---------|
|                                                                        |   | **December                  31,**                         |      | **December                  31,** |   | **December                  31,**     |   | **June                  30,**   |    |
|                                                                        |   | **2006**                                                  |      | **2005**                          |   | **2004**                              |   | **2004**                        |    |
|                                                                        |   | (In                  thousands, except per share amounts) |      |
| Operating                  revenues (Note 21):                              |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Gas                  distribution                                           |   | $                                                         | 668,721   |                              | $      | 752,699                               |   | $                               | 273,597 |   | $ | 655,696 |   |
| Gas                  transportation and storage                             |   |                                                      | 577,182   |                              |   | 505,233                               |   |                            | 242,743 |   |   | 490,883 |   |
| Gas                  gathering and processing                               |   |                                                      | 1,090,216 |                              |   | -                                     |   |                            | -       |   |   | - |   |
| Other                                                                       |   |                                                      | 4,025     |                              |   | 8,950                                 |   |                            | 1,509   |   |   | 2,689 |   |
| Total                  operating revenues                                   |   |                                                      | 2,340,144 |                              |   | 1,266,882                             |   |                            | 517,849 |   |   | 1,149,268 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Operating                  expenses:                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Cost                  of gas and other energy                               |   |                                                      | 1,377,147 |                              |   | 529,450                               |   |                            | 184,299 |   |   | 456,291 |   |
| Revenue-related                  taxes                                      |   |                                                      | 35,281    |                              |   | 40,080                                |   |                            | 14,399  |   |   | 34,806 |   |
| Operating,                  maintenance and general                         |   |                                                      | 381,844   |                              |   | 302,025                               |   |                            | 158,566 |   |   | 301,728 |   |
| Depreciation                  and amortization                              |   |                                                      | 152,103   |                              |   | 92,562                                |   |                            | 47,393  |   |   | 87,735 |   |
| Taxes,                  other than on income and revenues                   |   |                                                      | 38,684    |                              |   | 33,648                                |   |                            | 20,248  |   |   | 41,388 |   |
| Total                  operating expenses                                   |   |                                                      | 1,985,059 |                              |   | 997,765                               |   |                            | 424,905 |   |   | 921,948 |   |
| Operating                  income                                           |   |                                                      | 355,085   |                              |   | 269,117                               |   |                            | 92,944  |   |   | 227,320 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Other                  income (expenses):                                   |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Interest                                                                    |   |                                                      | (210,043  | )                                 |   | (128,470                              | )      |                            | (61,597 | ) |   | (121,376 | ) |
| Earnings                  from unconsolidated investments                   |   |                                                      | 141,370   |                              |   | 70,742                                |   |                            | 4,745   |   |   | 200 |   |
| Other,                  net (Note 4)                                        |   |                                                      | 39,918    |                              |   | (8,241                                | )      |                            | (19,138 | ) |   | 324 |   |
| Total                  other expenses, net                                  |   |                                                      | (28,755   | )                                 |   | (65,969                               | )      |                            | (75,990 | ) |   | (120,852 | ) |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Earnings                  from continuing operations before income taxes    |   |                                                      | 326,330   |                              |   | 203,148                               |   |                            | 16,954  |   |   | 106,468 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Federal                  and state income taxes                             |   |                                                      | 109,247   |                              |   | 50,052                                |   |                            | 9,906   |   |   | 42,053 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Net                  earnings from continuing operations                    |   |                                                      | 217,083   |                              |   | 153,096                               |   |                            | 7,048   |   |   | 64,415 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Discontinued                  operations (Note 19):                         |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Earnings                  (loss) from discontinued operations before        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| income                  taxes                                               |   |                                                      | (2,369    | )                                 |   | (111,588                              | )      |                            | 11,744  |   |   | 76,660 |   |
| Federal                  and state income taxes                             |   |                                                      | 150,583   |                              |   | 20,825                                |   |                            | 4,021   |   |   | 27,050 |   |
| Net                  earnings (loss) from discontinued operations           |   |                                                      | (152,952  | )                                 |   | (132,413                              | )      |                            | 7,723   |   |   | 49,610 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Net                  earnings                                               |   |                                                      | 64,131    |                              |   | 20,683                                |   |                            | 14,771  |   |   | 114,025 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Preferred                  stock dividends                                  |   |                                                      | (17,365   | )                                 |   | (17,365                               | )      |                            | (8,683  | ) |   | (12,686 | ) |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Net                  earnings available for common stockholders             |   | $                                                         | 46,766    |                              | $      | 3,318                                 |   | $                               | 6,088   |   | $ | 101,339 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Net                  earnings (loss) available for common stockholders from |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| continuing                  operations per share (Note 5):                  |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Basic                                                                       |   | $                                                         | 1.74      |                              | $      | 1.24                                  |   |                  $         | ($0.02  | ) | $ | 0.64 |   |
| Diluted                                                                     |   | $                                                         | 1.70      |                              | $      | 1.20                                  |   |                  $         | ($0.02  | ) | $ | 0.63 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Net                  earnings available for common stockholders per    |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| share                  (Note 5):                                            |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Basic                                                                       |   | $                                                         | 0.41      |                              | $      | 0.03                                  |   | $                               | 0.07    |   | $ | 1.26 |   |
| Diluted                                                                     |   | $                                                         | 0.40      |                              | $      | 0.03                                  |   | $                               | 0.07    |   | $ | 1.24 |   |
| Cash                  dividends declared on common stock per share:         |   | $                                                         | 0.40      |                              |   | N/A                                   |   |                            | N/A     |   |   | N/A |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Weighted                  average shares outstanding (Note 5):              |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
| Basic                                                                       |   |                                                      | 114,787   |                              |   | 109,395                               |   |                            | 87,314  |   |   | 80,432 |   |
| Diluted                                                                     |   |                                                      | 117,344   |                              |   | 112,794                               |   |                            | 87,314  |   |   | 81,480 |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |
|                                                                        |   |                                                      |      |                              |   |                                  |   |                            |    |   |   |   |   |

*F-2*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED        BALANCE SHEET**

**ASSETS      **

|                                                                         |   |                              |      |                              |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|
|                                                                         |   |                              |      |                              |   |
|                                                                         |   | **December                  31,** |      | **December                  31,** |   |
|                                                                         |   | **2006**                          |      | **2005**                          |   |
|                                                                         |   | (In                  thousands)   |      |
| Current                  assets:                                             |   |                              |      |                              |   |   |   |
| Cash                  and cash equivalents                              |   | $                                 | 5,751     |                              | $      | 16,938 |   |
| Accounts                  receivable, billed and unbilled,              |   |                              |      |                              |   |   |   |
|  net                  of allowances of $4,830 and $15,893, respectively |   |                              | 298,231   |                              |   | 428,735 |   |
| Accounts                  receivable – affiliates                 |   |                              | 3,546     |                              |   | 8,827 |   |
| Inventories                                                             |   |                              | 241,137   |                              |   | 295,658 |   |
| Gas                  imbalances - receivable                            |   |                              | 69,877    |                              |   | 105,233 |   |
| Prepayments                  and other assets                           |   |                              | 72,317    |                              |   | 68,382 |   |
| Total                  current assets                                        |   |                              | 690,859   |                              |   | 923,773 |   |
|                                                                         |   |                              |      |                              |   |   |   |
| Property,                  plant and equipment (Note 6):                     |   |                              |      |                              |   |   |   |
| Plant                  in service                                       |   |                              | 5,025,631 |                              |   | 4,183,280 |   |
| Construction                  work in progress                          |   |                              | 178,935   |                              |   | 184,423 |   |
|                                                                         |   |                              | 5,204,566 |                              |   | 4,367,703 |   |
| Less                  accumulated depreciation and amortization         |   |                              | (620,139  | )                                 |   | (881,763 | ) |
| Net                  property, plant and equipment                           |   |                              | 4,584,427 |                              |   | 3,485,940 |   |
|                                                                         |   |                              |      |                              |   |   |   |
| Deferred                  charges:                                           |   |                              |      |                              |   |   |   |
| Regulatory                  assets (Note 8)                             |   |                              | 65,865    |                              |   | 112,963 |   |
| Deferred                  charges                                       |   |                              | 61,602    |                              |   | 113,793 |   |
|  Total                  deferred charges                                |   |                              | 127,467   |                              |   | 226,756 |   |
|                                                                         |   |                              |      |                              |   |   |   |
| Unconsolidated                  investments (Note 9)                         |   |                              | 1,254,749 |                              |   | 682,834 |   |
|                                                                         |   |                              |      |                              |   |   |   |
| Goodwill                  (Note 7)                                           |   |                              | 89,227    |                              |   | 465,547 |   |
|                                                                         |   |                              |      |                              |   |   |   |
| Other                                                                        |   |                              | 36,061    |                              |   | 51,969 |   |
|                                                                         |   |                              |      |                              |   |   |   |
|                                                                         |   |                              |      |                              |   |   |   |
|  Total                  assets                                          |   | $                                 | 6,782,790 |                              | $      | 5,836,819 |   |
|                                                                         |   |                              |      |                              |   |   |   |

*F-3*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEET**

**STOCKHOLDERS'      EQUITY AND LIABILITIES**

|                                                                         |   | **December                31,** |      | **December                31,** |   |
|------------------------------------------------------------------------------|--------|---------------------------------|-----------|---------------------------------|--------|
|                                                                         |   | **2006**                        |      | **2005**                        |   |
|                                                                         |   | (In                thousands)   |      |
| Stockholders’                equity (Note 10):                         |   |                            |      |                            |   |
| Common                stock, $1 par value; 200,000 shares authorized;   |   |                            |      |                            |   |   |   |
| 120,718                shares issued at December 31, 2006                    |   | $                               | 120,718   |                            | $      | 112,530 |   |
| Preferred                stock, no par value; 6,000 shares authorized;  |   |                            |      |                            |   |   |   |
| 920                shares issued at December 31, 2006 (Note 12)              |   |                            | 230,000   |                            |   | 230,000 |   |
| Premium                on capital stock                                 |   |                            | 1,775,763 |                            |   | 1,681,167 |   |
| Less                treasury stock: 1,059 and 1,054                     |   |                            |      |                            |   |   |   |
| shares,                respectively, at cost                                 |   |                            | (27,708   | )                               |   | (27,566 | ) |
| Less                common stock held in trust: 863                |   |                            |      |                            |   |   |   |
| and 826                shares, respectively                             |   |                            | (14,628   | )                               |   | (12,910 | ) |
| Deferred                compensation plans                              |   |                            | 14,691    |                            |   | 10,173 |   |
| Accumulated                other comprehensive loss                     |   |                            | (901      | )                               |   | (56,272 | ) |
| Accumulated                deficit                                      |   |                            | (47,527   | )                               |   | (83,053 | ) |
| Total                stockholders' equity                               |   |                            | 2,050,408 |                            |   | 1,854,069 |   |
|                                                                         |   |                            |      |                            |   |   |   |
| Long-term                debt and capital lease obligation (Note 13)         |   |                            | 2,689,656 |                            |   | 2,049,141 |   |
|                                                                         |   |                            |      |                            |   |   |   |
| Total                capitalization                                          |   |                            | 4,740,064 |                            |   | 3,903,210 |   |
|                                                                         |   |                            |      |                            |   |   |   |
| Current                liabilities:                                          |   |                            |           |                            |   |   |   |
| Long-term                debt and capital lease obligation              |   |                            |      |                            |   |   |   |
| due                within one year (Note 13)                            |   |                            | 461,011   |                            |   | 126,648 |   |
| Notes                payable                                            |   |                            | 100,000   |                            |   | 420,000 |   |
| Accounts                payable and accrued liabilities                 |   |                            | 300,762   |                            |   | 206,504 |   |
| Federal,                state and local taxes payable                   |   |                            | 30,828    |                            |   | 47,195 |   |
| Accrued                interest                                         |   |                            | 46,342    |                            |   | 40,688 |   |
| Customer                deposits                                        |   |                            | 14,670    |                            |   | 16,096 |   |
| Deferred                gas purchases                                   |   |                            | 15,551    |                            |   | 83,147 |   |
| Gas                imbalances - payable                                 |   |                            | 146,995   |                            |   | 124,297 |   |
| Other                                                                   |   |                            | 84,665    |                            |   | 158,555 |   |
| Total                current liabilities                                |   |                            | 1,200,824 |                            |   | 1,223,130 |   |
|                                                                         |   |                            |      |                            |   |   |   |
| Deferred                credits                                              |   |                            | 224,725   |                            |   | 313,989 |   |
|                                                                         |   |                            |      |                            |   |   |   |
| Accumulated                deferred income taxes (Note 15)                   |   |                            | 617,177   |                            |   | 396,490 |   |
|                                                                         |   |                            |      |                            |   |   |   |
| Commitments                and contingencies (Note 18)                       |   |                            |      |                            |   |   |   |
|                                                                         |   |                            |      |                            |   |   |   |
| Total                stockholders' equity and liabilities                    |   | $                               | 6,782,790 |                            | $      | 5,836,819 |   |
|                                                                         |   |                            |      |                            |   |   |   |

*F-4*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED        STATEMENT OF CASH FLOWS**

|                                                                                                        |   | **Year                  Ended**   |          | **Year                  Ended**   |   | **Six                  Months Ended** |   | **Year                  Ended** |     |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------------|-----------------------------------|--------|---------------------------------------|--------|---------------------------------|----------|
|                                                                                                        |   | **December                  31,** |          | **December                  31,** |   | **December                  31,**     |   | **June                  30,**   |     |
|                                                                                                        |   | **2006**                          |          | **2005**                          |   | **2004**                              |   | **2004**                        |     |
|                                                                                                        |   | (In                  thousands)   |          |
| Cash                  flows provided by (used in) operating activities:                                     |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |
| Net                  earnings                                                                               |   | $                                 | 64,131        |                              | $      | 20,683                                |   | $                               | 14,771   |   | $ | 114,025 |   |
| Adjustments                  to reconcile net earnings to net cash flows                                    |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |
| provided                  by (used in) operating activities:                                                |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |
| Depreciation                  and amortization                                                         |   |                              | 154,601       |                              |   | 126,393                               |   |                            | 63,376   |   |   | 118,755 |   |
| Goodwill                  impairment                                                                   |   |                              | -             |                              |   | 175,000                               |   |                            | -        |   |   | - |   |
| Amortization                  of debt expense (premium)                                                |   |                              | 12,130        |                              |   | 2,186                                 |   |                            | (446     | ) |   | (10,100 | ) |
| Deferred                  income taxes                                                                 |   |                              | 225,843       |                              |   | 61,211                                |   |                            | 12,082   |   |   | 67,455 |   |
| Provision                  for bad debts                                                               |   |                              | 20,151        |                              |   | 22,519                                |   |                            | 11,649   |   |   | 21,216 |   |
| Provision                  for impairment of other assets                                              |   |                              | 6,500         |                              |   | 2,338                                 |   |                            | 16,425   |   |   | 1,603 |   |
| Gain                  on derivative                                                                    |   |                              | (55,146       | )                                 |   | -                                     |   |                            | -        |   |   | - |   |
| Loss                  on sale of subsidiaries and other assets                                         |   |                              | 56,815        |                              |   | -                                     |   |                            | -        |   |   | 1,150 |   |
| Non-cash                  stock compensation                                                           |   |                              | 6,804         |                              |   | 3,848                                 |   |                            | -        |   |   | - |   |
| Earnings                  from unconsolidated investments, net of cash                  distributions  |   |                              | (92,607       | )                                 |   | (55,742                               | )      |                            | (4,745   | ) |   | (200 | ) |
| Other                                                                                                  |   |                              | (5,643        | )                                 |   | (1,821                                | )      |                            | (1,197   | ) |   | (7,429 | ) |
| Changes                  in operating assets and liabilities, net of                  acquisitions:    |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |
|  Accounts                  receivable, billed and unbilled                                             |   |                              | 147,450       |                              |   | (126,590                              | )      |                            | (174,716 | ) |   | (6,181 | ) |
|  Accounts                  payable                                                                     |   |                              | (67,021       | )                                 |   | 43,681                                |   |                            | 45,511   |   |   | (4,421 | ) |
|  Gas                  imbalance payable                                                                |   |                              | 3,167         |                              |   | (465                                  | )      |                            | 2,307    |   |   | 1,655 |   |
|  Customer                  deposits                                                                    |   |                              | 3,542         |                              |   | 2,940                                 |   |                            | 1,113    |   |   | (542 | ) |
|  Deferred                  gas purchase costs                                                          |   |                              | (35,906       | )                                 |   | 59,385                                |   |                            | 10,239   |   |   | 20,670 |   |
|  Inventories                                                                                           |   |                              | (14,369       | )                                 |   | (52,420                               | )      |                            | (47,474  | ) |   | (9,279 | ) |
|  Deferred                  charges and credits                                                         |   |                              | (37,459       | )                                 |   | (26,849                               | )      |                            | 22,743   |   |   | 13,773 |   |
|  Prepaids                  and other assets                                                            |   |                              | 104,889       |                              |   | (41,256                               | )      |                            | (17,215  | ) |   | 9,841 |   |
|  Taxes                  and other liabilities                                                          |   |                              | (39,067       | )                                 |   | 3,596                                 |   |                            | 18,323   |   |   | (4,831 | ) |
| Net                  cash flows provided by (used in) operating activities                             |   |                              | 458,805       |                              |   | 218,637                               |   |                            | (27,254  | ) |   | 327,160 |   |
| Cash                  flows (used in) provided by investing activities:                                     |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |
| Additions                  to property, plant and equipment                                            |   |                              | (347,896      | )                                 |   | (279,721                              | )      |                            | (170,644 | ) |   | (213,983 | ) |
| Acquisition                  of equity interest in unconsolidated investment                           |   |                              | -             |                              |   | -                                     |   |                            | (605,388 | ) |   | - |   |
| Acquisitions                  of operations, net of cash received                                      |   |                              | (1,537,627    | )                                 |   | -                                     |   |                            | -        |   |   | - |   |
| Proceeds                  from sale of subsidiaries and other assets                                   |   |                              | 1,076,714     |                              |   | -                                     |   |                            | -        |   |   | 2,175 |   |
| Other                                                                                                  |   |                              | 2,005         |                              |   | (2,808                                | )      |                            | (1,711   | ) |   | (3,131 | ) |
| Net                  cash flows used in investing activities                                                |   |                              | (806,804      | )                                 |   | (282,529                              | )      |                            | (777,743 | ) |   | (214,939 | ) |
| Cash                  flows provided by (used in) financing activities:                                     |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |
| Increase                  (decrease) in bank overdraft                                                 |   |                              | (4,941        | )                                 |   | (17,091                               | )      |                            | 7,405    |   |   | 1,820 |   |
| Issuance                  of long-term debt                                                            |   |                              | 1,065,000     |                              |   | 255,626                               |   |                            | -        |   |   | 750,000 |   |
| Issuance                  costs of debt and equity                                                     |   |                              | (10,590       | )                                 |   | (3,536                                | )      |                            | (337     | ) |   | (15,120 | ) |
| Issuance                  of preferred stock                                                           |   |                              | -             |                              |   | -                                     |   |                            | -        |   |   | 230,000 |   |
| Issuance                  of common stock and equity units                                             |   |                              | 125,000  |                              |   | 431,772                               |   |                            | 228,287  |   |   | - |   |
| Issuance                  of Bridge Loan                                                               |   |                              | 1,600,000     |                              |   | -                                     |   |                            | -        |   |   | - |   |
| Repayment                  of Bridge Loan                                                              |   |                              | (1,600,000    | )                                 |   | -                                     |   |                            | -        |   |   | - |   |
| Purchase                  of treasury stock                                                            |   |                              | -             |                              |   | (15,032                               | )      |                            | -        |   |   | (2,403 | ) |
| Dividends                  paid on common and preferred stock                                          |   |                              | (51,695       | )                                 |   | (17,365                               | )      |                            | (8,683   | ) |   | (8,393 | ) |
| Repayment                  of debt and capital lease obligation                                        |   |                              | (470,365      | )                                 |   | (335,567                              | )      |                            | (94,123  | ) |   | (908,773 | ) |
| Net                  (payments) borrowings under revolving credit                  facilities          |   |                              | (320,000      | )                                 |   | (279,000                              | )      |                            | 678,000  |   |   | (230,500 | ) |
| Proceeds                  from exercise of stock options                                               |   |                              | 9,216         |                              |   | 22,242                                |   |                            | 4,530    |   |   | 4,122 |   |
| Other                                                                                                  |   |                              | (4,813        | )                                 |   | 8,728                                 |   |                            | -        |   |   | - |   |
| Net                  cash flows provided by (used in) financing                  activities            |   |                              | 336,812       |                              |   | 50,777                                |   |                            | 815,079  |   |   | (179,247 | ) |
| Change                  in cash and cash equivalents                                                        |   |                              | (11,187       | )                                 |   | (13,115                               | )      |                            | 10,082   |   |   | (67,026 | ) |
| Cash                  and cash equivalents at beginning of period                                           |   |                              | 16,938        |                              |   | 30,053                                |   |                            | 19,971   |   |   | 86,997 |   |
| Cash                  and cash equivalents at end of period                                                 |   | $                                 | 5,751         |                              | $      | 16,938                                |   | $                               | 30,053   |   | $ | 19,971 |   |
|                                                                                                        |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |
|                                                                                                        |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |
| Cash                  paid for interest, net of amounts capitalized                                         |   | $                                 | 204,573       |                              | $      | 139,770                               |   | $                               | 69,954   |   | $ | 143,715 |   |
| Cash                  paid for income taxes, net of refunds                                                 |   |                              | 50,750        |                              |   | (2,007                                | )      |                            | 7,764    |   |   | (10,875 | ) |
|                                                                                                        |   |                              |          |                              |   |                                  |   |                            |     |   |   |   |   |

