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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, 2004

or

[

]

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

For the transition period from ____________________ to ____________________

Commission file number 333-110979

SOUTHERN STAR CENTRAL CORP.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:  (646) 735-0500

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes     X       No         

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ X ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).   Yes            No      X   

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  None

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  79.367 shares as of March 11, 2005.

TABLE OF CONTENTS

2004 FORM 10-K

SOUTHERN STAR CENTRAL CORP.

Page

Forward-Looking Statements

3

PART I

Item 1.

Business

4

Item 2.

Properties

12

Item 3.

Legal Proceedings

13

Item 4.

Submission of Matters to a Vote of Security Holders

14

PART II

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

14

Item 6.

Selected Financial Data

14

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results

of Operations and Risk Factors

15

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 8.

Financial Statements and Supplementary Data

32

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial

Disclosure

32

Item 9A.

Controls and Procedures

32

Item 9B.  Other Information

32

PART III

Item 10.

Directors and Executive Officers of the Registrant

32

Item 11.

Executive Compensation

36

Item 12.

Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

38

Item 13.

Certain Relationships and Related Transactions

39

Item 14.  Principal Accountant Fees and Services

40

PART IV

Item 15.  Exhibits and Consolidated Financial Statement Schedules

40

 FORWARD-LOOKING STATEMENTS

The information in this report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “objective” and other similar expressions identify some of the statements that are forward-looking.  These statements are based on management’s beliefs and assumptions and on information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statement include, among others, the following:

·

future utilization of pipeline capacity, which can depend on energy prices and the prices for natural gas available on the Company’s system, competition from other pipelines and alternative fuels, the general level of natural gas demand, decisions by customers not to renew expiring natural gas transportation contracts, adequate supplies of natural gas, the construction or abandonment of natural gas customer facilities, weather conditions and other factors beyond the Company’s control;

·

operational risks and limitations of the Company’s pipeline system and of interconnected pipeline systems;

·

the ability to raise capital and fund capital expenditures in a cost-effective manner;

·

changes in federal, state or local laws and regulations to which the Company is subject, including allowed rates of return and related regulatory matters, and tax, environmental and employment laws and regulations;

·

Federal Energy Regulatory Commission’s ultimate decision on the current rate case, as to either Central’s tariff or its rates or other practices;

·

the ability to manage costs;

·

the ability of the Company’s customers to pay for its services;

·

environmental liabilities that are not covered by an indemnity or insurance;

·

the ability to expand into new markets as well as the ability to maintain existing markets;

·

the ability to obtain governmental and regulatory approval of various expansion projects;

·

the cost and effects of legal and administrative proceedings;

·

the effect of accounting interpretations and changes in accounting policies;

·

restrictive covenants contained in various instruments applicable to the Company and its subsidiaries which may restrict the Company’s ability to pursue its business strategies;

·

changes in general economic, market or business conditions; and

·

economic repercussions from terrorist activities and the government’s response to such terrorist activities.

Other factors and assumptions not identified above may also have been involved in deriving these forward-looking statements, and the failure of those other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected.  The Company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements.

 PART I

Item 1.  Business

GENERAL

Southern Star Central Corp.

Southern Star Central Corp. (Southern Star) was organized and incorporated in the state of Delaware on September 11, 2002 as a wholly-owned subsidiary of AIG Highstar Capital, L.P. (Highstar).  On September 13, 2002, Southern Star entered into a purchase agreement with a subsidiary of The Williams Companies, Inc. (Williams) for the acquisition of all the capital stock of Williams Gas Pipelines Central, Inc. (WGP-Central) and all the limited liability company membership units of Western Frontier Pipeline Company, L.L.C. (Western Frontier).  The purchase price was $555.0 million, including $380.0 million in cash plus the assumption of $175.0 million in outstanding WGP-Central debt.  The transaction (the Acquisition) became effective November 16, 2002.  Southern Star has no operations other than its investment in WGP - -Central and Western Frontier.  Effective December 9, 2002, WGP-Central’s name was changed to Southern Star Central Gas Pipeline, Inc. (Central).    

Southern Star operates as a holding company for its regulated natural gas pipeline operations and development opportunities.  Central is Southern Star’s only operating subsidiary and the sole source of its operating revenues and cash flows. Southern Star also owns the development rights for the Western Frontier project, which could be developed in the future.

The terms “Southern Star” or “the Company” denote Southern Star Central Corp. and its consolidated subsidiaries.

Southern Star Central Gas Pipeline, Inc.

