exhibit2.htm

We have audited the accompanying consolidated balance sheets of FrontStreet Hugoton LLC and subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of operations, members’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FrontStreet Hugoton LLC and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.

FRONTSTREET HUGOTON LLC AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
(In thousands)


	2006			2005
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	1,906		$	2,916
Accounts receivable		7,426			3,953
Other current assets		134			138

Total current assets		9,466			7,007

PIPELINE AND GATHERING FACILITIES:
Pipeline and gathering facilities placed in service		100,283			96,803
Construction in progress		7,905			1,313

Total pipeline and gathering facilities		108,188			98,116

Less accumulated depreciation		(30,775	)		(24,122	)

Total		77,413			73,994

TOTAL ASSETS	$	86,879		$	81,001


LIABILITIES AND MEMBERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	9,078		$	4,315
Accrued liabilities		601			757

Total current liabilities		9,679			5,072

MEMBERS’ EQUITY		77,200			75,929

TOTAL LIABILITIES AND MEMBERS' EQUITY	$	86,879		$	81,001


See notes to consolidated financial statements.

FRONTSTREET HUGOTON LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands)


	2006		2005		2004

OPERATING REVENUES—Pipeline and gathering revenues	$	40,463	$	39,020	$	36,955

OPERATING EXPENSES:
Operating and maintenance		25,691		23,533		19,589
Depreciation		6,671		7,027		7,094
Related party management fees		281		320		323
Professional services:
Audit fees		55		42		46
Other services		23		22		21

Total operating expenses		32,721		30,944		27,073

OPERATING INCOME		7,742		8,076		9,882

OTHER INCOME		229		43		54

NET INCOME	$	7,971	$	8,119	$	9,936


See notes to consolidated financial statements.

FRONTSTEET HUGOTON LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands)


	FrontStreet			ASC			Total
	EnergyOne,			Hugoton,			Members’
	LLC			LLC			Equity

BALANCE—December 31, 2003	$	4,153		$	78,907		$	83,060

Member contributions		173			3,284			3,457

Net income		497			9,439			9,936

Member distributions		(739	)		(14,036	)		(14,775	)

BALANCE—December 31, 2004		4,084			77,594			81,678

Member contributions		185			3,521			3,706

Net income		406			7,713			8,119

Member distributions		(878	)		(16,696	)		(17,574	)

BALANCE—December 31, 2005		3,797			72,132			75,929

Member contributions		156			2,970			3,126

Net income		399			7,572			7,971

Member distributions		(491	)		(9,335	)		(9,826	)

BALANCE—December 31, 2006	$	3,861		$	73,339		$	77,200


See notes to consolidated financial statements.

FRONTSTREET HUGOTON LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands)


	2006			2005			2004

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,971		$	8,119		$	9,936
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation		6,671			7,027			7,094
Other		21			21			59
Changes in operating assets and liabilities:
Accounts receivable		(3,473	)		2,427			(3,295	)
Other current assets		4			10
Accounts payable		(2,315	)		1,439			423
Accrued liabilities		(53	)		57			(47	)

Net cash provided by operating activities		8,826			19,100			14,170

CASH FLOWS FROM INVESTING ACTIVITIES—Capital expenditures		(3,136	)		(3,713	)		(3,415	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions		3,126			3,706			3,457
Distributions to members		(9,826	)		(17,574	)		(14,775	)

Net cash used in financing activities		(6,700	)		(13,868	)		(11,318	)

NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS		(1,010	)		1,519			(563	)

CASH AND CASH EQUIVALENTS—at beginning of period		2,916			1,397			1,960

CASH AND CASH EQUIVALENTS—at end of period	$	1,906		$	2,916		$	1,397

SUPPLEMENTAL CASH FLOW INFORMATION—Noncash capital
expenditures in accounts payable and accrued liabilities	$	7,295		$	320		$	200


See notes to consolidated financial statements.

FrontStreet Hugoton LLC was formed in the State of Delaware and commenced operations on July 26, 2002, for the purpose of owning the equity interests of WGP-KHC, LLC (FrontStreet Hugoton LLC’s wholly owned subsidiary), whose purpose is owning the gas gathering pipeline in the southwest Kansas area. As of December 31, 2006 and 2005, the participating interests of FrontStreet Hugoton LLC and subsidiary (the “Company”) members were 95 percent by ASC Hugoton, LLC (“ASC”) and 5 percent by FrontStreet EnergyOne, LLC (“FSEO”).

The Company acquired 100 percent of the voting and ownership interests of WGP-KHC, LLC on July 26, 2002, for $79.9 million. The purpose of this transaction was to acquire ownership of a natural gas gathering system in Kansas (the “Gathering System”) and to hold the asset until the exhaustion of the underlying producing basin, which is the Hugoton gas field. The Company recorded no goodwill in conjunction with the acquisition.