*F-5*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE      INCOME**

|                                                |   |                            |   |                        |   |        |   |                         |      |                          |   |         |   | **Accumulated** |    |          |   |         |   |
|-----------------------------------------------------|--------|---------------------------------|--------|-----------------------------|--------|-------------|--------|------------------------------|-----------|-------------------------------|--------|--------------|--------|-----------------|---------|---------------|--------|--------------|--------|
|                                                |   |                            |   |                        |   |        |   |                         |      |                          |   |         |   | **Other**       |    |          |   |         |   |
|                                                |   | **Common**                      |   | **Preferred**               |   | **Premium** |   |                         |      | **Common**                    |   | **Deferred** |   | **Compre-**     |    |          |   | **Total**    |   |
|                                                |   | **Stock,**                      |   | **Stock,**                  |   | **on**      |   | **Treasury**                 |      | **Stock**                     |   | **Compen-**  |   | **hensive**     |    | **Retained**  |   | **Stock-**   |   |
|                                                |   | **$1                  Par**     |   | **No                  Par** |   | **Capital** |   | **Stock,**                   |      | **Held**                      |   | **sation**   |   | **Income**      |    | **Earnings**  |   | **holders'** |   |
|                                                |   | **Value**                       |   | **Value**                   |   | **Stock**   |   | **at                  cost** |      | **In                  Trust** |   | **Plans**    |   | **(Loss)**      |    | **(Deficit)** |   | **Equity**   |   |
|                                                |   | (In                  thousands) |   |
|                                                |   |                            |   |                        |   |        |   |                         |      |                          |   |         |   |            |    |          |   |         |   |
| Balance                  July 1, 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 |   |
|                                                |   |                            |   |                        |   |        |   |                         |      |                          |   |         |   |            |    |          |   |         |   |   |   |   |   |   |   |   |   |   |
| 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 |   |
|                                                |   |                            |   |                        |   |        |   |                         |      |                          |   |         |   |            |    |          |   |         |   |   |   |   |   |   |   |   |   |   |

*F-6*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE      INCOME**

**(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) |    |
|                                                |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |
| 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 liability          |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   |
|                                                |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                  income (loss):       |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  earnings                       |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | -           |    |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | - |   |   |   |   |   | 64,131 |   |   | 64,131 |   |
| Unrealized                  loss on hedging         |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |        |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| activities,                  net of tax             |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | -           |    |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | 918 |   |   |   |   |   | - |   |   | 918 |   |
| Change                  in fair value of hedging    |   |                            |    |   |   |                        |   |   |    |        |   |   |        |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| derivatives,                  net of tax            |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | -           |    |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | 5,276 |   |   |   |   |   | - |   |   | 5,276 |   |
| Reversal                  of minimum pension        |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liability                  related to disposition   |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | -           |    |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | 26,331 |   |   |   |   |   | - |   |   | 26,331 |   |
| Minimum                  pension liability          |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| adjustment,                  net of tax             |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | -           |    |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | 6,803 |   |   |   |   |   | - |   |   | 6,803 |   |
| Comprehensive                  income               |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 103,459 |   |
| Adjustment                  to initially apply FASB |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Statement                  No. 158                  |   |                            | -       |   |   |                        |   |   | -       |        |   |   |        |                         | -           |    |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | 16,043 |   |   |   |   |   | - |   |   | 16,043 |   |
| Preferred                  stock dividends          |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | (8,683      | )       |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | - |   |   |   |   |   | (8,682 | ) |   | (17,365 | ) |
| Cash                  dividends declared            |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | (26,366     | )       |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | - |   |   |   |   |   | (19,923 | ) |   | (46,289 | ) |
| Share-based                  compensation           |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | 6,804  |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         | -           |   |   |   |   |   | - |   |   |   |   |   | - |   |   | 6,804 |   |
| Implementation                  of FAS 123R         |   |                            |         |   |   |                        |   |   |    |        |   |   |   |                         | (2,800      | )  |   |                          |   |   | -     |         |   |   |   |                               | -  |   |   |          |   |         | 2,800  |   |   |   |   |   | -  |   |   |   |   |   | -  |   |   | -  |   |
| Restricted                  stock awards            |   |                            | 146     |   |   |                        |   |   | -       |        |   |   |   |                         | (146        | )       |   |                          |   |   | (142  | )       |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | - |   |   |   |   |   | - |   |   | (142  | )  |
| Exercise                  of stock options          |   |                            | 629     |   |   |                        |   |   | -       |        |   |   |   |                         | 9,544       |    |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | - |   |   |   |   |   | - |   |   | 10,173 |   |
| Contributions                  to Trust             |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | -           |    |   |                          |   |   | -          |         |   |   |   |                               | (3,079  | )      |   |          |   |         | 3,079  |   |   |   |   |   | - |   |   |   |   |   | - |   |   | - |   |
| Disbursements                  from Trust           |   |                            | -       |   |   |                        |   |   | -       |        |   |   |   |                         | -           |    |   |                          |   |   | -          |         |   |   |   |                               | 1,361   |   |   |          |   |         | (1,361      | ) |   |   |   |   | - |   |   |   |   |   | - |   |   | - |   |
| Equity                  Units Conversion            |   |                            | 7,413   |   |   |                        |   |   | -       |        |   |   |   |                         | 116,243     |    |   |                          |   |   | -          |         |   |   |   |                               | -       |   |   |          |   |         | -           |   |   |   |   |   | - |   |   |   |   |   | - |   |   | 123,656 |   |
| Balance                  December 31, 2006          |   | $                               | 120,718 |   |   |                        |   | $      | 230,000 |        |   |   |   | $                            | 1,775,763   |    |   |                          |   | $      | (27,708    | )            |   |   |   | $                                  | (14,628 | )      |   |          |   | $            | 14,691      |   |   |   |   | $ | (901 | ) |   |   |   | $ | (47,527 | ) | $ | 2,050,408 |   |
|                                                |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   |                            |    |   |   |                        |   |   |    |        |   |   |   |                         |        |    |   |                          |   |   |       |         |   |   |   |                               |    |   |   |          |   |         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

*F-7*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**1.      Corporate Structure**

***Operations.***
*Southern      Union*
*Company*
*PEPL*
*Panhandle*
*Bcf/d*
*LNG*
*Citrus*
*Florida      Gas*
*CCE      Holdings*
*Transwestern*
*Note      3 - Acquisitions and Sales - CCE Holdings Transactions*

**2.      Summary of Significant Accounting Policies**

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

***Principles      of Consolidation.***

***Purchase      Accounting.***
*Sid      Richardson Energy Services*
*FASB*
*Business      Combinations*
*Note      3 - Acquisitions and Sales - Acquisition of Sid Richardson Energy      Services.*

*F-8*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Note        3 - Acquisitions and Sales - CCE Holdings Transactions*
*The        Equity Method of Accounting for Investments in Common Stock*
*APB        18*
*Note        9 - Unconsolidated Investments - CCE Holdings Goodwill        Evaluation*

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

*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*

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

*F-9*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***Gathering        and Processing Revenues and Cost of Sales Recognition.***

*Operating      revenues*
*Cost      of gas and other energy*

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

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

*F-10*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                               |   | **Year                    Ended**   |    | **Year                    Ended**   |   | **Six                    Months Ended** |   | **Year                    Ended** |    |
|--------------------------------------------------------------------|--------|-------------------------------------|---------|-------------------------------------|--------|-----------------------------------------|--------|-----------------------------------|---------|
|                                                               |   | **December                    31,** |    | **December                    31,** |   | **December                    31,**     |   | **June                    30,**   |    |
|                                                               |   | **2006**                            |    | **2005**                            |   | **2004**                                |   | **2004**                          |    |
|                                                               |   | (In                    thousands)   |    |
| Beginning                    balance                               |   | $                                   | 15,893  |                                | $      | 15,424                                  |   | $                                 | 16,111  |   | $ | 22,651 |   |
| Additions:                    charged to cost and expenses (1)     |   |                                | 9,646   |                                |   | 22,519                                  |   |                              | 11,649  |   |   | 21,216 |   |
| Deductions:                    write-off of uncollectible accounts |   |                                | (9,756  | )                                   |   | (22,751                                 | )      |                              | (14,752 | ) |   | (30,809 | ) |
| Balance                    related to discontinued operations (2)  |   |                                | (10,968 | )                                   |   | -                                       |   |                              | -       |   |   | - |   |
| Other                                                              |   |                                | 15      |                                |   | 701                                     |   |                              | 2,416   |   |   | 3,053 |   |
| Ending                    balance                                  |   | $                                   | 4,830   |                                | $      | 15,893                                  |   | $                                 | 15,424  |   | $ | 16,111 |   |
|                                                               |   |                                |    |                                |   |                                    |   |                              |    |   |   |   |   |
|                                                               |   |                                |    |                                |   |                                    |   |                              |    |   |   |   |   |

***Earnings      Per Share.***
*Earnings      per Share*
*Statement      No. 128*
*Note      10 - Stockholders’ Equity - Dividends*

***Stock      Based Compensation.***
*Accounting      for Stock-Based Compensation*
*Statement      No. 123R*
*Accounting      for Stock Issued to Employees*
*APB      No. 25*
*Note      24 - Stock-based Compensation.*

*F-11*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                                       |   | **Year                  Ended**                           |   | **Six                  Months Ended** |   | **Year                  Ended** |   |
|----------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------|--------|
|                                                                       |   | **December                  31,**                         |   | **December                  31,**     |   | **June                  30,**   |   |
|                                                                       |   | **2005**                                                  |   | **2004**                              |   | **2004**                        |   |
|                                                                       |   | (In                  thousands, except per share amounts) |   |
|                                                                       |   |                                                      |   |                                  |   |                            |   |
| Net                  earnings, as reported                                 |   | $                                                         | 20,683 |                                  | $      | 14,771                          |   | $ | 114,025 |   |
| 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 |   |
| Pro                  forma net earnings                                    |   | $                                                         | 20,095 |                                  | $      | 14,275                          |   | $ | 112,326 |   |
|                                                                       |   |                                                      |   |                                  |   |                            |   |   |   |   |
| Net                  earnings available for common stockholders per share: |   |                                                      |   |                                  |   |                            |   |   |   |   |
| Basic                  - as reported                                       |   | $                                                         | 0.03   |                                  | $      | 0.07                            |   | $ | 1.26 |   |
| Basic                  - pro forma                                         |   | $                                                         | 0.02   |                                  | $      | 0.06                            |   | $ | 1.24 |   |
|                                                                       |   |                                                      |   |                                  |   |                            |   |   |   |   |
| Diluted                  - as reported                                     |   | $                                                         | 0.03   |                                  | $      | 0.07                            |   | $ | 1.24 |   |
| Diluted                  - pro forma                                       |   | $                                                         | 0.02   |                                  | $      | 0.06                            |   | $ | 1.21 |   |
|                                                                       |   |                                                      |   |                                  |   |                            |   |   |   |   |

***Accumulated      Other Comprehensive Loss.***
*Reporting      Comprehensive Income*
*Note      22 - Accumulated Other Comprehensive Loss.*

***Inventories.***
*MMBtu*

*F-12*

----

**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 *
*Statement      No. 71*
*Note      8 - Regulatory Assets and Liabilities.*

***Goodwill      and Other Intangible Assets.***
*Accounting      for Goodwill and Other Intangible Assets*
*Statement      No. 142*
*Note      7 - Goodwill and Intangibles*

***Fair      Value of Financial Instruments.***
*Note      13 - Debt Obligations*

***Gas      Imbalances.***

*F-13*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***Fuel      Tracker.***
*Trunkline      LNG*

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

***Derivative      Instruments and Hedging Activities.***
*Accounting      for Derivative Instruments and Hedging Activities*
*Statement      No. 133*
*a      fair value hedge*
*a      cash flow hedge*
*a      trading or non-hedging instrument*
*A*
*ccumulated      other comprehensive income *
*loss*
*Note      11 - Derivative Instruments and Hedging Activities*

***Asset      Retirement Obligations.***
*Accounting      for Asset Retirement Obligations (ARO) (Statement No. 143*
*Accounting      for Conditional Asset Retirement Obligations (FIN No. 47*

*Note      20 -Asset Retirement Obligations*

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

*F-14*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***Pensions      and Other Postretirement Benefit Plans.***
*Employers’      Accounting for Defined Benefit Pension and Other Postretirement Plans - an      amendment of FASB Statements No. 87, 88, 106, and 132(R)*
*Statement      No. 158*
*Accumulated      other comprehensive loss*

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

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

**New      Accounting Principles**

***Accounting      Principles Recently 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*
*Note      24 - Stock Based Compensation*

*F-15*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***FASB        Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other        Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and        132(R)”:***

***SEC      Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year      Misstatements when Quantifying Misstatements in Current Year Financial      Statements” (SAB No. 108):***

***Accounting      Principles Not Yet Adopted.***

***FIN      48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB      Statement***
***109”      (FIN 48):***
*Accounting      for Income Taxes*

***FASB      Statement No. 157, “Fair Value Measurements”:***

***FASB      Statement No. 159, “The Fair Value Option for Financial Assets and Financial      Liabilities - Including an Amendment of FASB Statement No.      115”***
**:**

*F-16*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**3.        Acquisitions and Sales**

***Acquisition      of Sid Richardson Energy Services*.**
*Sid      Richardson Bridge Loan*
*Note      13 - Debt Obligations - Short-Term Debt Obligations, Excluding Current Portion      of Long-Term Debt*

*Note      9 - Unconsolidated Investments*

*F-17*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                               |   |   |   | **At                  March 1, 2006**  |   |
|----------------------------------------------------|--------|--------|--------|---------------------------------------------|--------|
|                                                    |   |   |   |                                        |   | (In                  thousands)  |   |
|                                               |   |   |   |                                        |   |   |   |
| Property,                  plant and equipment (1) |   |   |   |                                        | $      | 1,556,212 |   |
| Current                  assets (2)                |   |   |   |                                        |   | 156,053 |   |
| Unconsolidated                  investment (3)     |   |   |   |                                        |   | 6,875 |   |
| Other                  non-current assets (4)      |   |   |   |                                        |   | 7,880 |   |
| Total                  assets acquired             |   |   |   |                                        |   | 1,727,020 |   |
| Current                  liabilities               |   |   |   |                                        |   | 140,678 |   |
| Other                  non-current liabilities     |   |   |   |                                        |   | 634 |   |
| Total                  liabilities assumed         |   |   |   |                                        |   | 141,312 |   |
| Net                  assets acquired (5)           |   |   |   |                                        | $      | 1,585,708 |   |
|                                               |   |   |   |                                        |   |   |   |

| (1)   | Includes                an allocation of $15.5 million to other intangibles for leases and                software with weighted-average lives of 4 years and 1 year,                respectively. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Includes                cash and cash equivalents of approximately $53.2                million. |
|-----------------|--------------------------------------------------------------------------------------------------|

| (3)   | Represents                a 50                percent ownership interest in Grey Ranch Plant                LP. |
|-----------------|-----------------------------------------------------------------------------------------------------------------|

| (4)   | Includes                intangibles for contracts totaling $2.6 million with a weighted average                life of 3 years. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------|

| (5)   | Reflects                final working capital adjustments of $11                million from the $1.6                billion purchase price. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                 |   | **Year                  Ended**   |      |
|----------------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                                 |   | **December                  31,** |      |
|                                                                 |   | **2006**                          |      | **2005** |   |
|                                                                 |   | (In                  thousands)   |      |
|                                                                 |   |                              |      |   |   |
| Operating                  revenue                                   |   | $                                 | 2,570,693 |   | $ | 2,636,056 |   |
| Net                  earnings available for common shareholders      |   |                              |      |   |   |   |   |
| from                  continuing operations                          |   |                              | 209,807   |   |   | 163,471 |   |
|                                                                 |   |                              |      |   |   |   |   |
| Net                  earnings available for common shareholders from |   |                              |      |   |   |   |   |
| continuing                  operations per share:                    |   |                              |      |   |   |   |   |
| Basic                                                                |   | $                                 | 1.83      |   | $ | 1.49 |   |
| Diluted                                                              |   | $                                 | 1.79      |   | $ | 1.45 |   |
|                                                                 |   |                              |      |   |   |   |   |

***Sale      of PG Energy.***

***Sale      of the Rhode Island Operations of New England Gas      Company.***

*F-18*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Note        7 - Goodwill and Intangibles*
*Note        19 - Discontinued Operations*

***CCE      Holdings Transactions***
***.***
*CrossCountry      Energy*
*ONEOK*
*Note      10 - Stockholders’ Equity*
*Earnings      from unconsolidated investments*

*F-19*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Energy        Transfer*
*Redemption Agreement*
*Note 13 - Debt        Obligations*

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

*Other,      net*
*Note      11 - Derivative Instruments and Hedging Activities - Gathering and Processing      Segment*

*Other,      net*
*Note      9 - Unconsolidated Investments*
*Note      11 - Derivative Instruments and Hedging Activities - Gathering and Processing      Segment *

*Other,      net*
*Note      9 - Unconsolidated Investments*
*Southwest*

*Other,      net*

*F-20*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**5.        Earnings Per Share**

*EPS*

|                                                                         |   |                                                      |     |                              |   | **Six                  Months**   |   |                            |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------------------------|----------|-----------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                         |   | **Year                  Ended**                           |     | **Year                  Ended**   |   | **Ended**                         |   | **Year                  Ended** |   |
|                                                                         |   | **December                  31,**                         |     | **December                  31,** |   | **December                  31,** |   | **June                  30,**   |   |
|                                                                         |   | **2006**                                                  |     | **2005**                          |   | **2004**                          |   | **2004**                        |   |
|                                                                         |   | (In                  thousands, except per share amounts) |     |
|                                                                         |   |                                                      |     |                              |   |                              |   |                            |   |
| Net                  earnings from continuing operations                     |   | $                                                         | 217,083  |                              | $      | 153,096                           |   | $                               | 7,048  |   | $ | 64,415 |   |
| Net                  earnings (loss) from discontinued operations            |   |                                                      | (152,952 | )                                 |   | (132,413                          | )      |                            | 7,723  |   |   | 49,610 |   |
| Preferred                  stock dividends                                   |   |                                                      | (17,365  | )                                 |   | (17,365                           | )      |                            | (8,683 | ) |   | (12,686 | ) |
| Net                  earnings available for common stockholders              |   | $                                                         | 46,766   |                              | $      | 3,318                             |   | $                               | 6,088  |   | $ | 101,339 |   |
|                                                                         |   |                                                      |     |                              |   |                              |   |                            |   |   |   |   |   |
| Weighted                  average shares outstanding - Basic                 |   |                                                      | 114,787  |                              |   | 109,395                           |   |                            | 87,314 |   |   | 80,432 |   |
| Weighted                  average shares outstanding - Diluted               |   |                                                      | 117,344  |                              |   | 112,794                           |   |                            | 87,314 |   |   | 81,480 |   |
|                                                                         |   |                                                      |     |                              |   |                              |   |                            |   |   |   |   |   |
| Basic                  earnings per share:                                   |   |                                                      |     |                              |   |                              |   |                            |   |   |   |   |   |
| Net                  earnings (loss) available for common stockholders  |   |                                                      |     |                              |   |                              |   |                            |   |   |   |   |   |
| from                  continuing operations                             |   | $                                                         | 1.74     |                              | $      | 1.24                              |   |                            | ($0.02 | ) | $ | 0.64 |   |
| Net                  earnings (loss) from discontinued operations       |   |                                                      | (1.33    | )                                 |   | (1.21                             | )      |                            | 0.09   |   |   | 0.62 |   |
| Net                  earnings available for common stockholders         |   | $                                                         | 0.41     |                              | $      | 0.03                              |   | $                               | 0.07   |   | $ | 1.26 |   |
|                                                                         |   |                                                      |     |                              |   |                              |   |                            |   |   |   |   |   |
| Diluted                  earnings per share:                                 |   |                                                      |     |                              |   |                              |   |                            |   |   |   |   |   |
| Net                  earnings (loss) available for common stockholders  |   |                                                      |     |                              |   |                              |   |                            |   |   |   |   |   |
| from                  continuing operations                             |   | $                                                         | 1.70     |                              | $      | 1.20                              |   |                            | ($0.02 | ) | $ | 0.63 |   |
| Net                  earnings (loss) from discontinued operations       |   |                                                      | (1.30    | )                                 |   | (1.17                             | )      |                            | 0.09   |   |   | 0.61 |   |
| Net                  earnings available for common stockholders         |   | $                                                         | 0.40     |                              | $      | 0.03                              |   | $                               | 0.07   |   | $ | 1.24 |   |
|                                                                         |   |                                                      |     |                              |   |                              |   |                            |   |   |   |   |   |

*F-21*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                            |   |                                  |    |                              |   |    |   | **Six                  Months**   |   |                            |   |
|-----------------------------------------------------------------|--------|---------------------------------------|---------|-----------------------------------|--------|---------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                            |   | **Year                  Ended**       |    | **Year                  Ended**   |   |    |   | **Ended**                         |   | **Year                  Ended** |   |
|                                                            |   | **December                  31,**     |    | **December                  31,** |   |    |   | **December                  31,** |   | **June                  30,**   |   |
|                                                            |   | **2006**                              |    | **2005**                          |   |    |   | **2004**                          |   | **2004**                        |   |
|                                                            |   |  (In                  thousands) |    |
| Weighted                  average shares outstanding - Basic    |   |                                  | 114,787 |                              |   | 109,395 |   |                              |   |                            |   | 87,314 |   |   | 80,432 |   |
| Add                  assumed vesting of restricted stock        |   |                                  | 35      |                              |   | 16      |   |                              |   |                            |   | - |   |   | - |   |
| Add                  assumed conversion of equity units         |   |                                  | 2,021   |                              |   | 2,141   |   |                              |   |                            |   | - |   |   | - |   |
| Add                  assumed exercise of stock options          |   |                                  | 501     |                              |   | 1,242   |   |                              |   |                            |   | - |   |   | 1,048 |   |
| Weighted                  average shares outstanding - Dilutive |   |                                  | 117,344 |                              |   | 112,794 |   |                              |   |                            |   | 87,314 |   |   | 81,480 |   |
|                                                            |   |                                  |    |                              |   |    |   |                              |   |                            |   |   |   |   |   |   |

*Note      10 - Stockholders’ Equity - 2005 Equity Issuances*
*Note      13 - Debt Obligations - Long-Term Debt and Capital Lease Obligations -      Remarketing Obligation*