Central is an interstate natural gas transportation company that owns and operates a regulated natural gas pipeline system, including facilities for natural gas transmission and natural gas storage with office headquarters in Owensboro, Kentucky.  The system operates in Colorado, Kansas, Missouri, Nebraska, Oklahoma, Texas and Wyoming, and serves customers in these seven states including major metropolitan areas in Kansas and Missouri, its main market areas.  As of December 31, 2004, Central’s natural gas pipeline system has a mainline delivery capacity of approximately 2.4 billion cubic feet (Bcf) of natural gas per day and is composed of approximately 6,000 miles of mainline and branch transmission and storage pipelines.  Central operates eight underground storage fields, seven in Kansas and one in Oklahoma, wit h an aggregate working gas storage capacity of approximately 43 Bcf and an aggregate delivery capacity of approximately 1.2 Bcf/day.  The combination and market proximity of Central’s integrated transportation and storage system allow it to provide multiple, high-value services to its customers.  Central’s service offerings include combined transportation/storage, transportation, storage, park and loan, and pooling. For the year ended December 31, 2004, 95% of Southern Star’s operating revenues were obtained through monthly firm reservation charges and 5% through commodity charges, which are based on volumes actually transported.

Central’s principal service is the delivery of natural gas to local natural gas distribution companies in the major metropolitan areas it serves.  At December 31, 2004, Central had transportation contracts with approximately 131 shippers.  Central transports natural gas to approximately 589 delivery points, including regulated natural gas distribution companies, municipalities, power plants, interstate and intrastate pipelines and large and small industrial and commercial customers.  The majority of Central’s business is conducted under long-term contracts with various expiration dates ranging from one to 20 years.  At December 31, 2004, the average remaining contract life on a volume-weighted basis was approximately five years.

For the year ended December 31, 2004, approximately 81% of Southern Star’s total operating revenues were generated from long-term contracts with its top ten customers. Natural gas transportation services for the two largest customers, Missouri Gas Energy Company, a division of Southern Union Company (approximately 30%), and Kansas Gas Service Company, a division of ONEOK, Inc. (approximately 29%), accounted for approximately 59% of operating revenues for the year ended December 31, 2004.  Missouri Gas Energy Company sells or resells natural gas to residential, commercial and industrial customers principally in certain major metropolitan areas of Missouri.  Kansas Gas Service Company sells or resells natural gas to residential, commercial and industrial customers principally in certain major metropolitan areas of Kansas .  Central has had significant business relationships with both of these customers or their predecessors for more than 20 years.  No other customer accounted for more than 10% of the Company’s revenues in 2004.

As with all interstate natural gas pipelines, Central’s transmission,  storage, and related activities are subject to regulation by the Federal Energy Regulatory Commission (FERC) and, as such, rates and charges for the transportation of natural gas in interstate commerce, the extension, enlargement or abandonment of jurisdictional facilities, and its accounting, among other things, are subject to regulation.

Competition

Central competes primarily with other interstate pipelines in the transportation of natural gas, and natural gas competes with other forms of energy available to Central’s customers, including electricity, coal, and fuel oils.  The principal elements of competition among pipelines are rates, terms of service, access to supply basins, and flexibility and reliability of services.  Central competes primarily with other interstate pipelines in the Kansas City metropolitan area and in Wichita, Kansas in the transportation and storage of natural gas.  One of these interstate pipelines became an affiliated company with one of Central’s largest customers during 2003.  

Pipeline Operations

Central currently has 39 compressor stations with approximately 205,000 certificated horsepower.  Twenty-eight of Central’s compressor stations are controlled remotely by its Supervisory, Control and Data Acquisition (SCADA) and station automation systems.  The SCADA system gathers data from various points on the pipeline such as compressor stations, chromatographs and metering stations. Central’s Gas Control Center remotely controls the operation of the automated engines at the compressor stations.

The system receives natural gas supplies from the major production areas of the Kansas Hugoton region, Oklahoma producing region, Wyoming Rocky Mountain region and Texas panhandle producing region.   The Kansas Hugoton region is a mature basin with substantial reserves.  The Company expects that gradual production declines in this area will be offset by attracting new supplies from other regions, particularly the Rocky Mountain region.  The Rocky Mountain region has substantial potential for future drilling and production.  Central’s Rawlins-Hesston line, which extends from Wyoming to Kansas, generally operates at full capacity.  The Company believes that its strategic location will continue to provide access to abundant natural gas supplies in the future.  

The system has 23 pipeline interconnects with major interstate and intrastate pipelines that provide customers the opportunity to access natural gas from a variety of U.S. basins.  Of the 23 interconnects, eight are delivery points; nine are receipt points; and six are bi-directional (both receipt and delivery) points.  The large number and geographic diversity of interconnects provide Central’s customers with a high degree of flexibility in sourcing natural gas supplies and independence from any single interconnect.  These interconnects allow the interaction of Central’s system with a substantial portion of the midwestern natural gas market, as well as access to major domestic pricing hubs.

Central has experienced average daily transportation throughput volumes as indicated in the tables below:

Trillion British thermal units (TBtu) per day

 This compares to Central’s average daily firm reserved capacity indicated below:  

TBtu per day

In addition, Central’s firm storage deliverability capacity has been 1.2 TBtu/day for each of these three years.  

