PANHANDLE EASTERN PIPE LINE CO - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from to
-------- ---------

Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------

1-2921 PANHANDLE EASTERN PIPE LINE COMPANY 44-0382470
(A Delaware Corporation)
5444 Westheimer Road, P.O. Box 4967, Houston, Texas 77210-4967
(713)989-7000

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) have 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
Registrants were required to file such reports), and (2) have 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. [ ]

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

As of June 28, 2002 and March 14, 2003, CMS Energy held all voting and
non-voting common equity of Panhandle.

Panhandle Eastern Pipe Line Company meets the conditions set forth in General
Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K
with the reduced disclosure format. Items 4, 6, 10, 11, 12 and 13 have been
omitted and Items 1, 2 and 7 have been reduced in accordance with Instruction I.

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TABLE OF CONTENTS

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GLOSSARY

Certain terms used in the text and financial statements are defined below.

APB....................................... Accounting Principles Board

APB Opinion No. 18........................ APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock"

APB Opinion No. 25........................ APB Opinion No. 25, "Accounting for Stock Issued to Employees"

APB Opinion No. 30........................ APB Opinion No. 30, "Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business"

AMT....................................... Alternative minimum tax

Accumulated Benefit Obligation............ The liabilities of a pension plan based on service and pay to date.
This differs from the Projected Benefit Obligation that is typically
disclosed in that it does not reflect expected future salary increases

Arthur Andersen........................... Arthur Andersen LLP

bcf....................................... Billion cubic feet

BG LNG Services........................... BG LNG Services, Inc., a subsidiary of BG Group of the United Kingdom

Board of Directors........................ CMS Energy Board of Directors

Centennial................................ Centennial Pipeline, LLC

Clean Air Act............................. Federal Clean Air Act, as amended

CMS Capital............................... CMS Capital Corp., a subsidiary of Enterprises

CMS Energy................................ CMS Energy Corporation, the parent of Consumers and Enterprises

CMS Energy Common Stock................... Common stock of CMS Energy, par value $.01 per share

CMS Gas Transmission...................... CMS Gas Transmission Company, a subsidiary of Enterprises

CMS MST................................... CMS Marketing, Services and Trading Company, a subsidiary of Enterprises

CMS Panhandle Holdings, LLC .............. An indirect subsidiary of Panhandle Eastern Pipe Line

Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy

DOE....................................... U.S. Department of Energy

Duke Energy............................... Duke Energy Corporation, a non-affiliated company

Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy

Ernst & Young............................. Ernst & Young LLP

EPA....................................... U. S. Environmental Protection Agency

FASB...................................... Financial Accounting Standards Board

FASB Interpretation No. 45................ FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirement for Guarantees, Including Indirect Guarantees of
Indebtedness of Others"

FASB Interpretation No. 46................ FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"

FERC...................................... Federal Energy Regulatory Commission

FTC....................................... Federal Trade Commission

Guardian ................................. Guardian Pipeline, L.L.C.

INGAA .................................... Interstate Natural Gas Association of America

LNG....................................... Liquefied natural gas

LNG Holdings.............................. CMS Trunkline LNG Holdings, LLC, a subsidiary of CMS Panhandle Holdings, LLC

MACT...................................... Maximum Achievable Control Technology

MAPL...................................... Marathon Ashland Petroleum, LLC, partner in Centennial

MD&A...................................... Management's Discussion and Analysis

3

Moody's .................................. Moody's Investors Service, Inc.

NOPR...................................... Notice of Proposed Rulemaking

OPEB...................................... Postretirement benefit plans other than pensions for retired employees

Pan Gas Storage........................... Pan Gas Storage Company, a subsidiary of Panhandle Eastern
Pipe Line Company

Panhandle................................. Panhandle Eastern Pipe Line Company, including all of its subsidiaries.

Panhandle Eastern Pipe Line............... Panhandle Eastern Pipe Line Company, a wholly owned subsidiary
of CMS Gas Transmission

Panhandle Storage......................... CMS Panhandle Storage Company, a subsidiary of Panhandle
Eastern Pipe Line Company

PCB....................................... Poly chlorinated biphenyl

Pension Plan.............................. The trusteed, non-contributory, defined benefit pension plan
of Panhandle, Consumers and CMS Energy

Sea Robin................................. Sea Robin Pipeline Company

SEC....................................... U.S. Securities and Exchange Commission

SERP...................................... Supplemental Executive Retirement Plan

SFAS...................................... Statement of Financial Accounting Standards

SFAS No. 5................................ SFAS No. 5, "Accounting for Contingencies"

SFAS No. 34............................... SFAS No. 34, "Capitalization of Interest Cost"

SFAS No. 71............................... SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"

SFAS No. 87............................... SFAS No. 87, "Employers' Accounting for Pension"

SFAS No. 106.............................. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions"

SFAS No. 121.............................. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of"

SFAS No. 123.............................. SFAS No. 123, "Accounting for Stock-Based Compensation"

SFAS No. 133.............................. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted"

SFAS No. 141.............................. SFAS No. 141, "Business Combinations"

SFAS No. 142.............................. SFAS No. 142, "Goodwill and Other Intangible Assets"

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

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

SFAS No. 145.............................. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections"

SFAS No. 146.............................. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"

SFAS No. 148.............................. SFAS No. 148, "Accounting for Stock-Based Compensation"

SIPS...................................... State Implementation Plans

Southern Union............................ Southern Union Company, a non-affiliated company

TBtu...................................... Trillion British thermal unit

TEPPCO.................................... TE Products Pipeline Company, Limited Partnership, partner in Centennial

Trunkline................................. CMS Trunkline Gas Company, LLC, a subsidiary of CMS Panhandle Holdings, LLC

Trunkline LNG............................. CMS Trunkline LNG Company, LLC, a subsidiary of LNG Holdings.