*F-22*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

**6.      Property, Plant and Equipment**

|                                                                           |   |                                |   | **December                  31,** |   | **December                  31,** |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
| **Property,                  Plant and Equipment**                             |   | **Lives                  in Years** |   | **2006**                          |   | **2005**                          |   |
|                                                                           |   |                                |   | (In                  thousands)   |   |
|                                                                           |   |                                |   |                              |   |                              |   |   |   |   |
| Gathering                  plant                                               |   |                                | 3-50   |                              | $      | 1,623,265                         |   | $ | 45,822 |   |
| Transmission                  plant                                            |   |                                | 36-46  |                              |   | 1,400,547                         |   |   | 1,285,848 |   |
| Distribution                  plant                                            |   |                                | 21-75  |                              |   | 897,075                           |   |   | 1,774,802 |   |
| General                  - LNG                                                 |   |                                | 40     |                              |   | 619,018                           |   |   | 494,827 |   |
| Underground                  storage plant                                     |   |                                | 36-46  |                              |   | 279,845                           |   |   | 275,603 |   |
| General                  plant and other                                       |   |                                | 1-50   |                              |   | 205,881                           |   |   | 306,378 |   |
| Plant                  in service (1)                                          |   |                                |   |                              |   | 5,025,631                         |   |   | 4,183,280 |   |
| Construction                  work in progress                                 |   |                                |   |                              |   | 178,935                           |   |   | 184,423 |   |
|                                                                           |   |                                |   |                              |   | 5,204,566                         |   |   | 4,367,703 |   |
| Less                  accumulated depreciation and amortization (1)            |   |                                |   |                              |   | (620,139                          | )      |   | (881,763 | ) |
| Net                  property, plant and equipment                             |   |                                |   |                              | $      | 4,584,427                         |   | $ | 3,485,940 |   |
| _________________________                                                      |   |                                |   |                              |   |                              |   |   |   |   |
| (1)                  Includes capitalized computerized software cost totaling: |   |                                |   |                              |   |                              |   |   |   |   |
|                                                                           |   |                                |   |                              |   |                              |   |   |   |   |
| Unamortized                  computer software cost                            |   |                                | 1-10   |                              | $      | 96,556                            |   | $ | 119,471 |   |
| Less                  accumulated amortization                                 |   |                                |   |                              |   | (41,186                           | )      |   | (44,588 | ) |
| Net                  capitalized computer software costs                       |   |                                |   |                              | $      | 55,370                            |   | $ | 74,883 |   |
|                                                                           |   |                                |   |                              |   |                              |   |   |   |   |

**7.      Goodwill and Intangibles**

| **Goodwill                  Analysis**           |   | **Amounts**                           |     |
|--------------------------------------------------|--------|---------------------------------------|----------|
|                                             |   | (In                  thousands)  |     |
|                                             |   |                                  |     |   |
| 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  |   |
| Impairment                  losses               |   |                                  | -        |   |
| Write-off                  associated with sales |   |                                  | (376,320 | ) |
| Balance                  as of December 31, 2006 |   | $                                     | 89,227   |   |
|                                             |   |                                  |     |   |

*F-23*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Earnings (losses)        from discontinued operations before income taxes*
*Note 19 - Discontinued        Operations*

*Deferred      charges*

**8.      Regulatory Assets**

*FERC*

*F-24*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                 |   |                              |   |                              |   |
|------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                                                 |   | **December                  31,** |   | **December                  31,** |   |
| **Regulatory                  Assets**               |   | **2006**                          |   | **2005**                          |   |
|                                                 |   | (In                  thousands)   |   |
|                                                 |   |                              |   |                              |   |   |   |
| Pension                  and Postretirement Benefits |   | $                                 | 33,969 |                              | $      | 32,627 |   |
| Deferred                  Income Tax                 |   |                              | -      |                              |   | 28,076 |   |
| Environmental                                        |   |                              | 15,571 |                              |   | 23,656 |   |
| Missouri                  Safety Program             |   |                              | 8,751  |                              |   | 11,956 |   |
| Other                                                |   |                              | 7,574  |                              |   | 16,648 |   |
|                                                 |   | $                                 | 65,865 |                              | $      | 112,963 |   |
|                                                 |   |                              |   |                              |   |   |   |

**9.      Unconsolidated Investments**

|                                            |   | **December                  31,** |      | **December                  31,** |   |
|-------------------------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|
| **Unconsolidated                  Investments** |   | **2006**                          |      | **2005**                          |   |
|                                            |   | (In                  thousands)   |      |
| Equity                  investments:            |   |                              |      |                              |   |
| Citrus                                          |   | $                                 | 1,233,172 |                              | $      | - |   |
| CCE                  Holdings                   |   |                              | -         |                              |   | 668,985 |   |
| Other                                           |   |                              | 20,802    |                              |   | 13,074 |   |
| Investments                  at cost            |   |                              | 775       |                              |   | 775 |   |
|                                            |   |                              |      |                              |   |   |   |
|                                            |   | $                                 | 1,254,749 |                              | $      | 682,834 |   |
|                                            |   |                              |      |                              |   |   |   |

***Equity      Investments.***
*Earnings      from unconsolidated investments*

***Citrus      and CCE Holdings.***
*Note      3 - Acquisitions and Sales - CCE Holdings Transactions*

*F-25*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                           |   | **Excess                  Purchase Costs** |    | **Amortization                  Period** |   |
|----------------------------------------------------------------|--------|--------------------------------------------|---------|------------------------------------------|--------|
|                                                           |   | (In                  thousands)            |    |                                     |   |
| Property,                  plant and equipment                 |   | $                                          | 34,000  |                                     |   | 40                  years |   |
| Capitalized                  software                          |   |                                       | 2,100   |                                     |   | 5                  years |   |
| Long-term                  debt (1)                            |   |                                       | (83,300 | )                                        |   | 4-20                  years |   |
| Deferred                  taxes (1)                            |   |                                       | (13,100 | )                                        |   | 40                  years |   |
| Other                  net liabilities (2)                     |   |                                       | (21,300 | )                                        |   | N/A |   |
| Goodwill                  (3)                                  |   |                                       | 642,200 |                                     |   | N/A |   |
| Sub-total                                                      |   |                                       | 560,600 |                                     |   |   |   |
| Accumulated,                  net accretion to equity earnings |   |                                       | 25,000  |                                     |   |   |   |
| Net                  investment in excess of underlying equity |   | $                                          | 585,600 |                                     |   |   |   |
|                                                           |   |                                       |    |                                     |   |   |   |

| (1)   | Accretion                of this amount increases equity earnings and accumulated net                accretion. |
|-----------------|-----------------------------------------------------------------------------------------------------------------|

| (2)   | Includes                reserve for Citrus accounts receivable amounts under dispute, proceeds                from which were obligated to be remitted to Enron Corp. under terms                in                place at December 1, 2006 pursuant to the purchase agreement for                the                November 17, 2004 acquisition of CCE                Holdings. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | The                Company expects to have a tax basis in all of the equity                goodwill. |
|-----------------|------------------------------------------------------------------------------------------------------|

***Other.***

*F-26*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                     |   | **At                  December 31, 2006** |      | **At                  December 31, 2005** |   |
|------------------------------------------|--------|-------------------------------------------|-----------|-------------------------------------------|--------|
|                                     |   |                                      |      | **Other                  Equity**         |   | **CCE** |   | **Other                  Equity** |   |
|                                     |   | **Citrus**                                |      | **Investments**                           |   | **Holdings** |   | **Investments** |   |
|                                     |   | (In                  thousands)           |      |
| Balance                  Sheet Data:     |   |                                      |      |                                      |   |   |   |   |   |
| Current                  assets          |   | $                                         | 64,295    |                                      | $      | 3,552 |   | $ | 69,983 |   | $ | 2,122 |   |
| Non-current                  assets      |   |                                      | 3,056,818 |                                      |   | 37,633 |   |   | 2,313,874 |   |   | 28,832 |   |
| Current                  liabilities     |   |                                      | 191,341   |                                      |   | 1,589 |   |   | 49,428 |   |   | 2,955 |   |
| Non-current                  liabilities |   |                                      | 1,636,671 |                                      |   | 1,802 |   |   | 1,034,092 |   |   | 356 |   |

|                                                                                                                                                                 |   | **Year                  Ended**            |    | **Year                  Ended**        |     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|---------|----------------------------------------|----------|
|                                                                                                                                                                 |   | **December                  31, 2006**     |    | **December                  31, 2005** |     |
|                                                                                                                                                                 |   | **CCE**                                                        |    |                                   |     |    |   |  **Other                  Equity** |   | **CCE** |   |   |   | **Other                  Equity** |   |
|                                                                                                                                                                 |   | **Holdings                  (a)**                              |    |                                   |     |  **Citrus                  (d)** |   |  **Investments** |   | **Holdings** |   |   |   | **Investments** |   |
|                                                                                                                                                                 |   | (In                  thousands)            |    |
| Income                  Statement Data:                                                                                                                              |   |                                                           |    |                                   |     |    |   |    |   |   |   |   |   |   |   |
| Revenues                                                                                                                                                             |   | $                                                              | -       |                                   |     |   | $ | 37,598 |   | $ | 5,386 |   | $ | - |   |   |   |   | $ | 6,942 |   |
| Operating                  income (loss)                                                                                                                             |   |                                                           | (5,729  | )                                      |     |   |   | 21,201 |   |   | 1,157 |   |   | (11,024 | ) |   |   |   |   | 1,230 |   |
| Equity                  earnings                                                                                                                                     |   |                                                           | 70,086  |                                   | (c       | ) |   | - |   |   | - |   |   | 72,492 |   |  (c | ) |   |   | - |   |
| Interest                  expense                                                                                                                                    |   |                                                           | 25,445  |                                   |     |   |   | 7,109 |   |   | 146 |   |   | 58,143 |   |   |   |   |   | 151 |   |
| Income                  from discontinued                                                                                                                            |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                                                                                                                                                           |   |                                                           | 156,612 |                                   | (b  | )  |   | - |   |   | - |   |   | 103,072 |   |   |   |   |   | - |   |
| Net                  income                                                                                                                                          |   |                                                           | 196,857 |                                   |     |   |   | 9,579 |   |   | 1,005 |   |   | 140,735 |   |   |   |   |   | 1,058 |   |
| _____________________                                                                                                                                                |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)                  The income statement information of CCE Holdings is through the                  period                  ended December 1, 2006. See            |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |
|  *Note                  3 - Acquisitions and Sales - CCE Holdings Transactions*for                  a description of the transactions                           |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |
| that                  led to the Company's consolidation of CCE Holdings as of December                  1,                  2006.                                   |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |   |   |   |   |
| (b)                  Income from discontinued operations for CCE Holdings relates primarily                  to                  the eleven months of operations of  |   |                                                           |    |                                   |     |   |   |   |   |   |
| Transwestern                  and to the closing of the transactions on December 1, 2006 contemplated                  by                  the Redemption Agreement, |   |                                                           |    |                                   |     |   |   |   |   |
| resulting                  in Energy Transfer's interest in CCE Holdings being exchanged for CCE                  Holdings' interest in Transwestern.      |   |                                                           |    |                                   |     |   |   |   |   |
| The                  year ended December 31, 2006 includes a pre-tax gain of $74.8 million                  related to the closing of the                            |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |
| transactions                  contemplated by the Redemption Agreement. See *Note 3 - Acquisitions                  and Sales - CCE**Holdings *                 |   |                                                           |    |                                   |     |   |   |   |   |   |
| *Transactions*                  for a description of the transaction.                                                                                                |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (c)                  Represents equity earnings of CCE Holdings in Citrus through the                  period                  ending December 1, 2006.              |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |
| (d)                  Includes Citrus results for the post-Redemption Agreement period                  of                  December 2006.                            |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                 |   |                                                           |    |                                   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

***Advent.***

*F-27*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Other        income, net*

***PointServe.***

***Contingent      Matters Potentially Impacting Southern Union Through the Company’s Investment in      Citrus.***

***Environmental      Matters.***

*U.S.      EPA*
*SPCC*

***CCE      Holdings’ Goodwill Evaluation.***
*Note      3 - Acquisitions and Sales - CCE Holdings Transactions*

***Regulatory      Assets and Liabilities.***

*F-28*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

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

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

***Citrus      Trading Litigation.***
*Citrus Parties*
*Duke*
*Spectra*

*F-29*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***Litigation.***

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

**10.      Stockholders’ Equity**

***Dividends.***
*Retained      earnings (deficit)*
*Premium      on capital stock*

***Stock      Award Plans.***
*Amended      2003 Plan*

*Second      Amended 2003 Plan*

| ·   | An                increase from 7,000,000 to 9,000,000 in                the aggregate number of shares of stock that may be issued under                the                plan; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | An                increase from 725,000 to 1,500,000 in                the total number of shares of stock that may be issued pursuant to                stock                awards, performance units and other equity-based rights;                and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | An                increase from 4,000 to 5,000 in                the maximum number of shares of restricted common stock that each                non-employee director is eligible to receive                annually. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*F-30*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*MDTE*

*1992      Plan*

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

*Note      24 - Share-Based Compensation*

***2006      Equity Issuances.***
*Note      13 - Debt Obligations - Long-Term Debt and Capital Lease Obligations -      Remarketing Obligation*

***2005      Equity Issuances.***
*Note      13 - Debt Obligations*

*F-31*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***2004      Equity Issuances.***

**11.      Derivative Instruments and Hedging Activities**

***Interest      Rate Swaps.***

*LNG      Holdings*
*Note      13 - Debt Obligations*
*Accumulated      other comprehensive loss*

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

*F-32*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***Distribution      Segment***

***Non-Hedging      Activities.***

***Gathering      and Processing Segment***

***Non-Hedging      Derivatives.***

***Cash      Flow Hedges.***

***December      2005 Put Options***
***.***
*Other,      net*

*F-33*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Accumulated        other comprehensive loss*

***July      2006 Put Options***
***.***
*Accumulated      other comprehensive loss*

***Financial      Statement Impact of Cash Flow Hedges.***
*Accumulated      other comprehensive loss*
*Prepayments      and other assets*
*Accumulated      other comprehensive loss*
*Operating      revenues*
*Accumulated      other comprehensive loss*

**12.      Preferred Securities **

*F-34*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

**13.      Debt Obligations**

|                                                                                                                                                                            |   | **Carrying                  Value** |      | **Fair                  Value**   |   | **Carrying                  Value** |   | **Fair                  Value**   |      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|-----------------------------------|--------|-------------------------------------|--------|-----------------------------------|-----------|
|                                                                                                                                                                            |   | **December                  31,**   |      | **December                  31,** |   | **December                  31,**   |   | **December                  31,** |      |
|                                                                                                                                                                            |   | **2006**                            |      | **2006**                          |   | **2005**                            |   | **2005**                          |      |
|                                                                                                                                                                            |   | (In                  thousands)     |      |
| **Long-Term                  Debt and Capital Lease Obligations:**                                                                                                              |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
|                                                                                                                                                                            |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| **Southern                  Union Company**                                                                                                                                     |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| 7.60%                  Senior Notes due 2024                                                                                                                                    |   | $                                   | 359,765   |                              | $      | 384,948                             |   | $                                 | 359,765   |   | $ | 411,931 |   |
| 8.25%                  Senior Notes due 2029                                                                                                                                    |   |                                | 300,000   |                              |   | 371,367                             |   |                              | 300,000   |   |   | 360,723 |   |
| 2.75%                  Senior Notes due 2006                                                                                                                                    |   |                                | -         |                              |   | -                                   |   |                              | 125,000   |   |   | 125,000 |   |
| 6.50%                  to 10.25% First Mortgage Bonds due 2006                                                                                                                  |   |                                | 19,500    |                              |   | 19,500                              |   |                              | 111,419   |   |   | 111,165 |   |
| to                  2029                                                                                                                                                        |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| 4.375%                  Senior Notes due 2008                                                                                                                                   |   |                                | 100,000   |                              |   | 100,000                             |   |                              | 100,000   |   |   | 100,000 |   |
| 6.15%                  Senior Notes due 2008                                                                                                                                    |   |                                | 125,000   |                              |   | 125,655                             |   |                              | -         |   |   | - |   |
| Junior                  Subordinated Notes due 2066                                                                                                                             |   |                                | 600,000   |                              |   | 598,572                             |   |                              | -         |   |   | - |   |
| Capital                  lease and other                                                                                                                                        |   |                                | -         |                              |   | -                                   |   |                              | 71        |   |   | 71 |   |
|                                                                                                                                                                            |   |                                | 1,504,265 |                              |   | 1,600,042                           |   |                              | 996,255   |   |   | 1,108,890 |   |
|                                                                                                                                                                            |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| **Panhandle**                                                                                                                                                                   |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| 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   |   |   | 300,000 |   |
| 6.05%                  Senior Notes due 2013                                                                                                                                    |   |                                | 250,000   |                              |   | 251,053                             |   |                              | 250,000   |   |   | 254,450 |   |
| 6.50%                  Senior Notes due 2009                                                                                                                                    |   |                                | 60,623    |                              |   | 61,721                              |   |                              | 60,623    |   |   | 63,228 |   |
| 8.25%                  Senior Notes due 2010                                                                                                                                    |   |                                | 40,500    |                              |   | 43,180                              |   |                              | 40,500    |   |   | 45,135 |   |
| 7.00%                  Senior Notes due 2029                                                                                                                                    |   |                                | 66,305    |                              |   | 71,947                              |   |                              | 66,305    |   |   | 73,521 |   |
| Term                  Loan due 2007                                                                                                                                             |   |                                | 255,626   |                              |   | 255,626                             |   |                              | 255,626   |   |   | 255,626 |   |
| Term                  Loan due 2008                                                                                                                                             |   |                                | 465,000   |                              |   | 465,000                             |   |                              | -         |   |   | - |   |
| Net                  premiums on long-term debt                                                                                                                                 |   |                                | 9,613     |                              |   | 9,613                               |   |                              | 12,205    |   |   | 12,205 |   |
|                                                                                                                                                                            |   |                                | 1,647,667 |                              |   | 1,658,140                           |   |                              | 1,185,259 |   |   | 1,204,165 |   |
|                                                                                                                                                                            |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| **Short-Term                  Debt Obligations, Excluding Current Portion of Long-Term                  Debt:**                                                                 |   |                                |      |                              |   |                                |   |                              |      |
|                                                                                                                                                                            |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| Credit                  Facilities                                                                                                                                              |   |                                | 100,000   |                              |   | 100,000                             |   |                              | 420,000   |   |   | 420,000 |   |
|                                                                                                                                                                            |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| **Total                  consolidated debt and capital lease**                                                                                                                  |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| **obligations**                                                                                                                                                                 |   |                                | 3,251,932 |                              | $      | 3,358,182                           |   |                              | 2,601,514 |   | $ | 2,733,055 |   |
| Less                  fair value swaps of Panhandle                                                                                                                             |   |                                | 1,265     |                              |   |                                |   |                              | 5,725     |   |   |   |   |
| Less                  current portion of long-term debt                                                                                                                         |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| and                  capital lease (1)                                                                                                                                          |   |                                | 461,011   |                              |   |                                |   |                              | 126,648   |   |   |   |   |
| Less                  short-term debt                                                                                                                                           |   |                                | 100,000   |                              |   |                                |   |                              | 420,000   |   |   |   |   |
| **Total                  consolidated long-term debt and**                                                                                                                      |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| **capital                  lease obligations**                                                                                                                                  |   | $                                   | 2,689,656 |                              |   |                                |   | $                                 | 2,049,141 |   |   |   |   |
|                                                                                                                                                                            |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
| (1)                  Includes $1.3 million and $5.7 million of fair value of swaps related                  to                  debt classified as current at December 31, 2006 |   |                                |      |                              |
| and                  2005, respectively.                                                                                                                                        |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
|                                                                                                                                                                            |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |
|                                                                                                                                                                            |   |                                |      |                              |   |                                |   |                              |      |   |   |   |   |

*F-35*

----

**SOUTHERN            UNION COMPANY AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS **

** **

***Long-Term            Debt and Capital Lease Obligations.***

|                                    |   |                            |    |     |   |     |   |     |   |     |   | **2012                  and** |   |
|-----------------------------------------|--------|---------------------------------|---------|----------|--------|----------|--------|----------|--------|----------|--------|-------------------------------|--------|
|                                    |   | **2007**                        |    | **2008** |   | **2009** |   | **2010** |   | **2011** |   | **thereafter**                |   |
|                                    |   | (In                  thousands) |    |
|                                    |   |                            |    |     |   |     |   |     |   |     |   |                          |   |
| Southern                  Union Company |   | $                               | -       |     | $      | 225,000  |   | $        | -      |     | $      | -                             |   | $ | - |   | $ | 1,279,265 |   |
| Panhandle                               |   |                            | 462,290 |     |   | 758,336  |   |     | 60,623 |     |   | 40,500                        |   |   | - |   |   | 316,305 |   |
|                                    |   |                            |    |     |   |     |   |     |   |     |   |                          |   |   |   |   |   |   |   |
| **Total**                               |   | $                               | 462,290 |     | $      | 983,336  |   | $        | 60,623 |     | $      | 40,500                        |   | $ | - |   | $ | 1,595,570 |   |
|                                    |   |                            |    |     |   |     |   |     |   |     |   |                          |   |   |   |   |   |   |   |

***LNG      Holdings Term Loan.***
*2006      Term Loan*
*Transwestern      Holding*

***Junior      Subordinated Notes***
***.***
*Junior      Subordinated Notes*

*F-36*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***Remarketing      Obligation.***

***Short-Term      Debt Obligations, Excluding Current Portion of Long-Term      Debt.***

***Credit      Facilities.***
*Long-Term      Facility*
*Senior      Notes*

***Sid      Richardson Bridge Loan***
***.***
*Note      19 -*
*Discontinued      Operations*

***Other      Debt Activity.***

*Note      19 - Discontinued Operations *

*F-37*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*2005      Term Loan*

*CCE      Holdings Bridge Loan*

*Panhandle      Tender Offer*
*Panhandle      Calls*

***Panhandle      Acquisition.***

***Restrictive      Covenants.***

*F-38*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|   | (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 Fall River Gas                division of New England Gas Company, 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.                                                                                                                          |

**Retirement      of Debt Obligations**

*2007        Expected TLNG Term Loan*

**14.      Benefits **

***Pension      and Other Postretirement Benefit Plans***
**.**
*pension      plans*

*F-39*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*other        postretirement plans*