Estimates—The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Pipeline and Gathering Facilities—Amounts incurred in connection with the purchase of pipeline and gathering facilities are stated at cost and depreciated using the units-of-production method based upon the actual production transported through the system and the related estimated natural gas reserves of the Hugoton gas field. Construction in progress represents the ongoing development of the gathering system. Upon completion of construction, related costs are transferred to pipeline and gathering facilities placed in service and depreciated.

The Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed by comparing the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of such assets exceed the fair value of the assets.

One customer accounted for approximately $39.8 million, $37.5 million and $35.7 million of the Company’s revenues for the years ended December 31, 2006, 2005 and 2004, respectively. The receivable balance related to this customer totaled $7.3 million and $3.8 million as of December 31, 2006 and 2005, respectively. This customer accounted for approximately $23.7 million of the Company’s operating expenses in 2006 and $10.1 million of the Company’s capital expenditures in 2006. This customer accounted for approximately $21.6 million of the Company’s operating expenses in 2005 and $3.8 million of the Company’s capital expenditures in 2005. This customer accounted for approximately $17.8 million of the Company’s operating expenses in 2004 and $2.7 million of the Company’s capital expenditures in 2004. The payable balance related to this customer totaled $8.4 million and $4.1 million as of December 31, 2006 and 2005, respectively.

The Company was charged approximately $281,000, $320,000 and $323,000 in management fees for the years ended December 31, 2006, 2005 and 2004, by FrontStreet Partners, LLC. Additionally, for the respective periods, the Company was charged approximately $270,000, $251,000 and $225,000 for management and administrative services, accounting and financial services, and operating services, which are included in operating and maintenance expenses in the consolidated statements of operations.

In connection with the acquisition of WGP-KHC, LLC, the Company acquired rights and responsibilities under the Gathering Agreement with BP America Production Company (“BP”). Under the Gathering Agreement, BP dedicates for gathering by the Gathering System all of the commercially producible gas in a defined list of producing fields. The Gathering Agreement provides for the Company to charge a per unit gathering fee (the “Gathering Fee”) calculated on estimated cost of service over the total estimated units to be transported in a calendar year. The Gathering Fee is predetermined for a calendar year by November 7 of the preceding calendar year and then subject to redetermination on June 7. As part of the redetermination process on June 7, the Gathering Fee is trued-up, inclusive of interest, based on actual costs incurred including abandonment costs and actual units transported. For the years ended December 31, 2006, 2005 and 2004, the Company recorded $35.4 million, $38.8 million and $31.8 million, respectively, of revenue under the Gathering Agreement.

In connection with the acquisition of WGP-KHC, LLC, the Company obtained the rights and responsibilities under a Construction and Operating Agreement (the “C&O Agreement”) with BP. Under the terms of the C&O Agreement, BP is responsible for operating, maintaining and repairing the Gathering System. Subject to prior approval, the Company is responsible for paying for capital additions and expenses incurred by BP as the operator of the Gathering System. For the years ended December 31, 2006, 2005 and 2004, the Company expensed $23.5 million, $21.4 million and $17.5 million respectively for operating and maintenance expenses under the C&O Agreement.

The C&O Agreement requires BP to comply with all applicable environmental standards. While the Company would be responsible for any environmental contamination as a result of the operation of the Gathering System, remedies are provided to the Company under the C&O Agreement allowing the Company to recover costs incurred to reclaim a contaminated site. Additionally, the C&O Agreement states the Company is specifically responsible for the removal, remediation and abatement of Polychlorinated Biphenyls (“Remediation Work”). However, under the terms of the C&O Agreement, the Company can include up to $2.2 million of expenditures for Remediation Work related to conditions in existence prior to October 1994. BP, exercising its right to review any additional expenditure for Remediation Work above and beyond the $2.2 million, has agreed to pay for remediation work in excess of $2.2 million as of December 31, 2006. Cumulatively, as of December 31, 2006, 2005 and 2004, $2.8 million, $2.1 million and $1.8 million had been spent to date on Remediation Work. The Company also obtained an indemnification against any environmental losses for preexisting conditions prior to the acquisition date from the previous owner. Approximately $750,000 has been escrowed in the event BP does not agree to include in the cost of service expenditures for Remediation Work. As of December 31, 2006, the Company has not recorded any obligation for Remediation Work.

The Company and BP are party to an Annual Settlement Payment Agreement (“ASPA”). The purpose of the ASPA is to provide the Company with a fixed return on its investment in the Gathering System. The ASPA also provides the mechanism for recovery of the costs of current period Remediation Work. The amount due under the ASPA is calculated monthly, inclusive of interest. Payments under the ASPA for a calendar year are due on the following March 15. As of December 31, 2006 and 2005, the Company was due $4.4 million from BP and owed $0.9 million to BP, respectively.

In addition to the settlement described above, the ASPA provides for a supplemental tailgate processing fee to be earned by the Company (the “Tailgate Fee”) through October 3, 2004. The Tailgate Fee is calculated based on certain BP gas transported through the Gathering System. For the year ended December 31, 2004, the Company recorded $1.2 million in Tailgate Fees.