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PART I

ITEM 1. BUSINESS

GENERAL

CMS ENERGY

CMS Energy, formed in Michigan in 1987, is an energy holding company
operating through subsidiaries in the United States and in selected
markets around the world. Its two principal subsidiaries are Consumers and
Enterprises. Consumers is a public utility that provides natural gas and/or
electricity to almost 6 million of Michigan's 10 million residents and serves
customers in all 68 of the state's Lower Peninsula counties. Enterprises,
through subsidiaries, is engaged in several energy businesses in the United
States and in selected international markets. For 2002, CMS Energy's
consolidated operating revenue was approximately $8.7 billion.

PANHANDLE

Panhandle is a wholly owned subsidiary of CMS Gas Transmission and
ultimately CMS Energy. On December 21, 2002, CMS Energy reached a definitive
agreement to sell the Panhandle companies to Southern Union Panhandle Corp. The
agreement calls for Southern Union Panhandle Corp., a newly formed entity owned
by Southern Union Company and AIG Highstar Capital, L.P. to pay $662 million in
cash and assume $1.166 billion in debt. Under terms of the agreement, CMS Energy
was to retain Panhandle's ownership in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net deferred tax assets, all tax
liabilities, and pension assets and liabilities. Panhandle has since sold its
interest in Centennial and the Guardian interest and the related cash collateral
has been transferred to Panhandle's direct parent, CMS Gas Transmission. The
sale of Panhandle has been approved by the board of directors of each company
and is subject to customary closing conditions and action by the Federal Trade
Commission under the Hart-Scott-Rodino Act.

On February 10, 2003, Panhandle sold its one-third equity interest in
Centennial Pipeline, LLC for $40 million to Centennial's two other partners,
MAPL and TEPPCO. Panhandle has been released by MAPL, TEPPCO and the lenders for
any liabilities, including credit fees, related to Panhandle's $50 million
parent guaranty of the project debt. In December 2002, Panhandle recorded a $26
million pre-tax ($16 million after-tax) writedown of its investment in
Centennial to $40 million.

On March 10, 2003, Panhandle's ownership interest in Guardian and $63
million of cash collateral was transferred to CMS Gas Transmission. Panhandle
was also released from its guarantee obligations associated with the Guardian
non-recourse guaranty as of March 10, 2003, by the partners, Prudential and the
other noteholders.

Panhandle Eastern Pipe Line, formed in Delaware in 1929, is a wholly
owned subsidiary of CMS Gas Transmission. In March 1999, CMS Energy acquired
Panhandle Eastern Pipe Line and its principal subsidiaries, Trunkline and Pan
Gas Storage, as well as Panhandle Eastern Pipe Line's affiliates, Trunkline LNG
and Panhandle Storage, from subsidiaries of Duke Energy. Immediately following
the acquisition, Trunkline LNG and Panhandle Storage became wholly owned
subsidiaries of Panhandle Eastern Pipe Line. In December 2001, Panhandle
monetized the value of its Trunkline LNG business and the value created by
long-term contracts for capacity at the Trunkline LNG Lake Charles terminal. The
transaction included the formation of CMS Trunkline LNG Holdings, LLC, which now
owns 100 percent of Trunkline LNG. At December 31, 2001, LNG Holdings was
jointly owned by a subsidiary of Panhandle Eastern Pipe Line and Dekatherm
Investor Trust, an unaffiliated entity. In November 2002, Panhandle acquired
Dekatherm Investor Trust's interest for approximately $41 million and now owns
100% of LNG Holdings, which has $281 million of non-recourse secured debt at
December 31, 2002. For additional information, see ITEM 7. PANHANDLE'S
MANAGEMENT'S DISCUSSION AND ANALYSIS - RESULTS OF OPERATIONS.

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Panhandle is primarily engaged in the interstate transmission and
storage of natural gas and also provides LNG terminalling and regasification
services. Panhandle operates a large natural gas pipeline network, which
provides customers in the Midwest and Southwest with a comprehensive array of
transportation services. Panhandle's major customers include 25 utilities
located primarily in the United States Midwest market area, which encompasses
large portions of Illinois, Indiana, Michigan, Missouri, Ohio and Tennessee.

In 2002, Panhandle's consolidated operating revenue was $484 million.
Of Panhandle's operating revenue, 77 percent was generated from transportation
services, 12 percent from LNG terminalling services, 8 percent from storage
services and 3 percent from other services. During 2002, sales to Proliance
Energy, LLC, a nonaffiliated local distribution company and gas marketer,
accounted for 16 percent of Panhandle's consolidated revenues. Also during 2002,
sales to BG LNG Services, a nonaffiliated gas marketer, accounted for 13 percent
of Panhandle's consolidated revenue. Sales to subsidiaries of CMS Energy,
primarily Consumers, accounted for 12 percent of Panhandle's consolidated
revenues during 2002; 15 percent during 2001; and 12 percent during 2000. No
other customer accounted for 10 percent or more of Panhandle's consolidated
revenues during 2002, 2001 or 2000. Aggregate sales to Panhandle's top ten
customers accounted for 67%, 60% and 53% of total revenues during 2002, 2001 and
2000, respectively. For additional information, see ITEM 7. PANHANDLE'S
MANAGEMENT'S DISCUSSION AND ANALYSIS -- RESULTS OF OPERATIONS.