*AML*

|                                                                                    |   | Pension                  Plans           |    |
|-----------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|---------|
|                                                                                    |   | Pre-SFAS                  158                                                    |    |    |   |  Pre-SFAS                  158 |   |  SFAS                  158 |   |    |   |
|                                                                                    |   | without                  AML                                                     |    |  AML |   |  with                  AML |   |  adoption |   | Post-SFAS  |   |
|                                                                                    |   | adjustment                                                                       |    |  adjustment |   |  adjustment |   |  adjustment |   |  158 |   |
|                                                                                    |   |  (in                  thousands)         |    |
| Intangible                  asset (included in *Deferred                  charges*)     |   | $                                                                                     | 4,883   |   | $ | (1,085 | ) | $ | 3,798 |   | $ | (3,798 | ) | $ | - |   |
| Pension                  liabilities, current (included in *Other*                      |   |                                                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *current                  liabilities*)                                                 |   |                                                                                  | -       |   |   | - |   |   | - |   |   | 13 |   |   | 13 |   |
| Pension                  liabilities, noncurrent*(*included                  in* * |   |                                                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Deferred                  credits*)                                                    |   |                                                                                  | 58,062  |   |   | (12,016 | ) |   | 46,046 |   |   | 7,066 |   |   | 53,112 |   |
| Accumulated                  deferred income taxes (benefit)                            |   |                                                                                  | (16,234 | ) |   | 4,128 |   |   | (12,106 | ) |   | (4,107 | ) |   | (16,213 | ) |
| Accumulated                  other comprehensive income (loss), net of tax              |   |                                                                                  | (26,711 | ) |   | 6,803 |   |   | (19,908 | ) |   | (6,770 | ) |   | (26,678 | ) |
| Accumulated                  other comprehensive income (loss), pre-tax                 |   |                                                                                  | (42,945 | ) |   | 10,931 |   |   | (32,014 | ) |   | (10,877 | ) |   | (42,891 | ) |
|                                                                                    |   |                                                                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                                                                       |   | Other                  Postretirement                  Plans          |   |
|----------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|
|                                                                       |   | Pre-SFAS                  158                                                                                 |   |    |   |  Pre-SFAS                  158 |   |  SFAS                  158 |   |    |   |
|                                                                       |   | without                  AML                                                                                  |   |  AML |   |  with                  AML |   |  adoption |   | Post-SFAS  |   |
|                                                                       |   | adjustment                                                                                                    |   |  adjustment |   |  adjustment |   |  adjustment |   |  158 |   |
|                                                                       |   |  (in                  thousands)                                      |   |
| Prepaid                  postretirement costs (included in *Deferred*      |   |                                                                                                          |   |    |   |    |   |    |   |    |   |
| *charges*)                                                                 |   | $                                                                                                                  | -      |   | $ | - |   | $ | - |   | $ | 248 |   | $ | 248 |   |
| Postretirement                  liabilities, current (included in *Other*  |   |                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *current                  liabilities*)                                    |   |                                                                                                               | -      |   |   | - |   |   | - |   |   | 87 |   |   | 87 |   |
| Postretirement                  liabilities, noncurrent (included in       |   |                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Deferred                  credits*)                                       |   |                                                                                                               | 57,258 |   |   | - |   |   | 57,258 |   |   | (29,402 | ) |   | 27,856 |   |
| Accumulated                  deferred income taxes                         |   |                                                                                                               | -      |   |   | - |   |   | - |   |   | 6,750 |   |   | 6,750 |   |
| Accumulated                  other comprehensive income (loss), net of tax |   |                                                                                                               | -      |   |   | - |   |   | - |   |   | 22,813 |   |   | 22,813 |   |
| Accumulated                  other comprehensive income (loss), pre-tax    |   |                                                                                                               | -      |   |   | - |   |   | - |   |   | 29,563 |   |   | 29,563 |   |
|                                                                       |   |                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

*F-40*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                     |     |                                            |   | **Other** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|----------|-------------------------------------------------|--------|-----------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **Pension                  Benefits At** |     | **Postretirement                  Benefits At** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **December                  31,**        |     | **December                  31,**               |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **2006**                                 |     | **2005**                                        |   | **2006**  |   | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (In                  thousands)          |     |
| Change                  in Benefit Obligation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                     |     |                                            |   |      |   |   |   |
| Benefit                  obligation at beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $                                        | 415,338  |                                            | $      | 398,516   |   | $ | 115,148 |   | $ | 168,953 |   |
| Service                  cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                     | 7,443    |                                            |   | 7,614     |   |   | 2,507 |   |   | 3,631 |   |
| Interest                  Cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                     | 20,889   |                                            |   | 22,396    |   |   | 5,556 |   |   | 7,594 |   |
| Benefits                  paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                     | (19,668  | )                                               |   | (20,816   | )      |   | (4,418 | ) |   | (5,121 | ) |
| Actuarial                  (gain) loss and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                     | (24,347  | )                                               |   | 19,956    |   |   | (9,925 | ) |   | (31,701 | ) |
| Plan                  amendments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                     | -        |                                            |   | -         |   |   | 972 |   |   | (28,208 | ) |
| Curtailment                  recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                     | (28,119  | )                                               |   | 103       |   |   | (2,250 | ) |   | - |   |
| Settlement                  recognition (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     | (208,581 | )                                               |   | (12,431   | )      |   | (33,508 | ) |   | - |   |
| Benefit                  obligation at end of period                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $                                        | 162,955  |                                            | $      | 415,338   |   | $ | 74,082 |   | $ | 115,148 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
| Change                  in Plan Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
| Fair                  value of plan assets at beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | $                                        | 298,289  |                                            | $      | 276,835   |   | $ | 45,509 |   | $ | 37,962 |   |
| Return                  on plan assets and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                     | 17,187   |                                            |   | 35,936    |   |   | 3,203 |   |   | 1,487 |   |
| Employer                  contributions                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                     | 28,399   |                                            |   | 18,765    |   |   | 14,926 |   |   | 11,181 |   |
| Benefits                  paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                     | (19,668  | )                                               |   | (20,816   | )      |   | (4,418 | ) |   | (5,121 | ) |
| Settlement                  recognition (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     | (215,574 | )                                               |   | (12,431   | )      |   | (12,987 | ) |   | - |   |
| Fair                  value of plan assets at end of period                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $                                        | 108,633  |                                            | $      | 298,289   |   | $ | 46,233 |   | $ | 45,509 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
| Funded                  Status:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
| Funded                  status at measurement date                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | $                                        | (54,322  | )                                               | $      | (117,049  | )      | $ | (27,849 | ) | $ | (69,639 | ) |
| Contributions                  subsequent to measurement date                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                     | 1,197    |                                            |   | 1,184     |   |   | 154 |   |   | 3,787 |   |
| Funded                  status at end of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                                        | (53,125  | )                                               |   | (115,865  | )      | $ | (27,695 | ) |   | (65,852 | ) |
| Unrecognized                  net actuarial loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                     |     |                                            |   | 128,930   |   |   |   |   |   | 9,404 |   |
| Unrecognized                  prior service cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                     |     |                                            |   | 9,085     |   |   |   |   |   | (23,940 | ) |
| Net                  amounts recognized                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                     |     |                                            | $      | 22,150    |   |   |   |   | $ | (80,388 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
| Amounts                  recognized in the Consolidated Balance Sheet (2):                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
| Prepaid                  benefit cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | $                                        | -        |                                            | $      | 29,456    |   | $ | 248 |   | $ | - |   |
| Accrued                  benefit liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                     | (53,125  | )                                               |   | (100,838  | )      |   | (27,943 | ) |   | (80,388 | ) |
| Intangible                  asset                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     | -        |                                            |   | 8,249     |   |   | - |   |   | - |   |
| Accumulated                  other comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                     | -        |                                            |   | 85,283    |   |   | - |   |   | - |   |
| Net                  asset (liability) recognized                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | $                                        | (53,125  | )                                               | $      | 22,150    |   | $ | (27,695 | ) | $ | (80,388 | ) |
| ______________________                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
| (1)                  Effective August 24, 2006, the Company transferred five pension                  plans and                  two other postretirement plans to the buyers                                                                                                                                                                                                                                                                                                                                   |   |                                     |     |                                            |
| of                  the assets of the Company's PG Energy natural gas distribution                  division                  and the Rhode Island operations of its New England                                                                                                                                                                                                                                                                                                                                |   |                                     |     |                                            |
| Natural                  Gas Company natural gas distribution division.                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
| (2)                  As of December 31, 2006, the Company’s pension plans had current                  liabilities of $13,000, noncurrent liabilities of $53.1 million                  and no                  noncurrent assets. The                          Company's other postretirement plans had current liabilities of                  $87,000,                  noncurrent liabilities of $27.9 million and noncurrent assets of                  $248,000. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                     |     |                                            |   |      |   |   |   |   |   |   |   |

*F-41*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Accumulated      other comprehensive loss*

|                                         |   |                                        |   |  **Other**                                    |   |
|----------------------------------------------|--------|---------------------------------------------|--------|----------------------------------------------------|--------|
|                                         |   | **Pension                  Benefits**       |   |  **Postretirement                  Benefits** |   |
|                                         |   |  (In                  thousands)  |   |
|                                         |   |                                        |   |                                          |   |
| Net                  actuarial loss (gain)   |   | $                                           | 39,093 |                                               | $      | (11,128 | ) |
| Prior                  service cost (credit) |   |                                        | 3,798  |                                               |   | (18,435 | ) |
| Total                  amount recognized     |   | $                                           | 42,891 |                                               | $      | (29,563 | ) |
|                                         |   |                                        |   |                                               |   |   |   |

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

|                                            |   |                                  |    |                              |   |                                         |   | **Other**                         |   |
|-------------------------------------------------|--------|---------------------------------------|---------|-----------------------------------|--------|----------------------------------------------|--------|-----------------------------------|--------|
|                                            |   | **Pension                  Benefits** |    |                              |   | **Postretirement                  Benefits** |   |
|                                            |   | **December                  31,**     |    | **December                  31,** |   |                                         |   | **December                  31,** |   | **December                  31,** |   |
|                                            |   | **2006**                              |    | **2005**                          |   |                                         |   | **2006**                          |   | **2005** |   |
|                                            |   |  (In                  thousands) |    |
|                                            |   |                                  |    |                              |   |                                         |   |                              |   |   |   |
| Projected                  benefit obligation   |   | $                                     | 162,955 |                              | $      | 379,474                                      |   |                              |   |   | N/A |   |   | N/A |   |
| Accumulated                  benefit obligation |   |                                  | 155,876 |                              |   | 348,593                                      |   |                              |   | $ | 68,033 |   | $ | 115,148 |   |
| Fair                  value of plan assets      |   |                                  | 108,633 |                              |   | 246,571                                      |   |                              |   |   | 39,937 |   |   | 45,509 |   |

|                                           |   | **Pension                  Benefits** |   |                              | **Other                  Postretirement Benefits** |                            |
|------------------------------------------------|--------|---------------------------------------|--------|-----------------------------------|----------------------------------------------------|---------------------------------|
|                                           |   |                                  |   |                              |                                               | **Six                  Months** |   | **Year** |   |   |   |   |   | **Six                  Months** |   | **Year** |   |
|                                           |   | **Years                  Ended**      |   | **Ended**                         |                                               | **Ended**                       |   | **Years                  Ended** |   | **Ended** |   | **Ended** |   |
|                                           |   | **December                  31,**     |   | **December                  31,** |                                               | **June                  30,**   |   | **December                  31,** |   | **December                  31,** |   | **June                  30,** |   |
|                                           |   | **2006**                              |   | **2005**                          |                                               | **2004**                        |   | **2004** |   | **2006** |   | **2005** |   | **2004** |   | **2004** |   |
|                                           |   |                                  |   |                              |                                               |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount                  rate                 |   |                                  | 5.77   | %                                 |                                               | 5.50                            | % |   | 5.75 | % |   | 6.00 | % |   | 5.78 | % |   | 5.50 | % |   | 5.75 | % |   | 6.00 | % |
| Rate                  of compensation increase |   |                                  |   |                              |                                               |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (average)                                      |   |                                  | 3.24   | %                                 |                                               | 3.24                            | % |   | 3.40 | % |   | 3.60 | % |   | N/A |   |   | N/A |   |   | N/A |   |   | N/A |   |
| Health                  care cost trend rate   |   |                                  | N/A    |                              |                                               | N/A                             |   |   | N/A |   |   | N/A |   |   | 11.00 | % |   | 12.00 | % |   | 13.00 | % |   | 13.00 | % |

*F-42*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                                |   | **December                  31,** |   | **June                  30,** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|-------------------------------|--------|
|                                                                |   | **2006**                          |   | **2005**                      |   | **2004** |   | **2004** |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |
| Health                  care cost trend rate assumed for next year  |   |                              | 11.00  | %                             |   | 12.00 | % |   | 13.00 | % |   | 13.00 | % |
| Ultimate                  trend rate                                |   |                              | 4.80   | %                             |   | 4.65 | % |   | 4.75 | % |   | 4.75 | % |
| Year                  that the rate reaches the ultimate trend rate |   |                              | 2013   |                          |   | 2012 |   |   | 2012 |   |   | 2012 |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |   |   |   |   |

*Note      19 - *
*Discontinued      Operations *

|                                              |   | **Pension                  Benefits** |   | **Other                  Postretirement Benefits** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------------|--------|
|                                              |   |                                  |   |                                               |   | **Six                  Months** |   | **Year** |   |   |   |   |   | **Six                  Months** |   | **Year** |   |
|                                              |   | **Years                  Ended**      |   | **Ended**                                          |   | **Ended** |   | **Years                  Ended** |   | **Ended** |   | **Ended** |   |
|                                              |   | **December                  31,**     |   | **December                  31,**                  |   | **June                  30,** |   | **December                  31,** |   | **December                  31,** |   | **June                  30,** |   |
|                                              |   | **2006**                              |   | **2005**                                           |   | **2004** |   | **2004** |   | **2006** |   | **2005** |   | **2004** |   | **2004** |   |
|                                              |   | (In                  thousands)       |   |
|                                              |   |                                  |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service                  cost                     |   | $                                     | 2,599  |                                               | $      | 2,550 |   | $ | 1,185 |   | $ | 2,018 |   | $ | 1,890 |   | $ | 2,908 |   | $ | 1,615 |   | $ | 3,164 |   |
| Interest                  cost                    |   |                                  | 8,899  |                                               |   | 9,355 |   |   | 4,847 |   |   | 9,674 |   |   | 3,615 |   |   | 4,908 |   |   | 2,889 |   |   | 5,419 |   |
| Expected                  return on plan assets   |   |                                  | (8,909 | )                                                  |   | (8,728 | ) |   | (4,525 | ) |   | (7,988 | ) |   | (1,871 | ) |   | (1,375 | ) |   | (509 | ) |   | (587 | ) |
| Prior                  service cost amortization  |   |                                  | 584    |                                               |   | 782 |   |   | 544 |   |   | 839 |   |   | (3,011 | ) |   | (551 | ) |   | 223 |   |   | 149 |   |
| Recognized                  actuarial (gain) loss |   |                                  | 7,236  |                                               |   | 5,364 |   |   | 2,022 |   |   | 3,331 |   |   | (145 | ) |   | (163 | ) |   | (179 | ) |   | (575 | ) |
| Curtailment                  recognition          |   |                                  | -      |                                               |   | 3,172 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Settlement                  recognition           |   |                                  | -      |                                               |   | (644 | ) |   | (386 | ) |   | (445 | ) |   | - |   |   | - |   |   | - |   |   | - |   |
| Sub-total                                         |   |                                  | 10,409 |                                               |   | 11,851 |   |   | 3,687 |   |   | 7,429 |   |   | 478 |   |   | 5,727 |   |   | 4,039 |   |   | 7,570 |   |
| Regulatory                  adjustment            |   |                                  | (7,710 | )                                                  |   | (7,521 | ) |   | - |   |   | - |   |   | 2,665 |   |   | 2,665 |   |   | 1,332 |   |   | 2,665 |   |
| Net                  periodic benefit cost        |   | $                                     | 2,699  |                                               | $      | 4,330 |   | $ | 3,687 |   | $ | 7,429 |   | $ | 3,143 |   | $ | 8,392 |   | $ | 5,371 |   | $ | 10,235 |   |
|                                              |   |                                  |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

*ERISA*

*F-43*

----

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS **

*Note          19 - Discontinued Operations*

|                                           |   | **Pension                  Benefits** |   | **Other                  Postretirement Benefits** |   |
|------------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------------|--------|
|                                           |   |                                  |   |                                               |   | **Six                  Months** |   | **Year** |   |   |   |   |   | **Six                  Months** |   | **Year** |   |
|                                           |   | **Years                  Ended**      |   | **Ended**                                          |   | **Ended** |   | **Years                  Ended** |   | **Ended** |   | **Ended** |   |
|                                           |   | **December                  31,**     |   | **December                  31,**                  |   | **June                  30,** |   | **December                  31,** |   | **December                  31,** |   | **June                  30,** |   |
|                                           |   | **2006**                              |   | **2005**                                           |   | **2004** |   | **2004** |   | **2006** |   | **2005** |   | **2004** |   | **2004** |   |
|                                           |   |                                  |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount                  rate                 |   |                                  | 5.50   | %                                                  |   | 5.75 | % |   | 6.00 | % |   | 6.50 | % |   | 5.50 | % |   | 5.75 | % |   | 6.00 | % |   | 6.50 | % |
| Expected                  return on assets -   |   |                                  |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax                  exempt accounts           |   |                                  | 8.75   | %                                                  |   | 9.00 | % |   | 9.00 | % |   | 9.00 | % |   | 7.00 | % |   | 7.00 | % |   | 7.00 | % |   | 7.00 | % |
| Expected                  return on assets -   |   |                                  |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| taxable                  accounts              |   |                                  | N/A    |                                               |   | N/A |   |   | N/A |   |   | N/A |   |   | 5.00 | % |   | 5.00 | % |   | 5.00 | % |   | 5.00 | % |
| Rate                  of compensation increase |   |                                  | 3.24   | %                                                  |   | 3.40 | % |   | 3.60 | % |   | 4.00 | % |   | N/A |   |   | N/A |   |   | N/A |   |   | N/A |   |
| Health                  cost trend rate        |   |                                  | N/A    |                                               |   | N/A |   |   | N/A |   |   | N/A |   |   | 11.00 | % |   | 13.00 | % |   | 13.00 | % |   | 13.00 | % |

|                                                                |   | **December                  31,** |   | **June                  30,** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|-------------------------------|--------|
|                                                                |   | **2006**                          |   | **2005**                      |   | **2004** |   | **2004** |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |
| Health                  care cost trend rate assumed for next year  |   |                              | 11.00  | %                             |   | 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 |   |
|                                                                |   |                              |   |                          |   |   |   |   |   |   |   |   |   |

|                                                                      |   |   | **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     |   |   | $                                            | 733    |                                         | $      | (588 | ) |
| Effect                  on accumulated post-retirement benefit obligation |   |   | $                                            | 7,092  |                                         | $      | (5,763 | ) |
|                                                                      |   |   |                                         |   |                                         |   |   |   |

*F-44*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

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

***Pension      Plan Asset Information.***

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

|                                      |   | **Pension                  Benefits** |   | **Other                  Postretirement Benefits** |   |
|-------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------------|--------|
|                                      |   | **At                  September 30,** |   | **At                  September 30,**              |   |
| **Asset                  Category**       |   | **2006**                              |   | **2005**                                           |   | **2006** |   | **2005** |   |
|                                      |   |                                  |   |                                               |   |   |   |   |   |   |   |   |   |
| Equity                  securities        |   |                                  | 76     | %                                                  |   | 74 | % |   | 24 | % |   | 15 | % |
| Debt                  securities          |   |                                  | 10     | %                                                  |   | 19 | % |   | 66 | % |   | 37 | % |
| Other                  - cash equivalents |   |                                  | 14     | %                                                  |   | 7 | % |   | 10 | % |   | 48 | % |
| Total                                     |   |                                  | 100    | %                                                  |   | 100 | % |   | 100 | % |   | 100 | % |
|                                      |   |                                  |   |                                               |   |   |   |   |   |   |   |   |   |

*F-45*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|      |   |                                        |   | **Other**                             |   |  **Other**                             |   |
|-----------|--------|---------------------------------------------|--------|---------------------------------------|--------|---------------------------------------------|--------|
|      |   |                                        |   | **Postretirement**                    |   |  **Postretirement**                    |   |
|      |   |                                        |   | **Benefits**                          |   |  **Benefits**                          |   |
|      |   | **Pension**                                 |   | **(Gross,                  Before**   |   |  **(Medicare                  Part D** |   |
| **Years** |   | **Benefits**                                |   | **Medicare                  Part D)** |   |  **Subsidy)**                          |   |
|      |   | (In                  thousands)   |   |
|      |   |                                        |   |                                  |   |                                   |   |
| 2007      |   | $                                           | 10,613 |                                  | $      | 4,454                                       |   | $ | 535 |   |
| 2008      |   |                                        | 10,152 |                                  |   | 4,501                                       |   |   | 606 |   |
| 2009      |   |                                        | 10,670 |                                  |   | 4,243                                       |   |   | 680 |   |
| 2010      |   |                                        | 10,801 |                                  |   | 4,562                                       |   |   | 760 |   |
| 2011      |   |                                        | 10,735 |                                  |   | 4,824                                       |   |   | 651 |   |
| 2012-2016 |   |                                        | 59,146 |                                  |   | 33,433                                      |   |   | 4,256 |   |