Storage Operations

Central operates eight underground storage fields, seven in Kansas and one in Oklahoma, with an aggregate working natural gas storage capacity of approximately 43 Bcf and an aggregate delivery capacity of approximately 1.2 Bcf of natural gas per day.

Central’s storage services are a key component of its service offerings. During periods of peak demand, approximately 50% of the natural gas delivered to customers is supplied from Central’s storage fields.  Central’s customers inject natural gas into these fields in warm months, when natural gas demand is often lower, and withdraw natural gas during colder, peak demand months.  Storage also provides flexibility to manage weather sensitive loads, such as residential heating, with no disruption in service. Storage capacity enables Central’s system to operate more uniformly and efficiently throughout the year as well as allowing it to offer storage services in addition to its transportation services.  Central is the only interstate natural gas pipeline serving major metropolitan areas in its main mark et area that offers customers integrated on-system storage and transportation services.

Services

Transportation/Storage.  Central offers a no-notice service that combines its firm transportation and firm storage services to enable its customers to manage their weather sensitive needs.  The storage component of this service provides the customer with the flexibility to inject natural gas supplies into storage during the non-winter months when the cost of natural gas supplies is generally lower.  During the winter months, the customer withdraws the stored natural gas supplies as needed to satisfy its weather sensitive needs.  On peak days, customers rely on the storage component of this service to satisfy up to two-thirds of their natural gas supply needs.  This service accounted for approximately 65% of Central’s 2004 operating revenues, and as of December 31, 2004, accounted for approx imately 74% of its firm market area capacity, 43% of its firm production area capacity and 87% of its firm storage deliverability.

Transportation.  Central offers both firm and interruptible transportation service.  Central transports natural gas from a receipt point to a delivery point and provides the related administrative functions, such as contracting, scheduling, billing and measuring and allocating natural gas flow into and out of the pipeline, principally on behalf of local natural gas distribution companies, power generators, industrials, marketers and producers.  This service accounted for approximately 33% of Southern Star’s 2004 operating revenues, and as of December 31, 2004, comprised approximately 26% of Central’s firm market area capacity and 57% of its firm production area capacity.

Storage.  Central provides both firm and interruptible storage service. Central has approximately 1.2 TBtu/day of firm storage deliverability capacity and 43 TBtu of on-system working gas storage capacity.  Central’s storage service allows shippers to store natural gas close to their customers. Central’s storage facilities are strategically located in close proximity to its key market areas.  The majority of the firm storage capacity is contracted as a component of the transportation/storage service (approximately 87% of the firm storage deliverability).  The stand alone firm storage service (approximately 13% of firm storage deliverability) accounted for approximately 1% of the Company’s operating revenues for the year ended December 31, 2004.

Park and Loan.  This is an interruptible service that provides customers with the flexibility to balance their supplies with market demand.  Parking allows customers to store delivered natural gas on the pipeline on a temporary basis.  Loaning permits a shipper to borrow natural gas from Central’s system on a temporary basis and later return an identical quantity of natural gas at a designated point on the pipeline.  This service accounted for approximately 1% of the Company’s operating revenues for the year ended December 31, 2004.

Pooling.  Central’s pooling service allows customers to aggregate natural gas from many receipt points into a pool before selling the natural gas into the market and provides them with access to natural gas at competitive prices.  This is a service offered by interstate pipelines to eligible customers at no additional charge over regular applicable rates.  Central’s ability to provide this service from multiple supply regions distinguishes its pooling service, providing it with a competitive advantage.

Seasonality

Substantially all of Central’s operating revenues are generated from the collection of fixed monthly reservation fees for transportation and/or storage services.  As a result, fluctuations in natural gas prices and actual volumes transported and stored have a limited impact on Central’s operating revenues.  Since the fixed monthly reservation fees are generally consistent from month to month, Central’s operating revenues do not fluctuate materially from season to season.

Generally, construction and maintenance on Central’s pipeline occurs during the summer months when volume throughput is usually lower than during the winter heating season.  As such, operating and maintenance expenses are generally higher in the second and third quarters and the majority of Central’s capital expenditures are incurred during this time.

Regulation

FERC Regulation.  The siting of Central’s pipeline system and its transportation and storage of natural gas in interstate commerce for its customers and certain related customer services is subject to regulation by the FERC under the Natural Gas Act (NGA) of 1938 and under the Natural Gas Policy Act (NGPA) of 1978, and as such, its rates and charges for the transportation of natural gas in interstate commerce, the extension, enlargement or abandonment of jurisdictional facilities, and its accounting, among other things, are subject to regulation.  Central holds certificates of public convenience and necessity issued by the FERC authorizing ownership and operation of all pipelines and related facilities, including storage fields, which are considered jurisdictional and for which certificates are required u nder the NGA.  The pipeline’s tariff — a compilation of the pipeline’s rules, and operating and commercial practices which is binding on the pipeline and its customers — is a regulatory document and cannot be modified without public notice and FERC approval.