For the years 1998 to 2002, Panhandle's combined throughput was 1,141
TBtu, 1,139 TBtu, 1,374 TBtu, 1,335 TBtu and 1,259 TBtu, respectively. Beginning
in March 2000, the combined throughput includes Sea Robin's throughput. A
majority of Panhandle's revenue comes from long-term service agreements with
local distribution company customers. Panhandle also provides firm
transportation services under contract to gas marketers, producers, other
pipelines, electric power generators and a variety of end-users. In addition,
the pipelines offer both firm and interruptible transportation to customers on a
short-term or seasonal basis. Demand for gas transmission on Panhandle's
pipeline systems is seasonal, with the highest throughput and a higher portion
of revenues occurring during the colder period in the first and fourth quarters.

NATURAL GAS TRANSMISSION PROPERTIES:. Panhandle has approximately
10,700 miles of pipeline in the United States. Panhandle Eastern Pipe Line's
natural gas transmission system consists of four large diameter pipelines
extending approximately 1,300 miles from producing areas in the Anadarko Basin
of Texas, Oklahoma and Kansas through the states of Missouri, Illinois, Indiana,
Ohio and into Michigan. Trunkline's transmission system now includes 2 large
diameter pipelines which extend approximately 1,400 miles from the Gulf Coast
areas of Texas and Louisiana through the states of Arkansas, Mississippi,
Tennessee, Kentucky, Illinois and Indiana to a point on the Indiana-Michigan
border.

Panhandle owns and operates 47 compressor stations. It also has five
gas storage fields located in Illinois, Kansas, Louisiana, Michigan and Oklahoma
with an aggregate storage capacity of 70 bcf.

During 2002, Panhandle also had a one-third interest in Guardian, which
constructed a 141 mile, 36 inch pipeline from Illinois to southeastern Wisconsin
for the transportation of natural gas. The Guardian pipeline was placed into
service on December 7, 2002. On March 10, 2003, Panhandle's ownership interest
in Guardian was transferred to CMS Gas Transmission, Panhandle's direct parent
company. Panhandle was also released from its guarantee obligations associated
with the Guardian non-recourse guaranty as of March 10, 2003 by the partners,
Prudential and the other note holders. For additional information, see Item 7.
PANHANDLE'S MANAGEMENT'S DISCUSSION AND ANALYSIS - OUTLOOK.

REGULATION

Panhandle and its subsidiaries are subject to regulation by various
federal, state, local and foreign governmental agencies, including those
specifically described below.

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FEDERAL ENERGY REGULATORY COMMISSION

FERC has comprehensive jurisdiction over Panhandle Eastern Pipe Line,
Pan Gas Storage, Trunkline, Trunkline LNG and Sea Robin as natural gas companies
within the meaning of the Natural Gas Act. FERC jurisdiction relates, among
other things, to the acquisition, operation and disposal of assets and
facilities and to the service provided and rates charged.

FERC has authority to regulate rates and charges for transportation or
storage of natural gas in interstate commerce, as well as those for gas, sold by
a natural gas company in interstate commerce for resale. FERC also has authority
over the construction and operation of pipeline and related facilities utilized
in the transportation and sale of natural gas in interstate commerce, including
the extension, enlargement or abandonment of service using such facilities.
Panhandle Eastern Pipe Line, Trunkline, Sea Robin, Trunkline LNG, and Pan Gas
Storage hold certificates of public convenience and necessity issued by the
FERC, authorizing them to construct and operate the pipelines, facilities and
properties now in operation for which such certificates are required, and to
transport and store natural gas in interstate commerce.

For a discussion of the effect of certain FERC orders on Panhandle, see
ITEM 7. PANHANDLE'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OTHER MATTERS and
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 OF PANHANDLE'S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

OTHER REGULATION

The Secretary of Energy regulates the importation and exportation of
natural gas and has delegated various aspects of this jurisdiction to FERC and
the DOE's Office of Fossil Fuels.

Panhandle is also subject to the Natural Gas Pipeline Safety Act of
1968 and the Pipeline Safety Improvement Act of 2002, which regulates the safety
of gas pipelines. Panhandle is also subject to the Hazardous Liquid Pipeline
Safety Act of 1979, which regulates oil and petroleum pipelines.

ENVIRONMENTAL COMPLIANCE

Panhandle and its subsidiaries are subject to various federal, state
and local regulations for environmental quality, including air and water
quality, waste management, zoning and other matters. For additional information
on Panhandle's environmental matters, see ITEM 7. PANHANDLE'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- OTHER ENVIRONMENTAL MATTERS and ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 12 OF PANHANDLE'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - COMMITMENTS AND CONTINGENCIES.

Certain environmental regulations affecting Panhandle include, but are
not limited to, the Clean Air Act Amendments of 1990 and Superfund. Superfund
can require any individual or entity that may have owned or operated a disposal
site, as well as transporters or generators of hazardous substances that were
sent to such site, to share in remediation costs for the site.

Panhandle's current insurance coverages do not extend to certain
environmental clean-up costs such as claims for air pollution, some past PCB
contamination and for some long-term storage or disposal of pollutants.

For discussion of environmental matters involving Panhandle, including
possible liability and capital costs, see ITEM 7. PANHANDLE'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- OTHER MATTERS -- ENVIRONMENTAL MATTERS and ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 12 OF PANHANDLE'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- COMMITMENTS AND CONTINGENCIES. Panhandle
does not anticipate that compliance with federal, state and local provisions

7

regulating the discharge of materials into the environment, or otherwise
protecting the environment will have a material adverse effect on the
competitive position, consolidated results of operations or financial position
of Panhandle.