*Medicare      Part D*

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

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

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

*F-46*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**15.      Taxes on Income **

|                                           |   |                              |    |                              |   | **Six                  Months** |   | **Year** |   |
|------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|---------------------------------|--------|----------|--------|
|                                           |   | **Years                  Ended**  |    | **Ended**                         |   | **Ended**                       |   |
|                                           |   | **December                  31,** |    | **December                  31,** |   | **June                  30,**   |   |
| **Income                  Tax Expense**        |   | **2006**                          |    | **2005**                          |   | **2004**                        |   | **2004** |   |
|                                           |   | (In                  thousands)   |    |
| Current:                                       |   |                              |    |                              |   |                            |   |     |   |   |   |   |   |
| Federal                                        |   | $                                 | 19,798  |                              | $      | 168                             |   | $        | 1,692  |   | $ | (15,677 | ) |
| State                                          |   |                              | 2,251   |                              |   | 1,062                           |   |     | (221   | ) |   | (2,224 | ) |
|                                           |   |                              | 22,049  |                              |   | 1,230                           |   |     | 1,471  |   |   | (17,901 | ) |
|                                           |   |                              |    |                              |   |                            |   |     |   |   |   |   |   |
| Deferred:                                      |   |                              |    |                              |   |                            |   |     |   |   |   |   |   |
| Federal                                        |   |                              | 74,563  |                              |   | 43,110                          |   |     | 7,143  |   |   | 51,372 |   |
| State                                          |   |                              | 12,635  |                              |   | 5,712                           |   |     | 1,292  |   |   | 8,582 |   |
|                                           |   |                              | 87,198  |                              |   | 48,822                          |   |     | 8,435  |   |   | 59,954 |   |
|                                           |   |                              |    |                              |   |                            |   |     |   |   |   |   |   |
| Total                  income tax expense from |   |                              |    |                              |   |                            |   |     |   |   |   |   |   |
| continuing                  operations         |   | $                                 | 109,247 |                              | $      | 50,052                          |   | $        | 9,906  |   | $ | 42,053 |   |
|                                           |   |                              |    |                              |   |                            |   |     |   |   |   |   |   |

*F-47*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                            |   | **December                  31,** |     |   |   | **December                  31,** |   |
|-----------------------------------------------------------------|--------|-----------------------------------|----------|--------|--------|-----------------------------------|--------|
| **Deferred                  Income Tax Analysis**               |   | **2006**                          |     |   |   | **2005**                          |   |
|                                                            |   | (In                  thousands)   |     |
| Deferred                  income tax assets:                    |   |                              |     |   |   |                              |   |
| Alternative                  minimum tax credit                 |   | $                                 | 8,178    |   |   |                              | $      | 26,089 |   |
| Post-retirement                  benefits                       |   |                              | 17,673   |   |   |                              |   | 21,198 |   |
| Pension                  benefits                               |   |                              | 13,810   |   |   |                              |   | 34,017 |   |
| Unconsolidated                  investments                     |   |                              | 11,530   |   |   |                              |   | 11,345 |   |
| Other                                                           |   |                              | 27,936   |   |   |                              |   | 42,544 |   |
| Total                  deferred income tax assets               |   |                              | 79,127   |   |   |                              |   | 135,193 |   |
|                                                            |   |                              |     |   |   |                              |   |   |   |
| Deferred                  income tax liabilities:               |   |                              |     |   |   |                              |   |   |   |
| Property,                  plant and equipment                  |   |                              | (624,797 | )      |   |                              |   | (448,359 | ) |
| Unconsolidated                  investments-Citrus/CCE Holdings |   |                              | (19,462  | )      |   |                              |   | (7,961 | ) |
| Goodwill                                                        |   |                              | (14,592  | )      |   |                              |   | (19,365 | ) |
| Regulatory                  liability                           |   |                              | (2,989   | )      |   |                              |   | (14,620 | ) |
| Other                                                           |   |                              | (34,976  | )      |   |                              |   | (31,943 | ) |
| Total                  deferred income tax liabilities          |   |                              | (696,816 | )      |   |                              |   | (522,248 | ) |
| Net                  deferred income tax liability              |   |                              | (617,689 | )      |   |                              |   | (387,055 | ) |
| Less                  current income tax assets (liabilities)   |   |                              | (512     | )      |   |                              |   | 9,435 |   |
| Accumulated                  deferred income taxes              |   | $                                 | (617,177 | )      |   |                              | $      | (396,490 | ) |
|                                                            |   |                              |     |   |   |                              |   |   |   |

*Deferred      credits*

*F-48*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                                   |   | **Year**                          |    | **Year**                          |   | **Six                  Months**   |   | **Year**                      |   |
|------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|-----------------------------------|--------|-------------------------------|--------|
|                                                                   |   | **Ended**                         |    | **Ended**                         |   | **Ended**                         |   | **Ended**                     |   |
|                                                                   |   | **December                  31,** |    | **December                  31,** |   | **December                  31,** |   | **June                  30,** |   |
| **Effective                  Income Tax Rate Analysis**                |   | **2006**                          |    | **2005**                          |   | **2004**                          |   | **2004**                      |   |
|                                                                   |   | (In                  thousands)   |    |
| Computed                  statutory income tax expense                 |   |                              |    |                              |   |                              |   |                          |   |   |   |   |   |
| from                  continuing operations at 35%                     |   | $                                 | 114,215 |                              | $      | 71,102                            |   | $                             | 5,934  |   | $ | 37,264 |   |
| Changes                  in income taxes resulting from:               |   |                              |    |                              |   |                              |   |                          |   |   |   |   |   |
| Valuation                  allowance                                   |   |                              | -       |                              |   | (11,942                           | )      |                          | 11,942 |   |   | - |   |
| Dividend                  received deduction                           |   |                              | (10,696 | )                                 |   | (8,732                            | )      |                          | (9,800 | ) |   | - |   |
| Executive                  compensation, non deductible                |   |                              | 5,063   |                              |   | -                                 |   |                          | -      |   |   | - |   |
| State                  income taxes, net of federal income tax benefit |   |                              | 9,411   |                              |   | 4,403                             |   |                          | 696    |   |   | 4,133 |   |
| Analysis                  of deferred tax accounts                     |   |                              | (7,490  | )                                 |   | (4,757                            | )      |                          | -      |   |   | - |   |
| Other                                                                  |   |                              | (1,256  | )                                 |   | (22                               | )      |                          | 1,134  |   |   | 656 |   |
| Actual                  income tax expense from continuing operations  |   | $                                 | 109,247 |                              | $      | 50,052                            |   | $                             | 9,906  |   | $ | 42,053 |   |
|                                                                   |   |                              |    |                              |   |                              |   |                          |   |   |   |   |   |

**16.      Regulation and Rates**

***Panhandle***
***.***
*Trunkline      LNG*
*Bcf/d*
*Construction      work-in-progress*

*Construction      work-in-progress *

*Construction      work-in-progress *

*F-49*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Trunkline*
*CIAC*
*Construction        work-in-progress *

*Southwest      Gas Storage*

*HCAs*

***Missouri      Gas Energy***
***.***
*MPSC*

*F-50*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***New      England Gas Company.***

**17.      Leases**

**18.      Commitments and Contingencies **

**Environmental**

*Environmental      Remediation Liabilities*

*F-51*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                             |   | **December                  31,** |   | **December                  31,** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                                             |   | **2006**                          |   | **2005**                          |   |
|                                             |   | (In                  thousands)   |   |
|                                             |   |                              |   |                              |   |   |   |
| Current                                          |   | $                                 | 5,098  |                              | $      | 6,541 |   |
| Noncurrent                                       |   |                              | 18,632 |                              |   | 27,274 |   |
| Total                  Environmental Liabilities |   | $                                 | 23,730 |                              | $      | 33,815 |   |
|                                             |   |                              |   |                              |   |   |   |

***Transportation      and Storage Segment Environmental Matters.***

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

*Pierce      Waste Oil sites*
*PRP*

*F-52*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Illinois        EPA*

*MDEQ*

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

*F-53*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*HAPs*

***Spill      Control.***
*SPCC*

***Gathering      and Processing Segment Environmental Matters.***

***Gathering      and Processing***
***Systems.***

***Air      Quality Control***
***.***
*TCEQ*

***Spill      Control***
***.***

*F-54*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

***Distribution      Segment Environmental Matters.***

*MGPs*

***North      Attleborough MGP Site in Massachusetts.***
*MADEP*
*Regulatory      Assets*

**Litigation**

*Accounting      for Contingencies*

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

*F-55*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

***Mercury      Release***
***.***

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

*F-56*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***Jack        Grynberg**.****Company        Defendants*

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

***Mineral      Management***
***Service.***
*MMS*

**Other      Commitments and Contingencies. **

***Hurricane-Related      Expenditures.***
*Sea      Robin*

*F-57*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

***Panhandle      Capital Expenditures.***

***Energy      Transfer Commitment.***

***Purchase      Commitments.***

***TIF      Debt Guarantee.***
*Taxing      Authorities*
*TIF      Plan*
*TIF      Debt*

*F-58*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

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

***Other.***

**19.      Discontinued Operations **

*Discontinued      operations*

*Earnings      from discontinued operations before income taxes*

*F-59*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

*Note      7 - Goodwill and Intangibles*

|                                                                                                                                                                                                                                   |   | **Year                  Ended**                                    |     | **Year                  Ended**   |   | **Six                  Months Ended** |   | **Year                  Ended** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|----------|-----------------------------------|--------|---------------------------------------|--------|---------------------------------|---------|
|                                                                                                                                                                                                                                   |   | **December                  31,**                                  |     | **December                  31,** |   | **December                  31,**     |   | **June                  30,**   |    |
|                                                                                                                                                                                                                                   |   | **                       2006  (2)** |     | **2005**                          |   | **2004**                              |   | **2004**                        |    |
|                                                                                                                                                                                                                                   |   |  (In                  thousands,except per share amounts)     |     |
|                                                                                                                                                                                                                                   |   |                                                               |     |                              |   |                                  |   |                            |    |
| Operating                  revenues                                                                                                                                                                                                    |   | $                                                                  | 512,935  |                              | $      | 752,549                               |   | $                               | 276,489 |   | $ | 650,506 |   |
| Operating                  income (loss)                                                                                                                                                                                               |   |                                                               | 54,662   |                              |   | (106,073                              | )      |                            | 13,986  |   |   | 78,007 |   |
| Net                  earnings (loss) from                                                                                                                                                                                              |   |                                                               |     |                              |   |                                  |   |                            |    |   |   |   |   |
| discontinued                  operations (1)                                                                                                                                                                                           |   |                                                               | (152,952 | )                                 |   | (132,413                              | )      |                            | 7,723   |   |   | 49,610 |   |
| Net                  earnings (loss) available from                                                                                                                                                                                    |   |                                                               |     |                              |   |                                  |   |                            |    |   |   |   |   |
| discontinued                  operations per share:                                                                                                                                                                                    |   |                                                               |     |                              |   |                                  |   |                            |    |   |   |   |   |
| Basic                                                                                                                                                                                                                                  |   | $                                                                  | (1.33    | )                                 | $      | (1.21                                 | )      | $                               | 0.09    |   | $ | 0.62 |   |
| Diluted                                                                                                                                                                                                                                |   | $                                                                  | (1.30    | )                                 | $      | (1.17                                 | )      | $                               | 0.09    |   | $ | 0.61 |   |
| __________________                                                                                                                                                                                                                     |   |                                                               |     |                              |   |                                  |   |                            |    |   |   |   |   |
| (1)                      Net earnings (loss) from discontinued operations do not include                  any                  allocation of corporate interest expense or other corporate                  costs. |   |                                                               |
| (2)                   Represents results of operations for year 2006 through August 24,                  2006.                                                                                                                    |   |                                                               |     |                              |   |                                  |   |                            |    |   |   |   |   |
|                                                                                                                                                                                                                                   |   |                                                               |     |                              |   |                                  |   |                            |    |   |   |   |   |

**20.      Asset Retirement Obligations**

*Conditional      ARO*

*F-60*

----

**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                      |   | $ | 3,962 |   |
|                                           |   |                            |    |                                   |   |                                                         |   |   |   |   |
| Other                                          |   |                            | Various |                                   |   | Mainlines,                  compressors and gathering plants |   |   | 1,385 |   |

|                                          |   | **Year                  Ended**                          |   | **Year                  Ended**   |   | **Six                  Months Ended** |   | **Year                  Ended** |   |
|-----------------------------------------------|--------|----------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------|--------|---------------------------------|--------|
|                                          |   | **December                  31,**                        |   | **December                  31,** |   | **December                  31,**     |   | **June                  30,**   |   |
|                                          |   | **                       2006** |   | **2005**                          |   | **2004**                              |   | **2004**                        |   |
|                                          |   |  (In                  thousands)               |   |
|                                          |   |                                                     |   |                              |   |                                  |   |                            |   |   |   |   |   |
| Beginning                  balance            |   | $                                                        | 8,200  |                              | $      | 5,657                                 |   | $                               | 6,407  |   | $ | 6,757 |   |
| Addition                  from Sid Richardson |   |                                                     |   |                              |   |                                  |   |                            |   |   |   |   |   |
| Energy                  Services acquisition  |   |                                                     | 885    |                              |   | -                                     |   |                            | -      |   |   | - |   |
| Incurred                                      |   |                                                     | 1,189  |                              |   | 2,371                                 |   |                            | -      |   |   | 395 |   |
| Settled                                       |   |                                                     | (414   | )                                 |   | (285                                  | )      |                            | (999   | ) |   | (1,373 | ) |
| Accretion                  expense            |   |                                                     | 675    |                              |   | 457                                   |   |                            | 249    |   |   | 628 |   |
| Ending                  balance               |   | $                                                        | 10,535 |                              | $      | 8,200                                 |   | $                               | 5,657  |   | $ | 6,407 |   |
|                                          |   |                                                     |   |                              |   |                                  |   |                            |   |   |   |   |   |

**21.      Reportable Segments**

*Note        3 - Acquisitions and Sales - CCE Holdings Transactions.*

*Note        3 - Acquisition of Sid Richardson Energy Services*

*F-61*

----

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS **

*Note          19 - Discontinued Operations*

*EBIT*
*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. |
|--------------------|----------------------------------------------|

*F-62*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                                                                     |   | **Year**                          |      | **Year**                          |   | **Six                  Months**   |   | **Year**                      |    |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|-----------------------------------|--------|-------------------------------|---------|
|                                                                                                     |   | **Ended**                         |      | **Ended**                         |   | **Ended**                         |   | **Ended**                     |    |
|                                                                                                     |   | **December                  31,** |      | **December                  31,** |   | **December                  31,** |   | **June                  30,** |    |
| **Segment                  Data**                                                                        |   | **2006**                          |      | **2005**                          |   | **2004**                          |   | **2004**                      |    |
|                                                                                                     |   | (In                  thousands)   |      |
| Revenues                  from external customers:                                                       |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Transportation                  and Storage                                                         |   | $                                 | 577,182   |                              | $      | 505,233                           |   | $                             | 242,743 |   | $ | 490,883 |   |
| Gathering                  and Processing                                                           |   |                              | 1,090,216 |                              |   | -                                 |   |                          | -       |   |   | - |   |
| Distribution                                                                                        |   |                              | 668,721   |                              |   | 752,699                           |   |                          | 273,597 |   |   | 655,696 |   |
| Total                  segment operating revenues                                                   |   |                              | 2,336,119 |                              |   | 1,257,932                         |   |                          | 516,340 |   |   | 1,146,579 |   |
| Corporate                  and other                                                                |   |                              | 4,025     |                              |   | 8,950                             |   |                          | 1,509   |   |   | 2,689 |   |
|                                                                                                     |   | $                                 | 2,340,144 |                              | $      | 1,266,882                         |   | $                             | 517,849 |   | $ | 1,149,268 |   |
|                                                                                                     |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Depreciation                  and amortization:                                                          |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Transportation                  and Storage                                                         |   | $                                 | 72,724    |                              | $      | 62,171                            |   | $                             | 30,159  |   | $ | 59,988 |   |
| Gathering                  and Processing                                                           |   |                              | 47,321    |                              |   | -                                 |   |                          | -       |   |   | - |   |
| Distribution                                                                                        |   |                              | 30,353    |                              |   | 29,447                            |   |                          | 16,527  |   |   | 26,582 |   |
| Total                  segment depreciation and amortization                                        |   |                              | 150,398   |                              |   | 91,618                            |   |                          | 46,686  |   |   | 86,570 |   |
| Corporate                  and other                                                                |   |                              | 1,705     |                              |   | 944                               |   |                          | 707     |   |   | 1,165 |   |
|                                                                                                     |   | $                                 | 152,103   |                              | $      | 92,562                            |   | $                             | 47,393  |   | $ | 87,735 |   |
|                                                                                                     |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Earnings                  (loss) from unconsolidated investments:                                        |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Transportation                  and Storage                                                         |   | $                                 | 141,310   |                              | $      | 70,618                            |   | $                             | 4,761   |   | $ | 200 |   |
| Gathering                  and Processing                                                           |   |                              | (188      | )                                 |   | -                                 |   |                          | -       |   |   | - |   |
| Corporate                  and other                                                                |   |                              | 248       |                              |   | 124                               |   |                          | (16     | ) |   | - |   |
|                                                                                                     |   | $                                 | 141,370   |                              | $      | 70,742                            |   | $                             | 4,745   |   | $ | 200 |   |
|                                                                                                     |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Other                  income (expense), net:                                                            |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Transportation                  and Storage                                                         |   | $                                 | 3,354     |                              | $      | 571                               |   | $                             | 89      |   | $ | 7,210 |   |
| Gathering                  and Processing                                                           |   |                              | 1,571     |                              |   | -                                 |   |                          | -       |   |   | - |   |
| Distribution                                                                                        |   |                              | (2,130    | )                                 |   | (2,598                            | )      |                          | (1,397  | ) |   | (1,920 | ) |
| Total                  segment other income (expense), net                                          |   |                              | 2,795     |                              |   | (2,027                            | )      |                          | (1,308  | ) |   | 5,290 |   |
| Corporate                  and other                                                                |   |                              | 37,123    |                              |   | (6,214                            | )      |                          | (17,830 | ) |   | (4,966 | ) |
|                                                                                                     |   | $                                 | 39,918    |                              | $      | (8,241                            | )      | $                             | (19,138 | ) | $ | 324 |   |
|                                                                                                     |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Segment                  performance:                                                                    |   |                              |      |                              |   |                              |   |                          |    |   |   |   |   |
| Transportation                  and Storage EBIT                                                    |   | $                                 | 417,536   |                              | $      | 281,344                           |   | $                             | 94,971  |   | $ | 200,912 |   |
| Gathering                  and Processing EBIT                                                      |   |                              | 62,630    |                              |   | -                                 |   |                          | -       |   |   | - |   |
| Distribution                  EBIT                                                                  |   |                              | 41,883    |                              |   | 61,698                            |   |                          | 4,266   |   |   | 39,611 |   |
| Total                  segment EBIT                                                                 |   |                              | 522,049   |                              |   | 343,042                           |   |                          | 99,237  |   |   | 240,523 |   |
| Corporate                  and other                                                                |   |                              | 14,324    |                              |   | (11,424                           | )      |                          | (20,686 | ) |   | (12,679 | ) |
| Interest                                                                                            |   |                              | 210,043   |                              |   | 128,470                           |   |                          | 61,597  |   |   | 121,376 |   |
| Federal                  and state income taxes                                                     |   |                              | 109,247   |                              |   | 50,052                            |   |                          | 9,906   |   |   | 42,053 |   |
| Net                  earnings from continuing operations                                            |   |                              | 217,083   |                              |   | 153,096                           |   |                          | 7,048   |   |   | 64,415 |   |
| Earnings                  (loss) from discontinued operations before income                  taxes  |   |                              | (2,369    | )                                 |   | (111,588                          | )      |                          | 11,744  |   |   | 76,660 |   |
| Federal                  and state income taxes (benefit)                                           |   |                              | 150,583   |                              |   | 20,825                            |   |                          | 4,021   |   |   | 27,050 |   |
| Net                  earnings (loss) from discontinued operations                                   |   |                              | (152,952  | )                                 |   | (132,413                          | )      |                          | 7,723   |   |   | 49,610 |   |
| Net                  earnings                                                                  |   |                              | 64,131    |                              |   | 20,683                            |   |                          | 14,771  |   |   | 114,025 |   |
| Preferred                  stock dividends                                                          |   |                              | 17,365    |                              |   | 17,365                            |   |                          | 8,683   |   |   | 12,686 |   |
| Net                  earnings available for common stockholders                                          |   | $                                 | 46,766    |                              | $      | 3,318                             |   | $                             | 6,088   |   | $ | 101,339 |   |

*F-63*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                  |   | **Year**                          |      | **Year**                          |   | **Six                  Months**   |   | **Year**                      |      |
|-------------------------------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|-----------------------------------|--------|-------------------------------|-----------|
|                                                  |   | **Ended**                         |      | **Ended**                         |   | **Ended**                         |   | **Ended**                     |      |
|                                                  |   | **December                  31,** |      | **December                  31,** |   | **December                  31,** |   | **June                  30,** |      |
| **Segment                  Data**                     |   | **2006**                          |      | **2005**                          |   | **2004**                          |   | **2004**                      |      |
|                                                  |   | (In                  thousands)   |      |
| Total                  assets:                        |   |                              |      |                              |   |                              |   |                          |      |
| Transportation                  and Storage      |   | $                                 | 3,874,318 |                              | $      | 3,155,549                         |   | $                             | 2,348,354 |   | $ | 2,197,289 |   |
| Gathering                  and Processing        |   |                              | 1,722,055 |                              |   | -                                 |   |                          | -         |   |   | - |   |
| Distribution                                     |   |                              | 1,016,491 |                              |   | 2,490,164                         |   |                          | 2,448,750 |   |   | 2,231,970 |   |
| Total                  segment assets            |   |                              | 6,612,864 |                              |   | 5,645,713                         |   |                          | 4,797,104 |   |   | 4,429,259 |   |
| Corporate                  and other             |   |                              | 169,926   |                              |   | 191,106                           |   |                          | 771,185   |   |   | 143,199 |   |
| Total                  consolidated assets            |   | $                                 | 6,782,790 |                              | $      | 5,836,819                         |   | $                             | 5,568,289 |   | $ | 4,572,458 |   |
|                                                  |   |                              |      |                              |   |                              |   |                          |      |   |   |   |   |
| Expenditures                  for long-lived assets:  |   |                              |      |                              |   |                              |   |                          |      |   |   |   |   |
| Transportation                  and Storage      |   | $                                 | 244,821   |                              | $      | 189,415                           |   | $                             | 111,886   |   | $ | 131,378 |   |
| Gathering                  and Processing        |   |                              | 35,101    |                              |   | -                                 |   |                          | -         |   |   | - |   |
| Distribution                                     |   |                              | 47,954    |                              |   | 84,896                            |   |                          | 56,442    |   |   | 78,791 |   |
| Total                  segment expenditures for  |   |                              |      |                              |   |                              |   |                          |      |   |   |   |   |
|  long-lived                  assets              |   |                              | 327,876   |                              |   | 274,311                           |   |                          | 168,328   |   |   | 210,169 |   |
| Corporate                  and other             |   |                              | 4,798     |                              |   | 2,306                             |   |                          | 10,109    |   |   | 15,884 |   |
| Total                  consolidated expenditures for  |   |                              |      |                              |   |                              |   |                          |      |   |   |   |   |
| long-lived                  assets                    |   | $                                 | 332,674   |                              | $      | 276,617                           |   | $                             | 178,437   |   | $ | 226,053 |   |

