Natural gas is a critical component of energy consumption in the United States. The U.S. natural gas pipeline grid transports natural gas from producing regions to customers, industrial users and electric generation facilities. Interstate pipelines carry natural gas across state boundaries and are subject to Federal Energy Regulatory Commission, or FERC, regulation on the rates charged for their services, on the terms and conditions of the services they offer, and on the location, construction and abandonment of their facilities. Intrastate pipelines transport natural gas within a particular state and are typically not subject to FERC regulation. At the close of 2004, based on data from the Energy Information Administration, or EIA, the U.S. natural gas pipeline grid included 107 interstate systems and more than 90 intrastate systems which collectively accounted for over 297,000 miles of pipeline with a combined 178 Bcf/d of natural gas transportation capacity.

Substantially all natural gas consumed in the United States is transported to the ultimate end-user on the natural gas pipeline grid. As such, utilization of the pipeline grid is highly correlated with growth in domestic consumption of natural gas. According to the EIA, natural gas consumption in the United States is expected to grow by approximately 2.3% per year for the period from 2004 to 2010, from 60.7 Bcf/d in 2004 to 69.7 Bcf/d in 2010.

Domestic gas production in the United States is not expected to keep pace with domestic consumption. According to the EIA, production in the lower 48 states is forecast to grow 1.5% per year, from 50.7 Bcf/d in 2004 to 55.3 Bcf/d in 2010. This compares to forecast U.S. natural gas demand in 2010 of 69.7 Bcf/d. The bulk of this supply shortfall is expected to be met through natural gas imports from Canada as well as through LNG imports, which are expected to be delivered predominately through terminals along the Gulf Coast.

The Company offers customers storage services on both firm and interruptible bases. Firm storage customers reserve a specific amount of storage capacity, including injection and withdrawal rights, while interruptible customers receive storage capacity when it is available. Similar to firm transportation customers, firm storage customers generally pay fees based on the quantity of capacity reserved plus an injection and withdrawal fee. Substantially all of a firm storage fee is paid based on the amount of capacity reserved rather than on the amount of reserved capacity actually utilized. Firm storage contracts typically range in term from one to five years. Under its interruptible storage service, the Company stores gas when there is capacity available. Interruptible storage customers pay for the volume of gas actually stored. Generally, the Company’s interruptible storage agreements range from one to twelve months.

No-notice service consists of a combination of firm transportation and storage services that allow customers to pull their gas from storage with little or no notice and requires us to reserve a specified amount of storage and transportation capacity for those customers. Customers pay a reservation charge based upon the capacity reserved plus a commodity and fuel charge paid on the volume of gas actually transported. No-notice service provides customers with additional flexibility over traditional firm transportation and storage services. The Company’s Texas Gas system also loans gas provided from storage to the no-notice customers, who are obligated to repay the gas in-kind.

Parking and lending is an interruptible service offered to the Company’s customers providing them the ability to park (inject) or lend (withdraw) gas into or out of the pipeline at a specific location for a specific period of time. The Company’s parking and lending rates are also cost-based.

Volume-based revenues were $0.8 million lower, storage and parking and lending services were $2.1 million lower and capacity reservation revenues were $4.9 million lower.

Operating costs and expenses increased $83.9 million, or 117.3%, for the six months ended June 30, 2005 as compared to the same period in 2004, of which $85.8 million was attributable to the operations of Gulf South, and $0.7 million was attributable to property and franchise taxes, primarily from higher state assessments.

Net income increased by $20.5 million, or 66.2%, due to the increase in revenues, partially offset by an increase in interest expense due to the increase in long-term debt.