COMPETITION

Panhandle's interstate pipelines compete with other interstate and
intrastate pipeline companies in the transportation and storage of natural gas.
The principal elements of competition among pipelines are rates, terms of
service and flexibility and reliability of service. Panhandle competes directly
with Alliance Pipeline LP, ANR Pipeline Company, Natural Gas Pipeline Company of
America, Northern Border Pipeline Company, Texas Gas Transmission Corporation,
Northern Natural Gas Company and Vector Pipeline in the Midwest market area.

Natural gas competes with other forms of energy available to
Panhandle's customers and end-users, including electricity, coal and fuel oils.
The primary competitive factor is price. Changes in the availability or price of
natural gas and other forms of energy, the level of business activity,
conservation, legislation and governmental regulations, the capability to
convert to alternative fuels, and other factors, including weather and natural
gas storage levels, affect the demand for natural gas in the areas served by
Panhandle.

INSURANCE

Panhandle maintains insurance coverage provided under its policies or
policies of CMS Energy similar to other comparable companies in the same lines
of business. The insurance policies are subject to terms, conditions,
limitations and exclusions that might not fully compensate Panhandle for all
losses. Furthermore, as Panhandle renews its policies, it is possible that full
insurance coverage may not be obtainable on commercially reasonable terms due to
the recent increasingly restrictive insurance markets.

EMPLOYEES

At December 31, 2002, Panhandle and its subsidiaries had 1,155
full-time equivalent employees. Included in the total are 247 full-time
compressor, pipeline, gas measurement, and field clerical employees of Panhandle
Eastern Pipe Line Company who are represented by the Paper, Allied - Industrial
Chemical and Energy Workers International Union. Panhandle and the Union
negotiated a collective bargaining agreement that became effective as of May 28,
1999 and will continue in full force and effect until May 27, 2003.

FORWARD-LOOKING STATEMENTS, CAUTIONARY FACTORS AND UNCERTAINTIES.

Specific uncertainties are described in ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA --NOTE 10 OF PANHANDLE'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage such disclosures without the
threat of litigation, if those statements are identified as forward-looking and
are accompanied by meaningful, cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the statements. Forward-looking statements give our expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Forward-looking
statements have been and will be made in this Form 10-K and in our other written
documents (such as press releases, visual presentations, and securities
disclosure documents) and oral presentations (such as analyst conference calls).
Such statements are based on management's beliefs as well as assumptions made
by, and information currently available to, management. When used in our
documents or oral presentations, we intend the words "anticipate", "believe",
"estimate", "expect", "forecast", "intend", "objective", "plan", "possible",
"potential", "project" "projection" and variations of such words and similar
expressions to target forward-looking statements that involve risk and
uncertainty.

8

Any or all of our forward-looking statements in oral or written
statements or in other publications may turn out to be wrong. They can be
affected by inaccurate assumptions or by known or unknown risks and
uncertainties. Many such factors will be important in determining our actual
future results. Consequently, we cannot guarantee any forward-looking statement.

In addition to any assumptions and other factors referred to
specifically in connection with such forward-looking statements, there are
numerous factors that could cause our actual results to differ materially from
those contemplated in any forward-looking statements. Such factors include our
inability to predict and/or control:

o Achievement of capital expenditure reductions and cost
savings;

o Capital and financial market conditions, including current
price of CMS Energy Common Stock and the effect on the Pension
Plan, interest rates and availability of financing to CMS
Energy, Consumers, Panhandle or any of their affiliates and
the energy industry;

o Market perception of the energy industry, CMS Energy,
Consumers, Panhandle or any of their affiliates;

o CMS Energy, Consumers, Panhandle or any of their affiliates
securities ratings;

o Factors affecting operations such as unusual weather
conditions, catastrophic weather-related damage, maintenance
or repairs, environmental incidents, or gas pipeline system
constraints;

o National, regional and local economic, competitive and
regulatory conditions and developments;

o Adverse regulatory or legal decisions, including environmental
laws and regulations;

o Energy markets, including the timing and extent of
unanticipated changes in commodity prices for oil, coal,
natural gas, natural gas liquids, electricity and certain
related products due to lower or higher demand, shortages,
transportation problems or other developments;

o The increased competition in natural gas transportation which
could reduce volumes of gas transported by our natural gas
transmission businesses or cause them to lower rates in order
to meet competition;

o Technological developments in energy production, delivery and
usage;

o Changes in financial or regulatory accounting principles or
policies;

o Outcome, cost, and other effects of legal and administrative
proceedings, settlements, investigations and claims including
particularly claims, damages, and fines resulting from those
involving round-trip trading and inaccurate commodity price
reporting;

o Disruptions in the normal commercial insurance and surety bond
markets that may increase costs or reduce traditional
insurance coverage, particularly terrorism and sabotage
insurance and performance bonds;

o Other business or investment considerations that may be
disclosed from time to time in CMS Energy's, Consumers' or
Panhandle's SEC filings or in other publicly disseminated
written documents; and

o Other uncertainties, which are difficult to predict and many
of which are beyond our control.

Panhandle and their affiliates undertake no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. The foregoing review of factors pursuant to the
Private Securities

9

Litigation Reform Act should not be construed as exhaustive or as any admission
regarding the adequacy of our disclosures. Certain risk factors are detailed
from time to time in our various public filings. You are advised, however to
consult any further disclosures we make on related subjects in our reports to
the SEC. In particular, you should read the discussion in the section entitled
"Forward-Looking Statements and Risk Factors" in our most recent reports to the
SEC on Form 10-Q/A or Form 8-K filed subsequent to this Form 10-K.

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ITEM 2. PROPERTIES.

A description of Panhandle properties is contained in ITEM 1. BUSINESS
- -- Natural Gas Transmission Properties which is incorporated by reference
herein.