Central’s rates and charges for the transportation of natural gas and related services in interstate commerce are subject to regulation by the FERC.  FERC regulations and Central’s FERC-approved tariff allow it to establish and collect rates designed to give it an opportunity to recover all actually and prudently incurred operations and maintenance costs of its pipeline system, taxes, interest, depreciation and amortization and a regulated equity return.

Generally, rates charged by interstate natural gas companies may not exceed the just and reasonable rates approved by the FERC.  In addition, interstate natural gas companies are prohibited from granting any undue preference to any person, or maintaining any unreasonable difference in their rates or terms and conditions of service.  FERC regulations also generally prohibit Central from preventing shippers from freely assigning their capacity to other parties, provided that the assignee meets the credit rating standards imposed by Central’s FERC tariff and that the assignment is operationally feasible to accommodate.

Rates.  Natural gas pipeline companies subject to FERC jurisdiction may from time to time propose revised rates for their services in formal proceedings conducted by the FERC.  Pipeline customers, state regulatory commissions and others are permitted to participate in the FERC rate case proceeding.  In FERC rate case proceedings, the pipeline’s total cost of service is determined and is then divided among the various quantities and classes of service offered by the pipeline, resulting in a maximum rate for each type of service that the pipeline offers.  For bona fide commercial reasons, a pipeline may offer customers discounts from the maximum rate if such discounts will increase the overall volumes shipped by the pipeline.  Central provides no-notice service to local natural gas utilities, pursuant to which the utilities have flexible scheduling rights. In most locations, other than the Kansas City and Wichita metropolitan areas previously discussed, there is presently no competitive alternative.  As a result, Central’s largest customers generally pay the maximum reservation rates for their firm service.

Central’s rates are categorized by area served, type of service and interruptibility.  Central has divided its service territory into two discrete geographical areas for rate purposes:  the production area and the market area.  The production area is located generally in Wyoming, Colorado, Texas, Oklahoma and western Kansas.  The market area is located generally in Missouri, Nebraska and eastern Kansas.  Central’s rates are designed to create discrete transportation tariffs within the production area and the market area that are additive for the transportation of natural gas from the production area to the market area and vice versa.  The FERC generally requires rates to reflect the distances that natural gas is transported, and Central’s separate, additive rates are designed to comply wit h this FERC requirement.

On April 30, 2004, Central filed a general rate case under FERC Docket No. RP04-276 which became effective November 1, 2004, subject to the requirement that Central refund to customers any amounts it collects in excess of the rates ultimately allowed, with interest.  This general rate proceeding increases Central's transportation, storage, and related rates, and also provides for changes to a number of the terms and conditions of customer service which are provided for in Central’s tariff.   On May 28, 2004, the FERC issued an Order ultimately suspending the effective date of the increase until November 1, 2004 and asking the Chief Administrative Law Judge (ALJ) to designate an ALJ to convene a pre-hearing conference to establish a procedural schedule for a formal, trial-type evidentiary proceeding and allowing t ime for settlement discussions.

The new general rate proceeding is intended to enable Central to increase revenues to reflect cost levels that are in excess of the cost levels reflected in Central’s previous FERC general rate proceeding in 1995.  Since then, Central has invested new capital in facilities, and has incurred increased income taxes and depreciation expenses.  In addition, Central filed to receive an increased rate of return on equity.     

On January 21, 2005, Central filed a Stipulation and Agreement with the FERC reflecting a settlement it reached with all of the active parties (including the FERC’s litigation staff) that would resolve all of the issues set for hearing in the rate proceeding.  Pursuant to the terms of the settlement agreement, the Company expects that the settlement rates would increase Central’s annual revenues by approximately $18.0 million above the revenues collected for the 12 months ended January 31, 2004, which is the 12-month base period used to justify the rate increase.  On February 28, 2005, the FERC’s presiding ALJ issued an order finding the settlement to be fair, reasonable, and in the public interest, as well as uncontested, and certified it to the FERC for final action.  At December 31, 2004, the Company had estimated reserves for revenues collected in excess of expected settlement rates of approximately $3.0 million, including interest, which will be refunded to customers within 60 days of final approval by the FERC.  The reserve is included in other accrued liabilities on the consolidated Balance Sheets.

Recent FERC Regulatory Orders. The “Little Mo” system is a facility originally constructed pursuant to Section 311 of the NGPA.  This system consists of approximately 200 miles of eight-inch pipeline extending from Jackson County, Missouri to St. Charles County, Missouri, near St. Louis, and includes three compressor stations.  Since this system was built originally under Section 311 of the NGPA, it was not required to be certificated under the NGA, as amended, 15 U.S.C. §717 et seq., and the regulations and orders thereunder.  These facilities are not for the purpose of locally distributing natural gas to retail customers, and therefore do not subject Central to the Public Utility Holding Company Act of 1935.  On September 12, 2003, Central filed an application with the FERC in Docket No. CP03-352, requesting authority to convert the status of these facilities from “311” facilities to facilities governed by Section 7 of the NGA, consistent with the remainder of its system.  An order granting the certificate under Section 7 of the NGA was issued on February 18, 2004.  As a result of this order, Central now has the Federal right of eminent domain with respect to these facilities like all of its other pipeline and storage facilities and compressors.