*F-64*

----

**SOUTHERN          UNION COMPANY AND SUBSIDIARIES**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS **

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

|                                    |   | **Percent                  of**             |   |  **Percent                  of**             |   |
|-----------------------------------------|--------|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
|                                    |   | **Transportation                  and**     |   |  **Consolidated**                            |   |
|                                    |   | **Storage                  Segment**        |   |  **Company                  Total**          |   |
|                                    |   | **Revenues**                                |   |  **Operating                  Revenues**     |   |
|                                    |   |                                                            |   |                                                             |   |  **For                  Six** |   |    |   |    |   |  **For                  Six** |   |
|                                    |   | **Years                  Ended**                      |   |  **Months                  Ended**                               |   |  **Years                  Ended**   |   |  **Months                  Ended** |   |
|                                    |   | **December                  31,**                     |   |  **December                  31,**                               |   |  **December                  31,**   |   |  **December                  31,** |   |
| **Customer**                            |   | **2006**                                                        |   |  **2005**                                                        |   |  **2004** |   |  **2006** |   |  **2005** |   |  **2004** |   |
|                                    |   |                                                            |   |                                                             |   |    |   |    |   |    |   |    |   |
| BG                  LNG Services        |   |                                                            | 24     | %                                                                     |   | 17 | % |   | 16 | % |   | 6 | % |   | 4 | % |   | 5 | % |
| ProLiance                               |   |                                                            | 12     |                                                                  |   | 16 |   |   | 17 |   |   | 3 |   |   | 4 |   |   | 5 |   |
| Ameren                  Corp            |   |                                                            | 10     |                                                                  |   | 11 |   |   | 11 |   |   | 3 |   |   | 3 |   |   | 3 |   |
| Other                  top 10 customers |   |                                                            | 19     |                                                                  |   | 14 |   |   | 14 |   |   | 5 |   |   | 4 |   |   | 5 |   |
| Remaining                  customers    |   |                                                            | 35     |                                                                  |   | 42 |   |   | 42 |   |   | 8 |   |   | 10 |   |   | 13 |   |
| Total                  percentage       |   |                                                            | 100    | %                                                                     |   | 100 | % |   | 100 | % |   | 25 | % |   | 25 | % |   | 31 | % |
|                                    |   |                                                            |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                                        |   | **Percent                  of**               |   |   | **Percent                  of**               |   |
|---------------------------------------------|--------|-----------------------------------------------|--------|--------|-----------------------------------------------|--------|
|                                        |   | **Gathering                  and**       |   |   | **Consolidated**                              |   |
|                                        |   | **Processing                  Segment**  |   |   | **Company                  Total**            |   |
|                                        |   | **Revenues**                             |   |   | **Operating                  Revenues**  |   |
|                                        |   | **Year                  Ended**          |   |   | **Year                  Ended**          |   |
| **Customer**                                |   | **December                  31, 2006**        |   |   |  **December                  31, 2006**  |   |
|                                        |   |                                          |   |   |                                          |   |
| ConocoPhillips                  Company     |   | 22                                            | %      |   | 10                                            | %      |
| BP                  Energy Company          |   | 11                                            |   |   | 5                                             |   |
| Constellation                  Power Source |   | 10                                            |   |   | 5                                             |   |
| Other                  top 10 customers     |   | 22                                            |   |   | 10                                            |   |
| Remaining                  customers        |   | 35                                            |   |   | 17                                            |   |
| Total                  percentage           |   | 100                                           | %      |   | 47                                            | %      |

*F-65*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**22.      Accumulated Other Comprehensive Loss**

*Comprehensive      income (loss)*

|                                                                                   |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   | **Six                  Months**                                                                                                                         |   | **Year**                                                                                                                                     |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                   |   | **Year                  Ended**                                                                                                                         |         |                                                                                                                                                    |   | **Ended**                         |   | **Ended**                                                                                                                                               |   |
|                                                                                   |   | **December                  31,**                                                                                                                       |         |                                                                                                                                                    |   | **December                  31,** |   | **June                  30,**                                                                                                                           |   |
| **Other                  Comprehensive Income (Loss)**                                 |   | **2006**                                                                                                                                                |         | **2005**                                                                                                                                                |   |                              |   | **2004**                                                                                                                                                |   | **2004**                                                                                                                                     |   |
|                                                                                   |   |  (In                  thousands)                                                                                                                   |         |
| Net                  Earnings                                                          |   | $                                       64,131 |         | $                                       20,683 |   |                              |   | $                                       14,771 |   | $                                     114,025 |   |
| Other                  Comprehensive Income (loss) Adjustments:                        |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |
| Unrealized                  gain (loss) on interest rate hedges, net of tax of $(745), |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |
| $73,                  $2,031 and $4,293 respectively                                   |   |                                                                                                                                                    | (49          | )                                                                                                                                                       |   | 108                               |   |                                                                                                                                                    |   |                                                                                                                                         | 2,154  |   |   | 7,084 |   |
| Reclassification                  of unrealized gain (loss) on interest rate hedges    |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |
| into                  earnings, net of tax of $608, $608, $(2,089) and $(3,331),       |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |
| respectively                                                                           |   |                                                                                                                                                    | 967          |                                                                                                                                                    |   | 967                               |   |                                                                                                                                                    |   |                                                                                                                                         | (2,216 | ) |   | (5,497 | ) |
| Reversal                  of minimum pension liability related to disposition, net     |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |
| of                  tax of $16,004, $0, $0 and $0, respectively                        |   |                                                                                                                                                    | 26,331       |                                                                                                                                                    |   | -                                 |   |                                                                                                                                                    |   |                                                                                                                                         | -      |   |   | - |   |
| Minimum                  pension liability adjustment, net of tax of $4,128, $1,064,   |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |
| $(8,328)                  and $6,526, respectively                                     |   |                                                                                                                                                    | 6,803        |                                                                                                                                                    |   | 1,771                             |   |                                                                                                                                                    |   |                                                                                                                                         | (8,832 | ) |   | 10,768 |   |
| Change                  in fair value of commodity hedges, net of tax of $7,466,       |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |
| $0,                  $0 and $0, respectively                                           |   |                                                                                                                                                    | 12,360  |                                                                                                                                                    |   | -                                 |   |                                                                                                                                                    |   |                                                                                                                                         | -      |   |   | - |   |
| Reclassification                  of unrealized gain (loss) on commodity hedges        |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |
| into                  earnings, net of tax of $(4,266), $0, $0 and $0                  |   |                                                                                                                                                    | (7,084       | )                                                                                                                                                       |   | -                                 |   |                                                                                                                                                    |   |                                                                                                                                         | -      |   |   | - |   |
| Total                  other comprehensive income (loss)                               |   |                                                                                                                                                    | 39,328       |                                                                                                                                                    |   | 2,846                             |   |                                                                                                                                                    |   |                                                                                                                                         | (8,894 | ) |   | 12,355 |   |
| Total                  comprehensive income                                            |   | $                                                                                                                                                       | 103,459      |                                                                                                                                                    | $      | 23,529                            |   |                                                                                                                                                    |   | $                                                                                                                                            | 5,877  |   | $ | 126,380 |   |
|                                                                                   |   |                                                                                                                                                    |         |                                                                                                                                                    |   |                              |   |                                                                                                                                                    |   |                                                                                                                                         |   |   |   |   |   |

*Accumulated      other comprehensive loss*

|                                                                                                               |   | **December                  31,** |    | **December                  31,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
|                                                                                                               |   | **2006**                          |    | **2005**                          |   |
|                                                                                                               |   | (In                  thousands)   |    |
| Interest                  rate hedges, net                                                                         |   | $                                 | (2,312  | )                                 | $      | (3,227 | ) |
| Commodity                  hedges, net                                                                             |   |                              | 5,276   |                              |   | - |   |
| Benefit                  Plans:                                                                                    |   |                              |    |                              |   |   |   |
| Minimum                  pension liability, net                                                                    |   |                              | -       |                              |   | (53,045 | ) |
| Net                  actuarial loss and prior service costs, net - pensions                                        |   |                              | (26,678 | )                                 |   | - |   |
| Net                  actuarial gain and prior service credit, net - other postretirement                  benefits |   |                              | 22,813  |                              |   | - |   |
| Accumulated                  other comprehensive loss, net of tax                                                  |   | $                                 | (901    | )                                 | $      | (56,272 | ) |

| ** ** |   |
|------------|--------|

*Manager*
*Management      Agreement*
*Note      3 - Acquisitions and Sales - CCE*
*Holdings      Transactions*

*Accounts      receivable - related parties*

*F-66*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

**24. Stock      Based      Compensation**

| ** ** |   |
|------------|--------|

***Stock      Options.***
*Premium      on capital stock*

*Accounting      for Stock-Based Compensatio*
*Operating      Income, Earnings from continuing operations before income taxes,*
*Net      earnings*

*F-67*

----

**SOUTHERN        UNION COMPANY AND SUBSIDIARIES**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                                                                                               |   | **Years                  ended**  |                        | **Year                  ended**   |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------------------------|-----------------------------------|--------|
|                                                                                                                               |   | **December                  31,** |                        | **June                  30,**     |   |
|                                                                                                                               |   | **2006**                          |                        | **2005**                          |   | **2004** |   |
| Expected                  volatility                                                                                               |   | 32.90%                            |                        | 20.57%                  to 37.61% |   | 36.75% |   |
| Expected                  dividend yield                                                                                           |   |                              | 1.43%                       |                              |   | 1.67% |   |   | 0.00% |   |
| Risk-free                  interest rate                                                                                           |   |                              | 4.69%                       |                              |   | 3.76%                  to 4.63% |   |   | 4.95% |   |
| Expected                  life                                                                                                     |   |                              | 6.00                  years |                              |   | 0.75                  to 6.50 years |   |   | 6.00                  years |   |
|                                                                                                                               |   |                              |                        |                              |   |   |   |   |   |   |
| Note:                  There were no grants during the six month period ended December                  31,                  2004. |   |                              |                        |                              |   |   |   |   |   |   |
|                                                                                                                               |   |                              |                        |                              |   |   |   |   |   |   |

*F-68*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                                                                                                                                               |   |    |   | ** Second                  Amended 2003 Plan** |      | **1992                  Plan** |         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|-----------------------------------------------------|-----------|--------------------------------|--------------|
|                                                                                                                                                                               |   |    |   | **Shares**                                          |      |                           | **Average**  |   | **Shares** |   |   | **Average** |   |
|                                                                                                                                                                               |   |    |   | **Under**                                           |      |                           | **Exercise** |   | **Under** |   |   | **Exercise** |   |
|                                                                                                                                                                               |   |    |   | **Option**                                          |      |                           | **Price**    |   | **Option** |   |   | **Price** |   |
|                                                                                                                                                                               |   |    |   |                                                |      |                           |         |   |   |   |   |   |   |
| Outstanding                  July 1, 2003                                                                                                                                          |   |    |   | -                                                   |      |  $                        |  -      |   | 3,142,935 |   |  $ | $                  12.41 |   |
|   Granted                                                                                                                                                                |   | 765,779 |   |                                                | 16.83     |                           | -            |   |   | - |   |
|   Exercised                                                                                                                                                              |   | -       |   |                                                | -         |                           | (370,128)    |   |   | 9.44 |   |
|   Forfeited                                                                                                                                                              |   | (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 |
| Forfeited                                                                                                                                                                          |   |    |   |                                                | (65,051)  |                           |         | 16.83 |   | (18,887) |   |   | 14.63 |
| Outstanding                  December 31, 2004                                                                                                                                     |   |    |   |                                                | 698,522   |                           | $            | 16.83 |   | 2,390,705 |   | $ | 12.81 |
| Granted                                                                                                                                                                            |   |    |   |                                                | 731,349   |                           |         | 23.52 |   | 136,608 |   |   | 12.75 |
| Exercised                                                                                                                                                                          |   |    |   |                                                | (62,976)  |                           |         | 16.83 |   | (794,105) |   |   | 12.47 |
| Forfeited                                                                                                                                                                          |   |    |   |                                                | (77,385)  |                           |         | 16.83 |   | (473,584) |   |   | 12.45 |
| Outstanding                  December 31, 2005                                                                                                                                     |   |    |   |                                                | 1,289,510 |                           | $            | 20.62 |   | 1,259,624 |   | $ | 13.15 |
| Granted                                                                                                                                                                            |   |    |   |                                                | -         |  (1)                      |         | - |   | - |   |   | - |
| Exercised                                                                                                                                                                          |   |    |   |                                                | (121,137) |                           |         | 17.31 |   | (521,289) |   |   | 13.92 |
| Forfeited                                                                                                                                                                          |   |    |   |                                                | (157,894) |                           |         | 18.23 |   | (23,139) |   |   | 12.92 |
| Outstanding                  December 31, 2006                                                                                                                                     |   |    |   |                                                | 1,010,479 |                           | $            | 21.39 |   | 715,196 |   | $ | 12.60 |
|                                                                                                                                                                               |   |    |   |                                                |      |                           |         |   |   |   |   |   |   |   |   |   |   |
| Exercisable                  June 30, 2004                                                                                                                                         |   |    |   |                                                | -         |                           | $            | - |   | 2,132,852 |   | $ | 12.52 |
| Exercisable                  December 31, 2004                                                                                                                                     |   |    |   |                                                | 22,050    |                           |         | 16.83 |   | 2,122,795 |   |   | 12.67 |
| Exercisable                  December 31, 2005                                                                                                                                     |   |    |   |                                                | 355,259   |                           |         | 21.85 |   | 1,147,902 |   |   | 13.06 |
| Exercisable                  December 31, 2006                                                                                                                                     |   |    |   |                                                | 533,363   |                           |         | 22.38 |   | 715,196 |   |   | 12.60 |
|                                                                                                                                                                               |   |    |   |                                                |      |                           |         |   |   |   |   |   |   |   |   |   |   |
| __________________________                                                                                                                                                         |   |    |   |                                                |      |                           |         |   |   |   |   |   |   |   |   |   |   |
| (1)                  Excludes 133,610 stock appreciation rights (SARs) which vest in                  equal                  increments on December 27, 2007 through 2009. Each    |   |    |   |                                                |      |                           |         |
| SAR                  entitles the holder to shares of the Company's common stock equal                  to the                  fair market value of the Company's common stock in |        |    |   |                                                |      |                           |         |
| excess                  of $28.07 for each SAR on the applicable vesting date.                                                                                                     |   |    |   |                                                |      |                           |         |   |   |   |   |   |   |   |   |   |   |

*F-69*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                       |   | **Second                  Amended 2003 Plan** |      | **1992                  Plan **           |   |
|--------------------------------------------|--------|-----------------------------------------------|-----------|------------------------------------------------|--------|
|                                       |   | **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** |   |
|                                       |   |                                          |      |                                           |   |   |   |   |   |   |   |   |   |
| Second                  Amended 2003 Plan: |   |                                          |      |                                           |   |   |   |   |   |   |   |   |   |
| 16.82                  - 22.49             |   | 316,427                                       |      | 7.09                  years                    |   | $                                                        16.83 |   | 93,105 |   |   |  $ |                     16.83 |   |
| 22.50                  - 28.07             |   |                                          | 694,052   |                                           |   | 7.39                  years |   |   | 24.22 |   |   | 440,258 |   |   |   |   | 23.56 |
|                                       |   |                                          | 1,010,479 |                                           |   |   |   |   |   |   |   | 533,363 |   |   |   |   |   |   |
|                                       |   |                                          |      |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1992                  Plan:                |   |                                          |      |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 9.69                  - 12.49              |   |                                          | 146,945   |                                           |   | 0.49                  years |   | $ | 9.70 |   |   | 146,945 |   |   |   | $ | 9.70 |
| 12.50                  - 14.66             |   |                                          | 568,251   |                                           |   | 2.56                  years |   |   | 13.35 |   |   | 568,251 |   |   |   |   | 13.35 |
|                                       |   |                                          | 715,196   |                                           |   |   |   |   |   |   |   | 715,196 |   |   |   |   |   |   |
|                                       |   |                                          |      |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

***Restricted      Stock.***

*F-70*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

|                                                                                                                                                                 |   | **Number                  of**         |     |      |   |   |                    | **Weighted-Average **  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|----------|-----------|--------|--------|-------------------------|----------------------------------|--------|
|                                                                                                                                                                 |   | **Restricted                  Shares** |     |      |   |   |                    | **Grant-Date**              |   |
| **Nonvested                  Restricted Stock**                                                                                                                      |   | **Outstanding**                        |     |      |   |   |                    | **Fair-Value**              |   |
|                                                                                                                                                                 |   |                                   |     |      |   |        |                    |                             |   |
| Nonvested                  restricted shares at January 1, 2005                                                                                                      |   | -                                      |     |      |   |   |                  $ |  -                          |   |
| Granted                                                                                                                                                              |   | 209,903                                |     |      |   |   |                    | 24.15                            |   |
| Vested                                                                                                                                                               |   |                                   | -        |      |   |   |                    |                             |   |   | - |
| Forfeited                                                                                                                                                            |   |                                   | -        |      |   |   |                    |                             |   |   | - |
| Nonvested                  restricted shares at December 31, 2005                                                                                                    |   |                                   | 209,903  |      |   |   |                    |                             |   | $ | 24.15 |
| Granted                                                                                                                                                              |   |                                   | 137,036  |  (1) |   |   |                    |                             |   |   | 26.50 |
| Vested                                                                                                                                                               |   |                                   | (146,335 | )         |   |   |                    |                             |   |   | 24.17 |
| Forfeited                                                                                                                                                            |   |                                   | (31,820  | )         |   |   |                    |                             |   |   | 24.44 |
| Nonvested                  restricted shares at December 31, 2006                                                                                                    |   |                                   | 168,784  |      |   |   |                    |                             |   | $ | 25.98 |
| ______________________                                                                                                                                               |   |                                   |     |      |   |   |                    |                             |   |   |   |   |
| (1)                  Excludes 108,869 equity-based units (*Cash                  Restricted Units*),                  which vest in equal increments on December 27, |   |                                   |     |      |   |   |                    |                             |
| 2007                  through 2009. Each Cash Restricted Unit entitles the holder to                  a cash                  payment equal to the closing price of  |   |                                   |     |      |   |   |                    |                             |   |
| the                  Company’s common stock on the applicable vesting date.                                                                                    |   |                                   |     |      |   |   |                    |                             |   |   |   |   |

*F-71*

----

**SOUTHERN      UNION COMPANY AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

**25.      Quarterly Operations (Unaudited)**

|                                                              |   | **Quarters                  Ended**                       |    |
|-------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                              |   | **March                  31**                             |    | **June                  30** |   | **September                  30** |   | **December                  31** |   |
|                                                              |   | (In                  thousands, except per share amounts) |    |
|                                                              |   |                                                      |    |   |   |   |   |   |   |
| Operating                  revenues                               |   | $                                                         | 547,166 |   | $ | 552,355 |   | $ | 564,418 |   | $ | 676,205 |   |
| Operating                  income                                 |   |                                                      | 102,847 |   |   | 69,792 |   |   | 69,961 |   |   | 112,485 |   |
| Net                  earnings from continuing operations          |   |                                                      | 73,418  |   |   | 16,321 |   |   | 11,829 |   |   | 115,515 |   |
| Net                  earnings (loss) from discontinued operations |   |                                                      | 24,529  |   |   | (2,587 | ) |   | (174,473 | ) |   | (421 | ) |
| Net                  earnings (loss) available for common         |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| stockholders                                                      |   |                                                      | 93,606  |   |   | 9,393 |   |   | (166,985 | ) |   | 110,752 |   |
| Diluted                  net earnings (loss) per share            |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| available                  for common stockholders:               |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| Continuing                  operations                            |   | $                                                         | 0.60    |   | $ | 0.10 |   | $ | 0.06 |   | $ | 0.92 |   |
| Available                  for common stockholders                |   | $                                                         | 0.82    |   | $ | 0.08 |   |   | ($1.42 | ) | $ | 0.92 |   |
|                                                              |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |

|                                                              |   | **Quarters                  Ended**                       |    |
|-------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                              |   | **March                  31**                             |    | **June                  30** |   | **September                  30** |   | **December                  31** |   |
|                                                              |   | (In                  thousands, except per share amounts) |
|                                                              |   |                                                      |    |   |   |   |   |   |   |
| Operating                  revenues                               |   | $                                                         | 452,100 |   | $ | 195,236 |   | $ | 186,480 |   | $ | 433,066 |   |
| Operating                  income                                 |   |                                                      | 101,855 |   |   | 32,124 |   |   | 46,518 |   |   | 88,620 |   |
| Net                  earnings from continuing operations          |   |                                                      | 56,394  |   |   | 17,642 |   |   | 26,078 |   |   | 52,982 |   |
| Net                  earnings (loss) from discontinued operations |   |                                                      | 35,802  |   |   | (1,967 | ) |   | (6,487 | ) |   | (159,761 | ) |
| 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:               |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| Continuing                  operations                            |   | $                                                         | 0.48    |   | $ | 0.12 |   | $ | 0.19 |   | $ | 0.42 |   |
| Available                  for common stockholders                |   | $                                                         | 0.81    |   | $ | 0.10 |   | $ | 0.13 |   |  $ | (0.97 | ) |