ITEM 3. LEGAL PROCEEDINGS

Panhandle and some of its subsidiaries and affiliates are parties to
certain routine lawsuits and administrative proceedings incidental to their
businesses involving, for example, claims for personal injury and property
damage, contractual matters, various taxes, and rates and licensing. Reference
is made to ITEM 1. BUSINESS --PANHANDLE REGULATION, as well as to ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS included herein
for additional information regarding various pending administrative and judicial
proceedings involving regulatory, operating and environmental matters.

ENVIRONMENTAL MATTERS: Panhandle and its subsidiaries and affiliates
are subject to various federal, state and local laws and regulations relating to
the environment. Several of these companies have been named parties to various
actions involving environmental issues. Based on their present knowledge and
subject to future legal and factual developments, Panhandle believes that it is
unlikely that these actions, individually or in total, will have a material
adverse effect on its financial condition. See ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS; and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.

11

PART II

ITEM 5. MARKET FOR PANHANDLE'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Panhandle's common stock is privately held by its parent, CMS Gas Transmission,
and does not trade in the public market. In February and May 2002, Panhandle
paid $17 million and $11 million in cash dividends, respectively, on its common
stock to CMS Gas Transmission. Panhandle paid no dividends in August and
November of 2002. In April, June, September and December 2001, Panhandle paid
$29 million, $10 million, $11 million and $11 million in cash dividends,
respectively, on its common stock to CMS Gas Transmission.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management's Discussion and Analysis of Financial Condition and Results of
Operations is contained in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -
MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated by reference herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk is contained in
Forward Looking Statements and Risk Factors: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA - MANAGEMENT'S DISCUSSION AND ANALYSIS - OUTLOOK, which is
incorporated by reference herein.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements:

PANHANDLE EASTERN PIPE LINE COMPANY

Management's Discussion and Analysis ................................... 13
Consolidated Statements of Operations .................................. 27
Consolidated Statements of Cash Flows .................................. 28
Consolidated Balance Sheets ............................................ 29
Consolidated Statements of Common Stockholder's Equity and
Comprehensive Income ............................................ 31
Notes to Consolidated Financial Statements ............................. 32
Quarterly Financial Information (Unaudited) ............................ 58
Report of Independent Public Accountants ............................... 59

12

PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS

SALE OF PANHANDLE

On December 21, 2002, CMS Energy reached a definitive agreement to sell
Panhandle to Southern Union Panhandle Corp. The agreement calls for Southern
Union Panhandle Corp, a newly formed entity owned by Southern Union Company and
AIG Highstar Capital, L.P. to pay $662 million in cash and assume $1.166 billion
in debt. Under terms of the agreement, CMS Energy was to retain Panhandle's
ownership interests in the Centennial and Guardian pipeline projects, as well as
certain of Panhandle's net deferred tax assets, all tax liabilities, and pension
assets and liabilities. Panhandle has since sold its interest in Centennial and
the Guardian interest and the related cash collateral has been transferred to
Panhandle's direct parent, CMS Gas Transmission. The sale of Panhandle has been
approved by the Board of Directors of each company and is subject to customary
closing conditions and action by the Federal Trade Commission under the
Hart-Scott-Rodino Act.

Panhandle's consolidated financial statements for the year 2001 have been
restated and reflected in our previously filed Form 10-K/A for 2001, pursuant to
audit adjustments resulting from the re-audit of the consolidated financial
statements for the years 2001 and 2000 of CMS Energy, Panhandle's parent
company, which included audit work at Panhandle.

FORWARD LOOKING STATEMENTS

Panhandle, an indirect subsidiary of CMS Energy, is primarily engaged in the
interstate transportation and storage of natural gas and conducts operations
primarily in the central, gulf coast, midwest, and southwest regions of the
United States. Panhandle also owns a LNG importation terminal. (See Note 1,
Corporate Structure). The rates and conditions of service of the interstate
natural gas transmission and storage operations of Panhandle, as well as the LNG
operations, are subject to the rules and regulations of the FERC.

This MD&A refers to, and in some sections specifically incorporates by
reference, Panhandle's Notes to Consolidated Financial Statements and should be
read in conjunction with such Consolidated Financial Statements and Notes. This
Annual Report and other written and oral statements that Panhandle may make
contain forward-looking statements, as defined by the Private Securities
Litigation Reform Act of 1995. Panhandle's intentions with the use of the words
"anticipates," "believes," "estimates," "expects," "intends," and "plans" and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause
Panhandle's actual results to differ materially from those anticipated in such
statements. Panhandle has no obligation to update or revise forward-looking
statements regardless of whether new information, future events or any other
factors affect the information contained in such statements. Panhandle does,
however, discuss certain risk factors, uncertainties and assumptions in this
MD&A and in Item 1 of this Form 10-K in the section entitled "Forward-Looking
Statements Cautionary Factors and Uncertainties" and in various public filings
it periodically makes with the SEC.

The following information is provided to facilitate increased understanding of
the Consolidated Financial Statements and accompanying Notes of Panhandle and
should be read in conjunction with these financial statements. Because all of
the outstanding common stock of Panhandle Eastern Pipe Line is owned by a

13

wholly-owned subsidiary of CMS Energy, the following discussion uses the reduced
disclosure format permitted for issuers that are wholly-owned direct or indirect
subsidiaries of reporting companies.

RESULTS OF OPERATIONS

NET INCOME (LOSS):

For the year 2002, Panhandle incurred a net loss of $300 million, a decrease of
$354 million from the corresponding period in 2001 due primarily to a goodwill
impairment charge of $601 million ($369 million after-tax) which was recorded in
compliance with SFAS No. 142. SFAS No. 142 requires that goodwill no longer be
amortized over an estimated useful life, but rather goodwill amounts are subject
to a fair-value based impairment assessment.