In November 2003, the FERC issued a final rule in Docket No. RM01-10-000 (Order 2004) adopting new reporting requirements regarding transmission providers and their “energy affiliates.”  The effective date for compliance with the new regulations was deferred several times and eventually was set for September 22, 2004.  Central made its Order 2004 compliance filing on September 22, 2004 listing its “energy affiliates” and describing how it would comply with the rule.  At the same time, Central, in FERC Docket No. TS04-285, completed revisions to its Electronic Bulletin Board (EBB) and reporting practices consistent with the new rule.  Subsequently, at the request of the FERC staff (consistent with the FERC staff’s requests to other pipelines ), minor alterations to Central’s EBB posting practices were implemented.  On December 21, 2004, Order 2004-C was issued clarifying certain requirements under the Rule.  On January 27, 2005, Central filed with the FERC certain changes to its Order 2004 procedures in recognition of these clarifications.

On February 11, 2004, the FERC issued a final rule in Docket No. RM-03-8-000, requiring interstate natural gas pipelines to file quarterly financial information.  The quarterly report, FERC Form No. 3-Q, includes a comparative Balance Sheet, Statement of Income and Retained Earnings, Statement of Cash Flows, Statement of Accumulated Comprehensive Income and Hedging Activities and other selected financial information prepared in accordance with the FERC accounting requirements.  Central began filing FERC Form 3-Q in August 2004 in accordance with the requirements.

On November 11, 2004, the FERC issued a notice of inquiry regarding pipeline discounting practices.  The Company will continue to monitor the progress of this proceeding for any impact it may have on the Company.

The nature and degree of regulation of natural gas companies has changed significantly during the past 25 years, and there is no assurance that further substantial changes will not occur or that existing policies and rules will not be applied in a new or different manner.

Safety Regulations.  Central is subject to the Natural Gas Pipeline Safety Act of 1968 (NGPSA), as amended, which regulates safety requirements in the design, construction, operation and maintenance of interstate natural gas transmission facilities.  The NGPSA requires any entity that owns or operates pipeline facilities to comply with applicable safety standards, to establish and maintain inspection and maintenance plans and to comply with such plans.  Inspections and tests are performed at prescribed intervals to ensure the integrity of the pipeline system.  These inspections, for example, include periodic corrosion surveys, testing of relief and over-pressure devices and periodic aerial inspections of the rights-of-way.

In 2002, the U.S. Congress enacted the Pipeline Safety Improvement Act (PSIA), with final regulations implementing the PSIA issued in December 2003.  The PSIA makes numerous changes to pipeline safety law, the most significant of which is the requirement that operators of pipeline facilities implement written integrity management programs.  Such programs include a baseline integrity assessment of each facility located in high consequence areas that must be completed within ten years of the enactment of the PSIA.  The PSIA and regulations will impose increased costs associated with new pipeline inspection and pipeline integrity program requirements, but, based on current information the Company does not expect these costs to have a material adverse effect upon its earnings.  Southern Star’s capital expenditure program includes its estimated expenditures required to comply with the PSIA.

In 2002, the Kansas Corporation Commission enacted the Kansas Underground Porosity Gas Storage Regulations to establish natural gas storage regulations for porosity natural gas storage fields located in the state of Kansas.  These regulations impose numerous requirements including a geologic and hydro-geologic evaluation of storage fields, monitoring and reporting requirements and periodic inspections and testing of wells.  Seven of the eight storage fields Central operates are located in the state of Kansas.  Central anticipates that these regulations will result in increased costs to operate its storage fields; however, based on current information, it does not expect the costs to have a material adverse effect upon earnings.  Southern Star’s capital expenditure program includes its estimated expenditures r equired to comply with these regulations.

The Company believes that costs incurred to comply with safety regulations are prudent costs incurred in the ordinary course of business and, as such, will be recoverable in rates.

