Natural gas continues to be a critical component of energy consumption in the United States. According to the Energy Information Administration, or the EIA, total annual domestic consumption of natural gas is expected to increase from approximately 22.1 trillion cubic feet, or Tcf, (60.7 Bcf/d) in 2004 to approximately 25.4 Tcf (69.7 Bcf/d) in 2010, representing an average annual growth rate of over 2.3% per year. By 2010, natural gas is expected to represent approximately 24% of all end-user domestic energy requirements. During the last five years, the United States has on average consumed approximately 22.6 Tcf per year (62.0 Bcf/d) with average annual domestic production of approximately 19.1 Tcf (52.3 Bcf/d) during the same period.

The Gulf of Mexico is a significant producing area for natural gas consumed in the U.S. Many long-haul natural gas pipelines depend on the Gulf of Mexico as a significant source of natural gas. According to the EIA, historic natural gas production rates in the Gulf of Mexico since 1992 have fluctuated from a peak of approximately 14.1 Bcf/d in 1997 to an estimate of approximately 11.8 Bcf/d in 2003. Over that same period, natural gas produced from deepwater wells (greater than 200 meters), as opposed to shallow water wells (less than 200 meters), has constituted an increasingly greater component of total Gulf of Mexico natural gas production.

Discovery provides integrated “wellhead to market” services to natural gas producers operating in the shallow and deep waters of the Gulf of Mexico off the coast of Louisiana. Discovery consists of a 105-mile mainline, 168 miles of lateral gathering pipelines, a natural gas processing plant and an NGL fractionation facility. Upon completion of Discovery’s market expansion project, Discovery will have interconnections with five natural gas pipeline systems, which will allow producers to benefit from flexible and diversified access to a variety of natural gas markets. The Discovery mainline was placed into service in 1998 and has a design capacity of 600 million cubic feet per day.

The Company’s Carbonate Trend gathering pipeline is a 34-mile pipeline that gathers sour gas production from the Carbonate Trend area off the coast of Alabama. “Sour” gas is natural gas that has relatively high concentrations of acidic gases, such as hydrogen sulfide and carbon dioxide, that exceed normal gas transportation specifications. The pipeline was built and placed into service in 2000 and has a maximum design capacity of 120 million cubic feet per day.

Operating and maintenance expenses increased $5.4 million, or 39%, to $19.4 million for the year ended December 31, 2004 compared to $14.0 million for the year ended December 31, 2003.

Total costs and expenses incresed to $33.0 million for the year ended December 31, 2004 from $21.3 million for the year ended December 31, 2003.