RESERVATION REVENUE: For the twelve months ended December 31, 2002, reservation
revenue decreased $3 million compared to the same time period during 2001, due
to the impact of Trunkline's rate settlement effective May 2001 and less
capacity sold, primarily due to the conversion of Trunkline's 26-inch pipeline
to liquids service after the first quarter of 2001.

14

LNG TERMINALLING REVENUE: For the twelve months ended December 31, 2002, LNG
terminalling revenue decreased $17 million compared to the same time period
during 2001. In May 2001, Trunkline LNG signed an agreement with BG LNG Services
that provides for a 22-year contract for the existing uncommitted long-term
capacity at the company's facility. The 22-year contract resulted in reduced
revenues from 2001 levels but less volatility going forward is expected. The new
contract, in conjunction with new rates which became effective in January 2002
(see Note 3, Regulatory Matters), along with higher natural gas prices in the
first nine months of 2001, resulted in reduced revenues for Trunkline LNG from
2001 levels.

COMMODITY REVENUE: For the twelve months ended December 31, 2002, commodity
revenue decreased $7 million compared to the same time period during 2001,
primarily due to decreased natural gas transportation volumes. Volumes decreased
6 percent in the twelve months of 2002 versus 2001 due to higher storage levels
entering the summer months of 2002, which reduced transportation volumes to fill
storage in the second and third quarters of 2002, and an unseasonably mild
winter in the Midwest market area in early 2002.

EQUITY EARNINGS AND OTHER REVENUE: Equity earnings and other revenue for the
twelve months ended December 31, 2002 decreased $3 million compared to the same
time period during 2001. The decreases were primarily due to start-up related
losses of $8 million related to the Centennial Pipeline equity investment. Other
revenue for the twelve months ended December 31, 2002 includes a non-recurring
gain of $4 million for the settlement of Order 637 matters related to capacity
release and imbalance penalties (see Note 3, Regulatory Matters), equaling a
non-recurring gain related to the settlement of a gas purchase contract in the
first quarter of 2001.

OPERATION, MAINTENANCE, GENERAL AND ADMINISTRATIVE: Operation, maintenance,
general and administrative expenses were reduced by $48 million for the twelve
months ended December 31, 2002, compared to the same time period during 2001.
Panhandle operating expenses were lower due to $23 million of lower of cost or
market adjustments to Panhandle's system balancing gas recorded in 2001.
Expenses also decreased by $25 million compared to the same time period during
2001 due to reduced corporate charges, benefit costs and property and liability
insurance costs and related losses. Benefit costs were lower due to reduced
incentive plan payouts for 2001 approved in 2002, as well as no incentive plan
payouts being approved by the CMS Energy Board of Directors for 2002.

OTHER OPERATING EXPENSES: Other operating expenses were reduced by $23 million
for the twelve months ended December 31, 2002, compared to the same time period
during 2001, due to a reduction in depreciation and amortization expense of $18
million, primarily due to adoption of SFAS No. 142. SFAS No. 142 provides that
goodwill is no longer subject to amortization. Instead, goodwill amounts are
subject to a fair-value based impairment assessment. Panhandle has completed the
goodwill impairment testing which resulted in a $601 million pretax write-down
($369 million after-tax) under the new standard, restated to the first quarter
of 2002, and has reflected such change as a cumulative effect of change in
accounting for goodwill. For further information, see Note 2, Summary of
Significant Accounting Policies and Other Matters and Note 4, Goodwill
Impairment.

OTHER INCOME, NET: Other income, net, for the twelve months ended December 31,
2002 decreased $24 million compared to 2001, primarily due to a $26 million
pre-tax write-down of the Centennial investment in December 2002. Interest
income from CMS Capital was flat with 2001 at $9 million.

INTEREST CHARGES: Interest Charges for the twelve months ended December 31,
2002, compared to the same time period during 2001, were reduced by $7 million
primarily due to $319 million of

15

reductions of long-term debt principal in December 2001, April 2002 and May
2002, partially offset by additional debt of LNG Holdings. In March 2002,
Panhandle executed a fixed-to-floating interest rate swap with notional amounts
totaling $175 million related to existing notes to take advantage of lower
short-term interest rates, which reduced interest expense on the Consolidated
Income Statement compared to the prior year. In June 2002, the swaps were
unwound to monetize an increase in the market value of the fixed to floating
rate position. The resulting cash gain of approximately $3 million is being
amortized to income through the second and third quarters of 2004, which are the
maturity dates of the original debt instruments that were hedged. Interest cost
decreases due to reductions in debt principal and amortization of the gain on
the swaps unwind were partially offset by credit fees and other interest charges
of $3 million during 2002 related to Centennial, Guardian and LNG Holdings. For
further discussion of Panhandle's long-term debt and guarantees, see Note 12,
Commitment and Contingencies - Other Commitments and Contingencies.

MINORITY INTEREST: Minority interest increased $4 million due to an interest in
LNG Holdings being held by a third party from December 2001 until November 2002.

INCOME TAXES: Income taxes during the twelve months ended December 31, 2002,
compared to the same time period during 2001, increased $8 million due to
corresponding changes in pretax income. For further discussion of the CMS Energy
tax loss allocation, see the Outlook section of this MD&A.