Environmental Matters

Central is subject to federal, state and local statutes, rules and regulations relating to environmental protection, including the National Environmental Policy Act, the Clean Water Act, the Clean Air Act and the Resource Conservation and Recovery Act.  These laws and regulations can result in increased capital, operating and other costs.  These laws and regulations generally subject Central to inspections and require it to obtain and comply with a wide variety of environmental licenses, permits and other approvals.   Under the Clean Air Act, the U.S. Environmental Protection Agency (EPA) has recently promulgated regulations addressing emissions from equipment present at typical natural gas compressor stations.  These regulations include National Emission Standards for Hazardous Air Pollutants (NESHAPs) for r eciprocating internal combustion engines, stationary turbines, and glycol dehydration equipment in addition to regulations that address regional transport of ozone (i.e. NOx SIP Call).  Furthermore, there is no impact anticipated to Central’s existing operations based on an analysis of these regulations.  The EPA has also promulgated a new ambient air quality standard for ozone (i.e. the eight hour standard) which is generally more stringent than the standard it replaces (i.e. the one hour standard).   Presently, all of Central’s facilities are located in areas designated as in “attainment” for compliance with the eight hour ozone standard.  Therefore, the new standard does not impact Central’s existing operations.

Central considers environmental assessment, remediation costs and costs associated with compliance with environmental standards to be recoverable through rates, as they are prudent costs incurred in the ordinary course of business.  The actual costs incurred will depend on the actual amount and extent of contamination discovered, the final cleanup standards mandated by the EPA or other governmental authorities, and other factors.  Central has identified polycholorinated biphenyl (PCB) contamination in air compressor systems, soils and related properties at certain compressor station sites and has been involved in negotiations with the EPA and state agencies to develop screening, sampling and cleanup programs.  In addition, negotiations with certain environmental agencies concerning investigative and remedial actions re lative to potential mercury contamination at certain natural gas metering sites have commenced.  At December 31, 2004 and 2003, Central had accrued a liability of approximately $5.7 million and $6.8 million, respectively, representing the current estimate of future environmental cleanup costs to be incurred over the next five to six years.  Central currently plans to spend an estimated $1.0 million annually to remediate the PCB/mercury contamination.  Central recovers approximately the same amount in its current rates each year.  Central has environmental insurance, which provides an aggregate $25.0 million in coverage (subject to certain exclusions, limits and deductibles) for certain cleanup and remediation obligations.  The policy covers, among other things, up to $10.0 million for costs incurred above the estimated cleanup cost of $8.6 million at the inception of the policy for PCB contamination at 14 compressor stations for a period of five years ending November 15, 2007.

Central may be responsible for environmental cleanup and other costs at sites that it formerly or currently owns or operates and at third-party waste disposal sites.  Central cannot predict with certainty the amount or timing of future expenditures related to environmental matters because of the difficulty of estimating cleanup costs at sites not yet identified.  There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liabilities on all potentially responsible parties. Environmental regulations may also require Central to install pollution control equipment at, or perform environmental remediation on, its facilities.

Historically, with respect to any capital expenditures required to meet applicable standards and regulations, the FERC has granted the requisite rate relief so that, for the most part, such expenditures and a return thereon have been allowed to be recovered.  Central has no reason to believe the FERC will change that position.  Central believes that compliance with applicable environmental requirements is not likely to have a material adverse effect upon its financial condition or results of operations.

Recent Expansion Projects

Central generally undertakes expansion projects only when it has firm transportation and/or storage commitments from customers that Central believes will provide revenues sufficient for Central to earn its regulated allowed return on investment.  These customer commitments may take the form of actual reimbursement to Central for the cost of the project or long-term firm capacity contracts for increased transportation or storage.  The following is a summary of notable expansion projects for the past year:

Southwest Missouri.  The Southwest Missouri expansion consists of 15.7 miles of 20-inch pipe and modifications at the Saginaw compressor station and was placed in service in August 2004.  The capital cost of the project was $14.6 million, and the annual revenue increase pursuant to the transportation contracts will be $2.5 million in year one, increasing to $3.1 million by year 15.  Empire District Electric has contracted for an additional firm contract of 28,800 MMBtu/day for its State Line Power Plant and an additional 35,000 MMBtu/day for its LaRussell Energy Center.  Kansas Gas Service has subscribed for an additional firm contract of 3,000 MMBtu/day in the open season.    

Cheyenne Plains Interconnect.  The interconnect with the Cheyenne Plains Pipeline in Kiowa County, Kansas, referred to as Sand Dunes, was placed in service in January 2005.  The facility is capable of delivering to Central from Cheyenne Plains up to 400,000 MMBtu/day of Rocky Mountain natural gas supplies from the developing reserves in that region.

Potential Expansion Projects

Ozarks Trails.   A binding open season was held during the period from January 26, 2005 through February 25, 2005 on the Company’s Ozark Trails Expansion Project, which proposes to expand pipeline capacity in certain parts of Missouri, Kansas, and Oklahoma.  The Company is currently evaluating potential design parameters and related costs of the project based on the results of the open season.  If sufficient market support has been obtained as a result of the open season to economically support the expansion, the project will be filed with the FERC for approval with an anticipated in-service date as early as the fourth quarter of 2006.

Rocky Mountains.   Central continues to pursue, either through development, acquisition or partnership, expansion opportunities in the Rocky Mountain natural gas region.  These opportunities, in all likelihood, will be pipeline infrastructure projects that may or may not be contiguous to the existing Central pipeline system.