*F-72*

----

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

*F-73*

----

----

**Citrus        Corp. and Subsidiaries **

**Consolidated        Financial Statements**

*Years        ended December 31, 2006, 2005 and 2004*

*with        Report of Independent Registered Public accounting Firm*

*F-74*

----

| **Consolidated                    Financial Statements**                       |
|--------------------------------------------------------------------------------|
|                                                                           |   |   |   |   |
| **Years                    ended December 31, 2006, 2005 annd 2004**           |
|                                                                           |   |   |   |   |
|                                                                           |   |   |   |   |
|                                                                           |   |   |   |   |
|  **TABLE                  OF CONTENTS**                                   |
|                                                                           |   |   |   |   |
|                                                                           |   |   | **Page** |   |
|                                                                           |   |   |   |   |
| **Report                    of Independent Registered Public Accounting Firm** | F-76 |   |
|                                                                           |   |   |   |   |
| **Audited                    Consolidated Financial Statements**               |   |   |
|                                                                           | Consolidated                    Balance Sheets |   | F-77 |   |
|                                                                           | Consolidated                    Statements of Income |   | F-78 |   |
|                                                                           | Consolidated                    Statements of Stockholders' Equity |   | F-79 |   |
|                                                                           | Consolidated                    Statements of Comprehensive Income |   | F-79 |   |
|                                                                           | Consolidated                    Statements of Cash Flows |   | F-80 |   |
|                                                                           | Notes                    to Consolidated Financial Statements |   | F-81 |   |
|                                                                           |   |   |   |   |

*F-75*

----

**Report          of Independent Registered Public Accounting Firm**

** **

** **

*F-76*

----

**CITRUS              CORP. AND SUBSIDIARIES**

| **CONSOLIDATED                    BALANCE SHEETS**                                                                 |
|--------------------------------------------------------------------------------------------------------------------|
|                                                                                                               |   |   |   |   |   |
|                                                                                                               |   |   |   |   |   |
|                                                                                                               |   |   |   |   |   |
|                                                                                                               |   |   |   |   |   |
|                                                                                                               |   | **December                    31,** |   | **December                    31,** |   |
|                                                                                                               |   | **2006** |   | **2005** |   |
|                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                               |   | (In                    thousands) |   |
| **ASSETS**                                                                                                         |   |   |   |   |   |   |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **Current                    Assets**                                                                              |   |   |   |   |   |   |   |
| Cash                    and cash equivalents                                                                       |   | $ | 15,267 |   | $ | 21,406 |   |
| Accounts                    receivable - net of allowance for doubtful accounts of $282 and                    $23 |   |   | 45,049 |   |   | 41,072 |   |
| Income                    tax receivable                                                                           |   |   | - |   |   | 872 |   |
| Materials                    and supplies                                                                          |   |   | 2,954 |   |   | 3,077 |   |
| Exchange                    gas receivable                                                                         |   |   | - |   |   | 508 |   |
| Other                                                                                                              |   |   | 1,025 |   |   | 1,184 |   |
| Total                    Current Assets                                                                            |   |   | 64,295 |   |   | 68,119 |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **Property,                    Plant and Equipment, at Cost**                                                      |   |   |   |   |   |   |   |
| Plant                    in service                                                                                |   |   | 4,163,082 |   |   | 4,118,518 |   |
| Construction                    work in progress                                                                   |   |   | 85,746 |   |   | 9,693 |   |
| Less                    - accumulated depreciation and amortization                                                |   |   | (1,304,133 | ) |   | (1,211,663 | ) |
| Property,                    Plant and Equipment, Net                                                              |   |   | 2,944,695 |   |   | 2,916,548 |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **Other                    Assets**                                                                                |   |   |   |   |   |   |   |
| Unamortized                    debt expense                                                                        |   |   | 4,687 |   |   | 5,735 |   |
| Regulatory                    assets                                                                               |   |   | 19,260 |   |   | 24,092 |   |
| Other                                                                                                              |   |   | 88,176 |   |   | 74,893 |   |
| Total                    Other Assets                                                                              |   |   | 112,123 |   |   | 104,720 |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **Total                    Assets**                                                                                |   | $ | 3,121,113 |   | $ | 3,089,387 |   |
|                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **LIABILITIES                    AND STOCKHOLDERS' EQUITY**                                                        |   |   |   |   |   |   |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **Current                    Liabilities**                                                                         |   |   |   |   |   |   |   |
| Long-term                    debt due within one year                                                              |   | $ | 84,000 |   | $ | 14,000 |   |
| Accounts                    payable - trade and other                                                              |   |   | 37,741 |   |   | 21,325 |   |
| Accounts                    payable - affiliated companies                                                         |   |   | 2,823 |   |   | 5,501 |   |
| Accrued                    interest                                                                                |   |   | 14,805 |   |   | 15,091 |   |
| Accrued                    income taxes                                                                            |   |   | 2,375 |   |   | - |   |
| Accrued                    taxes, other than income                                                                |   |   | 9,332 |   |   | 9,090 |   |
| Exchange                    gas payable                                                                            |   |   | 24,225 |   |   | 5,182 |   |
| Other                                                                                                              |   |   | 16,040 |   |   | 6,161 |   |
| Total                    Current Liabilities                                                                       |   |   | 191,341 |   |   | 76,350 |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **Deferred                    Credits**                                                                            |   |   |   |   |   |   |   |
| Deferred                    income taxes                                                                           |   |   | 777,404 |   |   | 758,775 |   |
| Regulatory                    liabilities                                                                          |   |   | 14,256 |   |   | 9,049 |   |
| Other                                                                                                              |   |   | 8,129 |   |   | 33,070 |   |
| Total                    Deferred Credits                                                                          |   |   | 799,789 |   |   | 800,894 |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **Long-Term                    Debt**                                                                              |   |   | 836,882 |   |   | 922,355 |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **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                                                            |   |   | (10,524 | ) |   | (13,162 | ) |
| Retained                    earnings                                                                               |   |   | 669,353 |   |   | 668,678 |   |
| Total                    Stockholders' Equity                                                                      |   |   | 1,293,101 |   |   | 1,289,788 |   |
|                                                                                                               |   |   |   |   |   |   |   |
| **Total                    Liabilities and Stockholders' Equity**                                                  |   | $ | 3,121,113 |   | $ | 3,089,387 |   |
|                                                                                                               |   |   |   |   |   |   |   |

*F-77*

----

**CITRUS              CORP. AND SUBSIDIARIES**

| **CONSOLIDATED                    STATEMENTS OF INCOME**     |
|--------------------------------------------------------------|
|                                                         |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |
|                                                         |   | **Year                    Ended** |   | **Year                    Ended** |   | **Year                    Ended** |   |
|                                                         |   | **December                    31,** |   | **December                    31,** |   | **December                    31,** |   |
|                                                         |   | **2006** |   | **2005** |   | **2004** |   |
|                                                         |   | (In                    thousands) |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                                                 |   |   |   |   |   |   |   |   |   |   |
| Transportation                    of natural gas             |   | $ | 485,189 |   | $ | 476,049 |   | $ | 467,422 |   |
| Gas                    Sales                                 |   |   | - |   |   | - |   |   | 44,996 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| Total                    Revenues                            |   |   | 485,189 |   |   | 476,049 |   |   | 512,418 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| **Costs                    and Expenses**                    |   |   |   |   |   |   |   |   |   |   |
| Natural                    gas purchased                     |   |   | - |   |   | - |   |   | 48,921 |   |
| Operations                    and maintenance                |   |   | 77,941 |   |   | 78,829 |   |   | 81,306 |   |
| Depreciation                    and amortization             |   |   | 98,653 |   |   | 91,125 |   |   | 68,053 |   |
| Taxes,                    other than income taxes            |   |   | 34,765 |   |   | 34,306 |   |   | 29,565 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| Total                    Costs and Expenses                  |   |   | 211,359 |   |   | 204,260 |   |   | 227,845 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| **Operating                    Income**                      |   |   | 273,830 |   |   | 271,789 |   |   | 284,573 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| **Other                    Income (Expense)**                |   |   |   |   |   |   |   |   |   |   |
| Interest                    expense and related charges, net |   |   | (76,428 | ) |   | (79,290 | ) |   | (93,771 | ) |
| Other,                    net                                |   |   | 4,633 |   |   | 6,531 |   |   | 15,262 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| Total                    Other Income (Expense)              |   |   | (71,795 | ) |   | (72,759 | ) |   | (78,509 | ) |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| **Income                    Before Income Taxes**            |   |   | 202,035 |   |   | 199,030 |   |   | 206,064 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| Income                    Tax Expense                        |   |   | 75,960 |   |   | 75,086 |   |   | 79,220 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |
| **Net                    Income**                            |   | $ | 126,075 |   | $ | 123,944 |   | $ | 126,844 |   |
|                                                         |   |   |   |   |   |   |   |   |   |   |

*F-78*

----

**CITRUS            CORP. AND SUBSIDIARIES**

| **CONSOLIDATED                    STATEMENTS OF STOCKHOLDERS' EQUITY**                                                                                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                       |   |   |   |   |   |   |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |
|                                                                                                                                                       |   | **Year                    Ended** |   | **Year                    Ended** |   | **Year                    Ended** |   |
|                                                                                                                                                       |   | **December                    31,** |   | **December                    31,** |   | **December                    31,** |   |
|                                                                                                                                                       |   | **2006** |   | **2005** |   | **2004** |   |
|                                                                                                                                                       |   | (In                    thousands) |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **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**                                                                                              |   |   |   |   |   |   |   |   |   |   |
| Balance,                    beginning of period                                                                                                            |   |   | (13,162 | ) |   | (15,800 | ) |   | (17,247 | ) |
| Recognition                    in earnings of previously deferred net losses related to derivative                    instruments used as cash flow hedges |   |   | 2,638 |   |   | 2,638 |   |   | 1,447 |   |
| Balance,                    end of period                                                                                                                  |   |   | (10,524 | ) |   | (13,162 | ) |   | (15,800 | ) |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **Retained                    Earnings**                                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Balance,                    beginning of period                                                                                                            |   |   | 668,678 |   |   | 665,934 |   |   | 679,090 |   |
| Net                    income                                                                                                                              |   |   | 126,075 |   |   | 123,944 |   |   | 126,844 |   |
| Dividends                                                                                                                                                  |   |   | (125,400 | ) |   | (121,200 | ) |   | (140,000 | ) |
| Balance,                    end of period                                                                                                                  |   |   | 669,353 |   |   | 668,678 |   |   | 665,934 |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **Total                    Stockholders' Equity**                                                                                                          |   | $ | 1,293,101 |   | $ | 1,289,788 |   | $ | 1,284,406 |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| **CONSOLIDATED                    STATEMENTS OF COMPREHENSIVE INCOME**                                                                                     |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                       |   |   | **Year                    Ended** |   |   | **Year                    Ended** |   |   | **Year                    Ended** |   |
|                                                                                                                                                       |   |   | **December                    31,** |   |   | **December                    31,** |   |   | **December                    31,** |   |
|                                                                                                                                                       |   |   | **2006** |   |   | **2005** |   |   | **2004** |   |
|                                                                                                                                                       |   | (In                    thousands) |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| Net                    income                                                                                                                              |   | $ | 126,075 |   | $ | 123,944 |   | $ | 126,844 |   |
| Recognition                    in earnings of previously deferred net losses related to derivative                    instruments used as cash flow hedges |   |   | 2,638 |   |   | 2,638 |   |   | 1,447 |   |
| **Total                    Comprehensive Income**                                                                                                          |   | $ | 128,713 |   | $ | 126,582 |   | $ | 128,291 |   |
|                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |

*F-79*

----

**CITRUS            CORP. AND SUBSIDIARIES**

| **CONSOLIDATED                    STATEMENTS OF CASH FLOWS**                                                            |
|-------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                    |   |   |   |   |   |   |   |
|                                                                                                                    |   |   |   |   |   |   |   |
|                                                                                                                    |   |   |   |   |   |   |   |
|                                                                                                                    |   |   |   |   |   |   |   |
|                                                                                                                    |   |   |   |   |   |   |   |
|                                                                                                                    |   | **Year                    Ended** |   | **Year                    Ended** |   | **Year                    Ended** |   |
|                                                                                                                    |   | **December                    31,** |   | **December                    31,** |   | **December                    31,** |   |
|                                                                                                                    |   | **2006** |   | **2005** |   | **2004** |   |
|                                                                                                                    |   | (In                    thousands) |   |
| **Cash                    flows provided by operating activities**                                                      |   |   |   |   |   |   |   |   |   |   |
| Net                    income                                                                                           |   | $ | 126,075 |   | $ | 123,944 |   | $ | 126,844 |   |
| Adjustments                    to reconcile net income to net cash provided by operating                    activities: |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| Depreciation                    and amortization                                                                        |   |   | 98,653 |   |   | 91,125 |   |   | 68,053 |   |
| Amortization                    of hedge loss in other comprehensive income                                             |   |   | 2,638 |   |   | 2,638 |   |   | 1,447 |   |
| Amortization                    of discount and swap hedge loss in long term debt                                       |   |   | 527 |   |   | 530 |   |   | 535 |   |
| Amortization                    of regulatory assets and other deferred charges                                         |   |   | 3,274 |   |   | 3,380 |   |   | 5,205 |   |
| Amortization                    of debt costs                                                                           |   |   | 1,048 |   |   | 1,053 |   |   | 922 |   |
| Deferred                    income taxes                                                                                |   |   | 18,629 |   |   | 12,740 |   |   | 69,694 |   |
| Price                    risk management fair market valuation revaluation                                              |   |   | - |   |   | - |   |   | 10,980 |   |
| Price                    risk gain on buy out of gas contracts                                                          |   |   | - |   |   | - |   |   | (19,884 | ) |
| Allowance                    for funds used during construction                                                         |   |   | (1,630 | ) |   | (1,441 | ) |   | (1,136 | ) |
| Gain                    on sale of assets                                                                               |   |   | - |   |   | (1,236 | ) |   | - |   |
| Changes                    in operating assets and liabilities:                                                         |   |   |   |   |   |   |   |   |   |   |
| Accounts                    receivable                                                                                  |   |   | (3,327 | ) |   | 403 |   |   | (1,762 | ) |
| Accounts                    payable                                                                                     |   |   | (3,316 | ) |   | (10,567 | ) |   | (17,258 | ) |
| Accrued                    interest                                                                                     |   |   | (286 | ) |   | (324 | ) |   | (3,639 | ) |
| Accrued                    income tax                                                                                   |   |   | 3,247 |   |   | (7,204 | ) |   | 5,183 |   |
| Other                    current assets and liabilities                                                                 |   |   | 18,749 |   |   | 3,234 |   |   | (9,680 | ) |
| Price                    risk management assets and liabilities                                                         |   |   | - |   |   | - |   |   | (23,162 | ) |
| Other                    assets and liabilities                                                                         |   |   | (24,627 | ) |   | 36,140 |   |   | 2,169 |   |
| **Net                    cash provided by operating activities**                                                        |   |   | 239,654 |   |   | 254,415 |   |   | 214,511 |   |
|                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Cash                    flows used in investing activities**                                                          |   |   |   |   |   |   |   |   |   |   |
| Capital                    expenditures                                                                                 |   |   | (106,023 | ) |   | (37,610 | ) |   | (48,982 | ) |
| Allowance                    for funds used during construction                                                         |   |   | 1,630 |   |   | 1,441 |   |   | 1,136 |   |
| Proceeds                    from sale of assets                                                                         |   |   | - |   |   | 1,715 |   |   | - |   |
| **Net                    cash used in investing activities**                                                            |   |   | (104,393 | ) |   | (34,454 | ) |   | (47,846 | ) |
|                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Cash                    flows used in financing activities**                                                          |   |   |   |   |   |   |   |   |   |   |
| Dividends                                                                                                               |   |   | (125,400 | ) |   | (121,200 | ) |   | (140,000 | ) |
| Net                    (payments) borrowings on the revolving credit facility                                           |   |   | (2,000 | ) |   | (75,000 | ) |   | 117,000 |   |
| Long-term                    debt finance costs                                                                         |   |   | - |   |   | - |   |   | (746 | ) |
| Payments                    on long-term debt                                                                           |   |   | (14,000 | ) |   | (14,000 | ) |   | (256,500 | ) |
| **Net                    cash used in financing activities**                                                            |   |   | (141,400 | ) |   | (210,200 | ) |   | (280,246 | ) |
|                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Net                    increase (decrease) in cash and cash equivalents**                                             |   |   | (6,139 | ) |   | 9,761 |   |   | (113,581 | ) |
|                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Cash                    and cash equivalents, beginning of period**                                                   |   |   | 21,406 |   |   | 11,645 |   |   | 125,226 |   |
|                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Cash                    and cash equivalents, end of period**                                                         |   | $ | 15,267 |   | $ | 21,406 |   | $ | 11,645 |   |
|                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Supplemental                    disclosure of cash flow information**                                                 |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| Interest                    paid (net of amounts capitalized)                                                           |   | $ | 72,067 |   | $ | 74,714 |   | $ | 95,770 |   |
| Income                    tax paid                                                                                      |   | $ | 56,814 |   | $ | 66,954 |   | $ | 4,432 |   |

*F-80*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

**         (1)**
**Corporate        Structure**

**         (2)**
**Significant        Accounting Policies**

**Basis        of Presentation**

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

**Revenue        Recognition**

**Derivative        Instruments**

*Accounting        for Derivative Instruments and Hedging Activities *

*F-81*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

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

*SFAS        No. 143, Accounting for Asset Retirement Obligations *

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

*F-82*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                 |   | Year                    Ended December                    31, 2006 |   | Year                    Ended December                    31, 2005 |   |
|--------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                 |   | (In                    thousands)                                  |   |
|                                 |   |                                                               |   |                                                               |   |   |   |
| Beginning                    balance |   | $                                                                  | 493    |                                                               | $      | - |   |
| Incurred                             |   |                                                               | -      |                                                               |   | 493 |   |
| Settled                              |   |                                                               | (36    | )                                                                  |   | - |   |
| Accretion                    Expense |   |                                                               | 24     |                                                               |   | - |   |
| Ending                    balance    |   | $                                                                  | 481    |                                                               | $      | 493 |   |
|                                 |   |                                                               |   |                                                               |   |   |   |

*SFAS        No. 144, Accounting for the Impairment or Disposal of Long-Lived        Assets*

**Gas        Imbalances**

**Environmental        Expenditures**

**Cash        and Cash Equivalents**

**Materials        and Supplies**
** **

**Fuel        Tracker**

**Income        Taxes**
*SFAS        No. 109,*
*Accounting        for Income Taxes*

*F-83*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

**Accounts        Receivable**
**        - **

**Use        of Estimates**
** **

**New        Accounting Principles **

**Accounting        Principles Recently Adopted**

***FASB        Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other        Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and        132(R)”***
**:**

**SEC        Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year        Misstatements when Quantifying Misstatements in Current Year Financial        Statements” (SAB No. 108).**

***Accounting        Principles Not Yet Adopted***

***FIN        48,” Accounting for Uncertainty in Income Taxes - an Interpretation of FASB        Statement 109” (FIN 48 or the Interpretation):***
*Accounting        for Income Taxes*

***FASB        Statement No. 157, “Fair Value Measurements” (FASB Statement No. 157 or the        Statement)***
**:**

*F-84*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

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

|                                                       |   | Years  |      | December                    31, 2006 |                              | December                    31, 2005 |   |
|------------------------------------------------------------|--------|--------|-----------|--------------------------------------|-----------------------------------|--------------------------------------|--------|
|                                                       |   | Due    |      | Book                    Value        |                              | Fair                    Value        |   | Book                    Value |   | Fair                    Value |   |
|                                                       |   |   |      |                                 | (In                    thousands) |                                 |
| Citrus                                                     |   |   |      |                                 |                              |                                 |   |   |   |   |   |   |   |   |   |   |
| 8.490%                    Senior Notes                     |   |   | 2007-2009 |                                 | $                                 | 90,000                               |   | $ | 95,011 |   | $ | 90,000 |   | $ | 95,624 |   |
| FGT                                                        |   |   |      |                                 |                              |                                 |   |   |   |   |   |   |   |   |   |   |
| 9.750%                    Senior B Notes                   |   |   | 1999-2008 |                                 |                              | 13,000                               |   |   | 13,663 |   |   | 19,500 |   |   | 20,139 |   |
| 10.110%                    Senior C Notes                  |   |   | 2009-2013 |                                 |                              | 70,000                               |   |   | 82,773 |   |   | 70,000 |   |   | 85,513 |   |
| 9.190%                    Senior Notes                     |   |   | 2005-2024 |                                 |                              | 135,000                              |   |   | 167,004 |   |   | 142,500 |   |   | 182,012 |   |
| 7.625%                    Senior Notes                     |   |   | 2010      |                                 |                              | 325,000                              |   |   | 348,137 |   |   | 325,000 |   |   | 353,940 |   |
| 7.000%                    Senior Notes                     |   |   | 2012      |                                 |                              | 250,000                              |   |   | 271,893 |   |   | 250,000 |   |   | 275,737 |   |
| Revolving                    Credit Agreement              |   |   | 2007      |                                 |                              | 40,000                               |   |   | 40,000 |   |   | 42,000 |   |   | 42,000 |   |
| Total                    debt outstanding                  |   |   |      |                                 |                              | 923,000                              |   | $ | 1,018,481 |   |   | 939,000 |   | $ | 1,054,965 |   |
| Unamortized                    Debt Discount and Swap Loss |   |   |      |                                 |                              | (2,118                               | )      |   |   |   |   | (2,645 | ) |   |   |   |
| Total                    debt                              |   |   |      |                                 |                              | 920,882                              |   |   |   |   |   | 936,355 |   |   |   |   |
| Current                    portion of long-term debt       |   |   |      |                                 |                              | (84,000                              | )      |   |   |   |   | (14,000 | ) |   |   |   |
| Total                    long-term debt                    |   |   |      |                                 | $                                 | 836,882                              |   |   |   |   | $ | 922,355 |   |   |   |   |
|                                                       |   |   |      |                                 |                              |                                 |   |   |   |   |   |   |   |   |   |   |

|       |   | December                    31,         |    |
|------------|--------|-----------------------------------------|---------|
|       |   | 2006                                    |    |
| Year       |   |  (In                    thousands) |    |
|       |   |                                    |    |   |
| 2007       |   | $                                       | 84,000  |   |
| 2008       |   |                                    | 44,000  |   |
| 2009       |   |                                    | 51,500  |   |
| 2010       |   |                                    | 346,500 |   |
| 2011       |   |                                    | 21,500  |   |
| Thereafter |   |                                    | 375,500 |   |
|       |   | $                                       | 923,000 |   |
|       |   |                                    |    |   |