CRITICAL ACCOUNTING POLICIES

USE OF ESTIMATES: The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States, requires
management to make judgments, estimates and assumptions that affect the reported
amounts of assets and liabilities, 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. The principles of SFAS No. 5
guide the recording of contingent liabilities within the financial statements.
Certain accounting principles require subjective and complex judgments used in
the preparation of financial statements. Accordingly, a different financial
presentation could result depending on the judgment, estimates or assumptions
that are used. Such estimates and assumptions, include, but are not specifically
limited to: depreciation and amortization, interest rates, discount rates,
future commodity prices, mark-to-market valuations, investment returns,
volatility in the price of CMS Energy Common Stock, impact of new accounting
standards, future costs associated with long-term contractual obligations,
future compliance costs associated with environmental regulations and continuing
creditworthiness of counterparties. Actual results could materially differ from
those estimates.

SYSTEM GAS AND OPERATING SUPPLIES: System gas and operating supplies consists of
gas held for operations and materials and supplies, carried at the lower of
weighted average cost or market. The gas held for operations that is not
expected to be consumed in operations in the next twelve months has been
reflected in non-current assets. All system gas and materials and supplies
purchased are recorded at the lower of cost or market, while gas net received
from and owed back to customers is valued at market. For the year ended December
31, 2001, $23 million of lower of cost or market write-downs were recorded to
Panhandle's system gas.

GAS IMBALANCES: Gas imbalances occur as a result of differences in volumes of
gas received and delivered. Gas imbalance in-kind receivables and payables are
valued at cost or market, based on whether net imbalances have reduced or
increased system gas balances, respectively.

16

FUEL TRACKER: Liability accounts are maintained for net volumes of fuel gas owed
to customers collectively. Trunkline records an asset whenever fuel is due from
customers from prior under recovery based on contractual and specific tariff
provisions which support the treatment as an asset. Panhandle's other companies
that are subject to fuel tracker provisions record an expense when fuel is under
recovered. The pipelines' fuel reimbursement is in-kind and non-discountable.

RELATED PARTY TRANSACTIONS: Panhandle enters into a number of significant
transactions with related parties. These transactions include revenues for the
transportation of natural gas for Consumers, CMS MST and the MCV Partnership
which are based on regulated prices, market prices or competitive bidding.
Related party expenses include payments for services provided by affiliates and
payment of overhead costs and management and royalty fees to CMS Gas
Transmission and CMS Energy, as well as allocated benefit plan costs. Other
income is primarily interest income from the Note receivable - CMS Capital (See
Note 5, Related Party Transactions).

GOODWILL: Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of SFAS No. 142 as of
January 1, 2002. Goodwill acquired in a purchase business combination and
determined to have an indefinite useful life is not amortized, but instead
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142's transitional goodwill impairment evaluation
required the Company to perform an assessment of whether there was an indication
that goodwill was impaired as of the date of adoption. Panhandle's goodwill,
which resulted from the CMS acquisition in March 1999, was tested for impairment
as of January 1, 2002, based on valuations by independent appraisers. As defined
in SFAS 142, Panhandle was considered a single reporting unit. The fair value of
the reporting unit was determined using a combination of the income approach
based on discounted cash flows and a market approach using public guideline
companies and market transactions. The goodwill impairment amount was determined
by comparing the fair value of goodwill to book value. Panhandle has completed
the goodwill impairment testing required upon adoption of SFAS No. 142 which
resulted in a $601 million pre-tax write-down ($369 million after-tax) under the
new standard. The impact has been reflected retroactively to the first quarter
of 2002 as a cumulative effect of a change in accounting for goodwill, pursuant
to the requirements of SFAS No. 142.

ACCOUNTING FOR RETIREMENT BENEFITS: Panhandle uses SFAS No. 87 to account for
pension costs and uses SFAS No. 106 to account for other postretirement benefit
costs. These statements require liabilities to be recorded on the balance sheet
at the present value of these future obligations to employees net of any plan
assets. The calculation of these liabilities and associated expenses require the
expertise of actuaries and are subject to many assumptions, including life
expectancies, present value discount rates, expected long-term rate of return on
plan assets, rate of compensation increase and anticipated health care costs.
Any change in these assumptions can significantly change the liability and
associated expenses recognized in any given year.

The Pension Plan is a CMS Energy plan for CMS Energy and affiliates, of which
Panhandle is a participating affiliate. The Pension Plan includes amounts for
employees of CMS Energy and affiliates, including Panhandle, which were not
distinguishable from the Pension Plan's total assets. On December 21, 2002, a
definitive agreement was executed to sell Panhandle. The sale is expected to
close in 2003. The Pension Plan obligations associated with Panhandle employees
will be retained by CMS Energy. Upon the closing of the sale of Panhandle to
Southern Union Panhandle Corp., none of the Panhandle employees will be eligible
to accrue additional benefits under the Pension Plan. However, the Pension Plan
will retain pension payment obligations under the Pension Plan for Panhandle
employees who are vested under the Pension Plan.

17

The estimated fair value of the Pension Plan's assets at December 31, 2002 was
$607 million and the Accumulated Benefit Obligation was estimated at $1.055
billion. The Pension Plan's Accumulated Benefit Obligation thus exceeded the
value of the assets at December 31, 2002, and as a result, Panhandle and the
other participants of the plan were required to recognize an additional minimum
liability for this excess in accordance with SFAS No. 87. As of December 31,
2002, the additional minimum liability allocated to Panhandle was $48 million,
of which $6 million was recorded as an intangible asset, and $42 million was
charged to other comprehensive income ($26 million after-tax).