Insurance

Central maintains insurance coverage for its pipeline system in such amounts and covering such risks as is typically carried by companies engaged in similar businesses and owning similar properties in the same general areas in which it operates.  Central’s insurance program includes general liability insurance, auto insurance, workers’ compensation insurance, non-owned aviation insurance, environmental insurance, all-risk property and business interruption insurance, terrorism insurance,  and excess liability insurance.

Employees

As of December 31, 2004, the Company had 458 employees at Central and none at Southern Star.  Central has a collective bargaining agreement with the International Union of Operating Engineers Local No. 647 (the Union), covering approximately 187 field employees.  This agreement was renegotiated during 2004 for a four-year term to expire July 15, 2008.  No strike or work stoppage has occurred at any of Central’s facilities during the last 20 years.  Southern Star believes that the relationship between Central and the Union is positive.  The Company provides competitive benefits including medical, 401(k) and pension benefits for all employees.

Reports

Southern Star files annual, quarterly and current reports with the Securities and Exchange Commission (SEC).  Southern Star’s SEC filings are available free of charge to the public over the Internet at the SEC’s website at www.sec.gov and on the Company’s website at www.southernstarcentralcorp.com as soon as reasonably practicable following the time that the documents are filed with or furnished to the SEC.  You may also read and copy any document Southern Star files with the SEC at its public reference rooms in Washington D.C., New York, NY and Chicago, IL.  Please call the SEC at (800) 732-0330 for further information on the public reference rooms.

Item 2.  Properties

Ownership of Property

Central’s pipeline system includes approximately 6,000 miles of various diameter pipe, eight storage fields and 39 compressor stations.  The system is constructed and maintained pursuant to rights-of-way, easements, permits, licenses or consents on and across properties owned in fee by others.  Most of these easements and rights-of-way are perpetual in nature and any term leases are perpetual as long as annual revenue payments are made.  Central’s compressor stations with appurtenant facilities are located in whole or in part upon lands owned by Central in fee, or held under the same type of term lease as described above, pursuant to permits issued or approved by public authorities, or pursuant to perpetual easements granted by private landowners.  Central’s pipeline, storage and compressor faciliti es are all subject to FERC certificates, the issuance of which provides Central with eminent domain rights to occupy its right-of-way for certain pipeline-related purposes.

In October 2004, the Company completed construction of a new headquarters building in Owensboro, Kentucky under a capital lease.  The project, including furnishing the facility, cost approximately $9.0 million.  The project was financed by the issuance of economic development bonds through the Owensboro-Daviess County Industrial Authority.  On February 4, 2004, Central entered into a 20-year lease with the Owensboro-Daviess County Industrial Authority for use of the facility after which ownership of the facility will transfer to Central for a nominal fee.  The assets are included in Property, Plant and Equipment as a capital lease and the related obligation is classified as long-term debt on the consolidated Balance Sheets.  The overall effective interest rate on the obligation is 6.29%.  Interest is paid semi-annually in January and July; principal payments will begin in July 2005.

Central also has leases covering office space located in Lenexa, Kansas; Hesston, Kansas; Independence, Kansas; Bartlesville, Oklahoma; Tulsa, Oklahoma; and Woodward, Oklahoma.  These leases are not for substantial space and have an aggregate annual rent of $0.2 million.

Item 3.  Legal Proceedings

United States ex rel, Grynberg v. Williams Natural Gas Company, et. al. (the Grynberg Litigation)

In 1998, Jack Grynberg, an individual, sued Central and approximately 300 other energy companies, purportedly on behalf of the federal government (qui-tam).  Invoking the False Claims Act, Grynberg alleges that the defendants have mismeasured the volume and wrongfully analyzed the heating content of natural gas, causing underpayments of royalties to the United States.  The relief sought is an unspecified amount of royalties allegedly not paid to the federal government, treble damages, or civil penalty, attorney fees and costs.  Thus far, the Department of Justice has declined to intervene in Grynberg’s qui-tam cases, which have been consolidated for pretrial purposes before a single judge in the United States District Court (Court) for the District of Wyoming.  The defendants’ obligation to file answers has been stayed, and thus far discovery has been limited to public disclosure/original source jurisdictional issues.  On June 4, 2004, a motion, with supporting briefs, was filed by the Joint Defendants requesting the Court to dismiss Grynberg’s claims based on lack of subject matter jurisdiction.  These motions have now been fully briefed and oral arguments are scheduled to occur on March 17 and 18, 2005.