*F-85*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

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

** **

*F-86*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

**         (5)**
**Income        Taxes **

|                                                   |   | December                    31, 2006 |    | December                    31, 2005 |   |
|--------------------------------------------------------|--------|--------------------------------------|---------|--------------------------------------|--------|
|                                                   |   | (In                    thousands)    |    |
| Deferred                    income tax asset           |   |                                 |    |                                 |   |   |   |
| Regulatory                    and other reserves       |   | $                                    | 8,595   |                                 | $      | 8,841 |   |
| Other                                                  |   |                                 | -       |                                 |   | 176 |   |
|                                                   |   |                                 | 8,595   |                                 |   | 9,017 |   |
|                                                   |   |                                 |    |                                 |   |   |   |
| Deferred                    income tax liabilities     |   |                                 |    |                                 |   |   |   |
| Depreciation                    and amortization       |   |                                 | 742,566 |                                 |   | 728,444 |   |
| Deferred                    charges and other assets   |   |                                 | 27,981  |                                 |   | 27,972 |   |
| Regulatory                    costs                    |   |                                 | 9,298   |                                 |   | 4,901 |   |
| Other                                                  |   |                                 | 6,154   |                                 |   | 6,475 |   |
|                                                   |   |                                 | 785,999 |                                 |   | 767,792 |   |
| Net                    deferred income tax liabilities |   | $                                    | 777,404 |                                 | $      | 758,775 |   |
|                                                   |   |                                 |    |                                 |   |   |   |

|                                        |   | Year                    Ended December                    31, 2006 |   | Year                    Ended December                    31, 2005 |   | Year                    Ended December                    31, 2004 |   |
|---------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                        |   | (In                    thousands)                                  |   |
| Current                    Tax Provision    |   |                                                               |   |                                                               |   |                                                               |   |   |   |   |
| Federal                                     |   | $                                                                  | 52,135 |                                                               | $      | 53,526                                                             |   | $ | 7,561 |   |
| State                                       |   |                                                               | 5,196  |                                                               |   | 8,820                                                              |   |   | 1,965 |   |
|                                        |   |                                                               | 57,331 |                                                               |   | 62,346                                                             |   |   | 9,526 |   |
|                                        |   |                                                               |   |                                                               |   |                                                               |   |   |   |   |
| Deferred                    Tax Provision   |   |                                                               |   |                                                               |   |                                                               |   |   |   |   |
| Federal                                     |   |                                                               | 15,863 |                                                               |   | 11,079                                                             |   |   | 60,808 |   |
| State                                       |   |                                                               | 2,766  |                                                               |   | 1,661                                                              |   |   | 8,886 |   |
|                                        |   |                                                               | 18,629 |                                                               |   | 12,740                                                             |   |   | 69,694 |   |
| Total                    income tax expense |   | $                                                                  | 75,960 |                                                               | $      | 75,086                                                             |   | $ | 79,220 |   |
|                                        |   |                                                               |   |                                                               |   |                                                               |   |   |   |   |

*F-87*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                          |   | Year                    Ended December                    31, 2006 |   | Year                    Ended December                    31, 2005 |   | Year                    Ended December                    31, 2004 |   |
|---------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                                          |   | (In                    thousands)                                  |   |
|                                                          |   |                                                               |   |                                                               |   |                                                               |   |   |   |   |
| Statutory                    federal income tax provision     |   | $                                                                  | 70,712 |                                                               | $      | 69,661                                                             |   | $ | 72,122 |   |
| State                    income taxes, net of federal benefit |   |                                                               | 5,176  |                                                               |   | 6,813                                                              |   |   | 7,053 |   |
| Other                                                         |   |                                                               | 72     |                                                               |   | (1,388                                                             | )      |   | 45 |   |
| Income                    tax expense                         |   | $                                                                  | 75,960 |                                                               | $      | 75,086                                                             |   | $ | 79,220 |   |
|                                                          |   |                                                               |   |                                                               |   |                                                               |   |   |   |   |
| Effective                    Tax Rate                         |   |                                                               | 37.6   | %                                                                  |   | 37.7                                                               | %      |   | 38.4 | % |
|                                                          |   |                                                               |   |                                                               |   |                                                               |   |   |   |   |

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

*F-88*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

**Other        Post - Employment Benefits**

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

*F-89*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

*Accumulated        other comprehensive income*

*F-90*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                           |   | Pre-SFAS                    158   |   | SFAS                    158 adoption                    adjustment |   | Post-SFAS                    158 |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                           |   | (in                    thousands) |   |
|                                                                           |   |                              |   |                                                               |   |                             |   |   |   |   |
| Prepaid                    postretirement benefit cost (non-current) (Note 11) |   | $                                 | (721   | )                                                                  | $      | 3,423                            |   | $ | 2,702 |   |
| Regulatory                    asset                                            |   |                              | 1,951  |                                                               |   | (1,951                           | )      |   | - |   |
| Regulatory                    liability                                        |   |                              | -      |                                                               |   | (1,472                           | )      |   | (1,472 | ) |
|                                                                           |   |                              |   |                                                               |   |                             |   |   |   |   |

*F-91*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                            |   | Year                    Ended December                    31, 2006 |   | Year                    Ended December                    31, 2005 |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                                                            |   | (In                    thousands)                                  |   |
| Change                    in Benefit Obligation                                 |   |                                                               |   |                                                               |   |   |   |
| Benefit                    obligation at the beginning of period (1)            |   | $                                                                  | 6,665  |                                                               | $      | 9,872 |   |
| Service                    cost                                                 |   |                                                               | 46     |                                                               |   | 71 |   |
| Interest                    cost                                                |   |                                                               | 312    |                                                               |   | 490 |   |
| Actuarial                    gain                                               |   |                                                               | (691   | )                                                                  |   | (3,522 | ) |
| Retiree                    premiums                                             |   |                                                               | 427    |                                                               |   | 757 |   |
| Benefits                    paid                                                |   |                                                               | (964   | )                                                                  |   | (1,003 | ) |
| Benefit                    obligation at end of year                            |   |                                                               | 5,795  |                                                               |   | 6,665 |   |
|                                                                            |   |                                                               |   |                                                               |   |   |   |
| Change                    in Plan Assets                                        |   |                                                               |   |                                                               |   |   |   |
| Fair                    value of plan assets at the beginning of period (1) (2) |   |                                                               | 7,840  |                                                               |   | 6,240 |   |
| Return                    on plan assets                                        |   |                                                               | (37    | )                                                                  |   | 352 |   |
| Employer                    contributions                                       |   |                                                               | 1,231  |                                                               |   | 1,494 |   |
| Retiree                    premiums                                             |   |                                                               | 427    |                                                               |   | 757 |   |
| Benefits                    paid                                                |   |                                                               | (964   | )                                                                  |   | (1,003 | ) |
| Fair                    value of plan assets at end of year                     |   |                                                               | 8,497  |                                                               |   | 7,840 |   |
|                                                                            |   |                                                               |   |                                                               |   |   |   |
| Funded                    Status                                                |   |                                                               |   |                                                               |   |   |   |
| Funded                    status at the end of the year                         |   | $                                                                  | 2,702  |                                                               | $      | 1,175 |   |
| Unrecognized                    net actuarial gain                              |   |                                                               |   |                                                               |   | (3,348 | ) |
| Net                    liability recognized                                     |   |                                                               |   |                                                               | $      | (2,173 | ) |
|                                                                            |   |                                                               |   |                                                               |   |   |   |
| Amount                    recognized in the Consolidated Balance Sheet          |   |                                                               |   |                                                               |   |   |   |
| Regulatory                    assets (Note 11)                                  |   | $                                                                  | -      |                                                               | $      | 2,173 |   |
| Other                    assets - other (Note 11)                               |   |                                                               | 2,702  |                                                               |   | - |   |
| Regulatory                    liability (Note 12)                               |   |                                                               | (1,472 | )                                                                  |   |   |   |
| Deferred                    credits - other (Note 12)                           |   |                                                               | -      |                                                               |   | (2,173 | ) |
| Net                    asset (liability) recognized                             |   | $                                                                  | 1,230  |                                                               | $      | - |   |
|                                                                            |   |                                                               |   |                                                               |   |   |   |

|   | (1) | For                  the purpose of this reconciliation, the plan adoption date is considered                  to be the same as the beginning period, January 1,                  2005. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*F-92*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                            |   | Year                    Ended December                    31, 2006 |                                      | Year                    Ended December                    31, 2005 |   |
|-------------------------------------------------|--------|-------------------------------------------------------------------------|-------------------------------------------|--------------------------------------------------------------------|--------|
|                                            |   |                                                                    |                                      |                                                               |   |   |   |
| Discount                    rate                |   |                                                                    | 5.68                                      | %                                                                  |   | 5.50 | % |
| Health                    care cost trend rates |   |                                                                    | 11.00                                     | %                                                                  |   | 12.00 | % |
|                                            |   |                                                                    | graded                    to 4.85%by 2013 |                                                               |   | graded                    to 4.65% by 2012 |   |

|                                              |   | Year                    Ended December                    31, 2006 |   | Year                    Ended December                    31, 2005 |   |
|---------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                              |   | (In                    thousands)                                  |   |
|                                              |   |                                                               |   |                                                               |   |   |   |
| Service                    cost                   |   | $                                                                  | 46     |                                                               | $      | 71 |   |
| Interest                    cost                  |   |                                                               | 312    |                                                               |   | 490 |   |
| Expected                    return on plan assets |   |                                                               | (402   | )                                                                  |   | (352 | ) |
| Recognized                    actuarial gain      |   |                                                               | (223   | )                                                                  |   | (174 | ) |
| Net                    periodic (benefit) cost    |   | $                                                                  | (267   | )                                                                  | $      | 35 |   |
|                                              |   |                                                               |   |                                                               |   |   |   |

|                                                        |   | Year                    Ended December                    31, 2006 |                                       | Year                    Ended December                    31, 2005 |   |
|-------------------------------------------------------------|--------|--------------------------------------------------------------------|--------------------------------------------|--------------------------------------------------------------------|--------|
|                                                        |   |                                                               |                                       |                                                               |   |   |   |
| Discount                    rate                            |   |                                                               | 5.50                                       | %                                                                  |   | 5.75 | % |
| Rate                    of compensation increase            |   |                                                               | N/A                                        |                                                               |   | N/A |   |
| Expected                    long-term return on plan assets |   |                                                               | 5.00                                       | %                                                                  |   | 5.00 | % |
| Health                    care cost trend rates             |   |                                                               | 12.00                                      | %                                                                  |   | 12.00 | % |
|                                                        |   |                                                               | graded                    to 4.65% by 2012 |                                                               |   | graded                    to 4.75% by 2012 |   |

*F-93*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                    |   | One                    Percentage                    Point                    Increase |   | One                    Percentage                    Point                    Decrease |   |
|-------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|
|                                                                    |   | (In                    thousands)                                                      |   |
| Effect                    on total service and interest cost components |   | $                                                                                      | 14     |                                                                                   | $      | (13 | ) |
| Effect                    on postretirement benefit obligation          |   | $                                                                                      | 274    |                                                                                   | $      | (245 | ) |

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

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

|                                         |   | December                    31, 2006 |   | December                    31, 2005 |   |
|----------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                         |   |                                 |   |                                 |   |   |   |
| Equity                    securities         |   |                                 | 0      | %                                    |   | 0 | % |
| Debt                    securities           |   |                                 | 0      | %                                    |   | 0 | % |
| Cash                    and cash equivalents |   |                                 | 100    | %                                    |   | 100 | % |
| Total                                        |   |                                 | 100    | %                                    |   | 100 | % |
|                                         |   |                                 |   |                                 |   |   |   |

*F-94*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

| Years                                 |   | Expected                    Benefits Before                    Effect of Medicare                    Part D                                                                                                                                                                                                                                                                                                                                                                                                                           |   | Payments                    Medicare Part D                                                                                                                                                                                                                                                                                                                                                                 |   | Net                                                                                                                                                                                                                                                                                                                                                                                              |
|---------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  (in                  thousands) |
|                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 2007                                  |   | $                                                                                                       539 |   | $                                                                                  89 |   | $                                                                                450 |
| 2008                                  |   | 583                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 93                                                                                                                                                                                                                                                                                                                                                                                                          |   | 490                                                                                                                                                                                                                                                                                                                                                                                              |
| 2009                                  |   | 615                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 95                                                                                                                                                                                                                                                                                                                                                                                                          |   | 520                                                                                                                                                                                                                                                                                                                                                                                              |
| 2010                                  |   | 622                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 96                                                                                                                                                                                                                                                                                                                                                                                                          |   | 526                                                                                                                                                                                                                                                                                                                                                                                              |
| 2011                                  |   | 621                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 95                                                                                                                                                                                                                                                                                                                                                                                                          |   | 526                                                                                                                                                                                                                                                                                                                                                                                              |
| 2012                    - 2016        |   | 2,961                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 426                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2,535                                                                                                                                                                                                                                                                                                                                                                                            |
|                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                                                                                                                                                                                                                                                                                                                             |

**         (7)**
**Major        Customers and Concentration of Credit Risk**

|                                                 |   | Year                    Ended December                    31, 2006 |    | Year                    Ended December                    31, 2005 |   | Year                    Ended December                    31, 2004 |   |
|------------------------------------------------------|--------|--------------------------------------------------------------------|---------|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                                 |   | (In                    thousands)                                  |    |
|                                                 |   |                                                               |    |                                                               |   |                                                               |   |   |   |   |
| Florida                    Power & Light Company |   | $                                                                  | 200,592 |                                                               | $      | 181,486                                                            |   | $ | 189,500 |   |
| Teco                    Energy, Inc.                 |   | $                                                                  | 80,192  |                                                               | $      | 76,059                                                             |   | $ | 68,971 |   |

*F-95*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                 |   | December                    31, 2006 |   | December                    31, 2005 |   |
|------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                 |   | (In                    thousands)    |   |
|                                                 |   |                                 |   |                                 |   |   |   |
| Florida                    Power & Light Company |   | $                                    | 15,065 |                                 | $      | 15,153 |   |
| Teco                    Energy, Inc.                 |   | $                                    | 6,161  |                                 | $      | 5,365 |   |

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

*F-96*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

*ASA*

*F-97*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

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

*F-98*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

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

|                                                               |   | December                    31, 2006 |       | December                    31, 2005 |   |
|--------------------------------------------------------------------|--------|--------------------------------------|------------|--------------------------------------|--------|
|                                                               |   | (In                    thousands)    |       |
|                                                               |   |                                 |       |                                 |   |   |   |
| Transmission                    plant                              |   | $                                    | 2,859,920  |                                 | $      | 2,812,586 |   |
| General                    plant                                   |   |                                 | 24,970     |                                 |   | 26,383 |   |
| Intangible                    plant                                |   |                                 | 25,726     |                                 |   | 27,083 |   |
| Construction                    work-in-progress                   |   |                                 | 85,746     |                                 |   | 9,693 |   |
| Acquisition                    adjustment                          |   |                                 | 1,252,466  |                                 |   | 1,252,466 |   |
|                                                               |   |                                 | 4,248,828  |                                 |   | 4,128,211 |   |
| less:                    Accumulated depreciation and amortization |   |                                 | (1,304,133 | )                                    |   | (1,211,663 | ) |
| Property,                    Plant and Equipment, net              |   | $                                    | 2,944,695  |                                 | $      | 2,916,548 |   |
|                                                               |   |                                 |       |                                 |   |   |   |

**         (11)**
**Other        Assets**

|                                                             |   | December                    31,   |   | December                    31, |   |
|------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                             |   | 2006                              |   | 2005                            |   |
|                                                                  |   | (In                    thousands) |   |
|                                                             |   |                              |   |                            |   |   |   |
| Ramp-up                    assets, net (1)                       |   | $                                 | 11,928 |                            | $      | 12,240 |   |
| Cash                    balance plan settlement (Note 6)         |   |                              | 4,185  |                            |   | 6,047 |   |
| Other                    post employment benefits (Note 6)       |   |                              | -      |                            |   | 2,173 |   |
| Environmental                    non-PCB clean-up cost (Note 13) |   |                              | 1,000  |                            |   | 1,000 |   |
| Other                    miscellaneous                           |   |                              | 2,147  |                            |   | 2,632 |   |
| Total                    Regulatory Assets                       |   | $                                 | 19,260 |                            | $      | 24,092 |   |
|                                                             |   |                              |   |                            |   |   |   |

*F-99*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                       |   | December                    31,   |   | December                    31, |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                       |   | 2006                              |   | 2005                            |   |
|                                                       |   | (In                    thousands) |   |
|                                                       |   |                              |   |                            |   |   |   |
| Long-term                    receivables                   |   | $                                 | 71,648 |                            | $      | 72,570 |   |
| Fuel                    tracker                            |   |                              | 11,747 |                            |   | - |   |
| Other                    post employment benefits (Note 6) |   |                              | 2,702  |                            |   | - |   |
| Other                    miscellaneous                     |   |                              | 2,079  |                            |   | 2,323 |   |
| Total                    Other Assets - other              |   | $                                 | 88,176 |                            | $      | 74,893 |   |
|                                                       |   |                              |   |                            |   |   |   |

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

|                                                       |   | December                    31,   |   | December                    31, |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                       |   | 2006                              |   | 2005                            |   |
|                                                            |   | (In                    thousands) |   |
|                                                       |   |                              |   |                            |   |   |   |
| Balancing                    tools (1)                     |   | $                                 | 12,154 |                            | $      | 9,049 |   |
| Other                    post employment benefits (Note 6) |   |                              | 1,472  |                            |   | - |   |
| Other                    miscellaneous                     |   |                              | 630    |                            |   | - |   |
| Total                    Regulatory liabilities            |   | $                                 | 14,256 |                            | $      | 9,049 |   |
|                                                       |   |                              |   |                            |   |   |   |

|                                                                     |   | December                    31,   |   | December                    31, |   |
|--------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                     |   | 2006                              |   | 2005                            |   |
|                                                                     |   | (In                    thousands) |   |
|                                                                     |   |                              |   |                            |   |   |   |
| Post                    construction mitigation costs                    |   | $                                 | 2,073  |                            | $      | 2,600 |   |
| Construction                    prepayments                              |   |                              | -      |                            |   | 4,536 |   |
| Customer                    deposits (Note 7)                            |   |                              | -      |                            |   | 1,249 |   |
| Fuel                    tracker                                          |   |                              | -      |                            |   | 14,477 |   |
| Deferred                    compensation (Note 6)                        |   |                              | 1,090  |                            |   | 1,425 |   |
| Environmental                    non-PCB clean-up cost reserve (Note 13) |   |                              | 1,423  |                            |   | 1,631 |   |
| Tax                    contingency                                       |   |                              | 1,664  |                            |   | 2,594 |   |
| Asset                    retirement obligation (Note 2)                  |   |                              | 481    |                            |   | 493 |   |
| Other                    post employment benefits (Note 6)               |   |                              | -      |                            |   | 2,173 |   |
| Other                    miscellaneous                                   |   |                              | 1,398  |                            |   | 1,892 |   |
| Total                    Deferred Credits - other                        |   | $                                 | 8,129  |                            | $      | 33,070 |   |
|                                                                     |   |                              |   |                            |   |   |   |

*F-100*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**         (14)**
**Accumulated        Other Comprehensive Income**

|                                                                                |   | Year                    Ended     |   | Year                    Ended   |   | Year                    Ended   |   |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                                                                                |   | December                    31,   |   | December                    31, |   | December                    31, |   |
|                                                                                |   | 2006                              |   | 2005                            |   | 2004                            |   |
|                                                                                |   | (In                    thousands) |   |
| Interest                    rate lock on 7.625% $325 million note due 2010          |   | $                                 | 1,872  |                            | $      | 1,872                           |   | $ | 1,872 |   |
| Interest                    rate swap loss on 7.0% $250 million note due 2012       |   |                              | 1,228  |                            |   | 1,228                           |   |   | 1,229 |   |
| Interest                    rate swap gain on 9.19% $150 million note due 2005-2024 |   |                              | (462   | )                               |   | (462                            | )      |   | (1,654 | ) |
|                                                                                |   | $                                 | 2,638  |                            | $      | 2,638                           |   | $ | 1,447 |   |
|                                                                                |   |                              |   |                            |   |                            |   |   |   |   |

*F-101*

----

**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                |   | Termination                    Date |                             | Amortization                    Period |   | Original                    Gain/(Loss) |   | December                    31, 2006 |    | December                    31, 2005 |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------------|----------------------------------|----------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|---------|--------------------------------------|--------|
|                                                                                     |   |                                |                             |                                   |   |                                    |   | (In                    thousands)    |    |
| Interest                    rate lock on 7.625% $325 million note due 2010          |   |                                | December                    2000 |                                   |   | 10                    years             |   | $                                    | (18,724 | )                                    | $      | (7,334 | ) | $ | (9,206 | ) |
| Interest                    rate swap loss on 7.0% $250 million note due 2012       |   |                                | July                    2002     |                                   |   | 10                    years             |   |                                 | (12,280 | )                                    |   | (6,807 | ) |   | (8,035 | ) |
| Interest                    rate swap gain on 9.19% $150 million note due 2005-2024 |   |                                | November                    1994 |                                   |   | 20                    years             |   |                                 | 9,236   |                                 |   | 3,617 |   |   | 4,079 |   |
|                                                                                |   |                                |                             |                                   |   |                                    |   |                                 |    |                                 | $      | (10,524 | ) | $ | (13,162 | ) |
|                                                                                |   |                                |                             |                                   |   |                                    |   |                                 |    |                                 |   |   |   |   |   |   |
|                                                                                |   |                                |                             |                                   |   |                                    |   |                                 |    |                                 |   |   |   |   |   |   |
|                                                                                |   |                                |                             |                                   |   |                                    |   |                                 |    |                                 |   |   |   |   |   |   |

**         (15)**
**Commitments        and Contingencies **

*FASB        Statement No. 5, Accounting for Contingencies,*

*FDOT/FTE*

*F-102*

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**CITRUS            CORP. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS**

*F-103*

----