Will Price, et al. v. El Paso Natural Gas Co., et al., Case No. 99 C 30, District Court, Stevens County, Kansas

In this putative class action filed May 28, 1999, the named plaintiffs (Plaintiffs) have sued over 50 defendants, including Central.  Asserting theories of civil conspiracy, aiding and abetting, accounting and unjust enrichment, their Fourth Amended Class Action Petition alleges that the defendants have undermeasured the volume of, and therefore have underpaid for, the natural gas they have obtained from or measured for Plaintiffs.  Plaintiffs seek unspecified actual damages, attorney fees, pre- and post-judgment interest, and reserved the right to plead for punitive damages.  On August 22, 2003, an answer to that pleading was filed on behalf of Central.  Despite a denial by the court on April 10, 2003 of their original motion for class certification, the Plaintiffs continue to seek the certification of a class. & nbsp;The Plaintiffs’ motion seeking class certification for a second time should be fully briefed by the end of March 2005, and the Court is scheduled to hear oral arguments on this issue in early April 2005.

Will Price, et al. v. El Paso Natural Gas Co., et al., Case No. 03 C 23, District Court, Stevens County, Kansas

In this putative class action filed May 12, 2003, the named Plaintiffs from Case No. 99 C 30 (discussed above) have sued the same defendants, including Central.  Asserting substantially identical legal and/or equitable theories, the Original Class Action Petition alleges that the defendants have undermeasured the British thermal unit (Btu) content of, and therefore have underpaid for, the natural gas they have obtained from or measured for Plaintiffs.  Plaintiffs seek unspecified actual damages, attorney fees, pre- and post-judgment interest, and reserved the right to plead for punitive damages.  On November 10, 2003, an answer to that pleading was filed on behalf of Central.  The Plaintiffs’ motion seeking class certification for a second time should be fully briefed by the end of March 2005, and the Court i s scheduled to hear oral arguments on this issue in April 2005.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters

There is no established public trading market for the common stock of the Company.  As of March 11, 2005, all of the Company’s common stock was held by two holders of record.

On January 21, 2003, Southern Star authorized and issued 500 shares of Series A Preferred Stock to an accredited investor for $50.0 million in cash.  Southern Star used the proceeds to repurchase 22.22 shares of its common stock owned by Highstar.  The Series A Preferred Stock is not registered under the Securities Act of 1933, as amended (the Securities Act), and was sold in a transaction exempt from registration pursuant to Regulation D of the Securities Act.

Simultaneously with the issuance of its Series A Preferred Stock, Southern Star issued a warrant to the purchaser of the Series A Preferred Stock.  The warrant was initially exercisable for two shares of Southern Star’s common stock, but was subsequently amended to represent two percent (2%) of Southern Star’s then outstanding common stock, or approximately 1.587 shares.  The warrant was exercised in full on August 15, 2003 in accordance with its terms.  

Prior to the exercise of the warrant, a dividend was declared on July 31, 2003 to Highstar, the sole holder of record of common stock as of that date.  The $50.0 million dividend was divided into multiple payments of which $25.0 million was paid in 2003 and $25.0 million was paid in 2004.  

On August 8, 2003, Southern Star issued $180.0 million of 8.5% Senior Secured Notes due August 1, 2010 (the 8.5% Notes).  Southern Star sold the 8.5% Notes for cash to an initial purchaser in a transaction exempt from registration pursuant to Regulation D of the Securities Act.  The proceeds were used to repay in full the balance of a bridge loan used to finance the Acquisition of Central and certain other expenses.  Subsequently, the initial purchaser sold the 8.5% Notes to qualified institutional buyers (as defined in the rules promulgated under the Securities Act) in transactions exempt from registration pursuant to Rule 144A and Regulation S of the Securities Act.  On December 5, 2003, Southern Star filed a registration statement with the SEC to register notes substantially similar to the 8.5% Notes (the New N otes).  On January 9, 2004, the registration statement was declared effective.  The New Notes were offered in exchange for the 8.5% Notes.  All the 8.5% Notes were exchanged for the New Notes.

The declaration and payments of dividends or distributions to equity holders, under Southern Star’s 8.5% Notes indenture is subject to a minimum fixed charge coverage ratio and available quarterly cash flows from operations, as defined in the indenture.  The Company’s Series A Preferred Stock and related agreements also restrict the payment of dividends or distributions to the equity holders through certain conditions.  The Company expects to continue to pay dividends as permitted under the 8.5% Notes indenture and other agreements discussed above.

Item 6.  Selected Financial Data

SELECTED HISTORICAL FINANCIAL DATA
SOUTHERN STAR CENTRAL CORP. AND SUBSIDIARIES

Southern Star was formed on September 11, 2002 but undertook no financial activity until the Acquisition became effective on November 16, 2002.  Therefore, Statements of Consolidated Operations and Cash Flows for periods ending prior to November 16, 2002 reflect the operations of WGP-Central, the predecessor entity.  Hence, there is a blackline division on the consolidated financial statements, which is intended to signify that the reporting entities shown are not comparable.

You should read these tables in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this report.

Southern Star Central Corp. and Subsidiaries
Selected Historical Financial Data