Pension and OPEB plan assets, net of contributions, have reduced in value from
the previous year due to the downturn in the equities market, and a decrease in
the price of CMS Energy Common Stock. As a result, CMS Energy expects to see an
increase in pension and OPEB expense levels over the next several years unless
market performance of plan assets improves. For pension expense, this increase
is due to a downturn in value of pension assets during the past two years,
forecasted increases in pay and added service, and a decline in the interest
rate used to value the liability of the plan. Estimated 2003 OPEB expenses are
expected to remain at approximately the same levels as 2002 due to additional
required contributions from retirees and increases in mail-order prescription
copays. Under the OPEB plans' assumptions, health care costs increase at a
slower rate from current levels through 2010; however, CMS Energy cannot predict
the impact that future health care costs and interest rates or market returns
will have on pension and OPEB expense in the future. As of January 2002, OPEB
plan claims are paid from the VEBA Trusts.

The estimated fair value of the Pension Plan assets at December 31, 2002 of $607
million included CMS Energy Common Stock which had a market value of $49 million
based on a market price $9.44. As of March 14, 2003, the market value of CMS
Energy Common Stock in the Pension Plan was $18 million based on a share price
of $3.52.

At December 31, 2002, the balance of the CMS Energy OPEB plan assets was $509
million. This amount consists primarily of stocks and bonds, including CMS
Energy Common Stock of $1.3 million, based on a share price of $9.44. As of
March 14, 2003, the market value of CMS Energy Common Stock in the OPEB plan
assets was $0.5 million, based on a share price of $3.52. The OPEB estimated
benefit obligation was $984 million at December 31, 2002.

ACCOUNTING FOR DERIVATIVES: Panhandle uses SFAS No. 133 to account for
derivative instruments and hedging activities. SFAS No. 133 requires that as of
the date of the initial adoption the difference between the fair market value of
derivative instruments recorded on the Company's balance sheet and the
previously recorded book value of the derivative instruments should be reflected
as the cumulative effect of a change in accounting principle in either net
income or other comprehensive income as appropriate. The gains and losses on
derivative instruments that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion, if
any, of all hedges is recognized in current period earnings. Fair market value
is determined based upon mathematical models using current and historical data.

Panhandle utilizes interest-rate related derivative instruments to manage its
exposure on its debt instruments and does not enter into derivative instruments
for any purpose other than hedging purposes. That is, Panhandle does not
speculate using derivative instruments.

Interest rate swaps are used to reduce interest rate risks and to manage
interest expense. By entering into these agreements, Panhandle generally
converts floating-rate debt into fixed-rate debt, or may also convert fixed rate
debt to floating rate debt. Interest differentials paid or received under the
swap agreements are reflected as an adjustment to interest expense.

The negative fair value of interest rate swap agreements was $22 million
pre-tax, $13 million net of tax at December 31, 2002. Current market pricing
models were used to estimate fair values of interest rate swap agreements. In
accordance with SFAS No. 133, an unrealized loss of $13 million after-tax was
recorded to other comprehensive loss.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Panhandle is exposed to market risks primarily from changes in interest rates as
a result of its issuance of variable-rate debt and fixed-rate debt (see Note 10
- - Debt) and from interest rate swap agreements (see Note 9 - Financial
Instruments). Panhandle uses a combination of fixed and variable-rate debt, as
well as interest rate swaps to manage and mitigate interest rate risk exposure
when deemed appropriate, based on market conditions. These strategies attempt to
provide and maintain the lowest cost of capital.

Panhandle's note receivable with CMS Capital utilizes a variable interest rate
and is subject to market changes.

OUTLOOK

Panhandle is a leading United States interstate natural gas pipeline system and
also owns the nation's largest operating LNG regasification terminal and intends
to optimize results through expansion and

18

better utilization of its existing facilities and construction of new
facilities. This involves providing additional transportation, storage and other
asset-based value-added services to customers such as gas-fueled power plants,
local distribution companies, industrial and end-users, marketers and others.
Panhandle conducts operations primarily in the central, gulf coast, midwest, and
southwest regions of the United States.

Panhandle owned a one-third interest in Guardian as of December 31, 2002, which
constructed a 141-mile, 36-inch pipeline from Illinois to southeastern Wisconsin
for the transportation of natural gas and began its operations in December 2002.
On March 10, 2003, Panhandle's ownership interest in Guardian was transferred to
CMS Gas Transmission (see Note 8, Investment in Affiliates). Trunkline
currently operates and maintains the pipeline. In 2002, Panhandle also held a
one-third interest in the Centennial Pipeline Company, which has converted an
existing 720-mile 26-inch pipeline extending from the U.S. Gulf Coast to
Illinois for the transportation of interstate refined petroleum products. The
pipeline began full commercial service in April 2002. On February 10, 2003,
Panhandle sold its one-third equity interest in Centennial to Centennial's two
other partners, MAPL and TEPPCO for $40 million. In December 2002, Panhandle
recorded a $26 million pre-tax ($16 million after-tax) write-down of its
investment in Centennial to $40 million, as a result of indicated values upon
announcement of the definitive agreement to sell Panhandle and the associated
efforts to sell Centennial in December 2002. For further information see Note 8,
Investment in Affiliates.

In May 2001, Trunkline LNG signed an agreement with BG LNG Services that
provides for a 22-year contract, beginning January 2002, for all the uncommitted
capacity at the Lake Charles, Louisiana facility. The 22-year contract, in
conjunction with new rates effective January 2002 (see Note 3, Regulatory
Matters), is expected to result in reduced revenues for Trunkline LNG from 2001
levels but less earnings volatility going forward. In October 2001, Trunkline
LNG announced the planned expansion of the Lake Charles facility to
approximately 1.2 bcf per day of send out capacity, up from its current send out
capacity of 630 million cubic feet per day. In December 2002, FERC approved the
expansion of the LNG regasification terminal. The expanded facility is currently
expected to be in operation by January 2006. The expansion expenditures are
currently expected to be funded by Panhandle contributions to LNG Holdings,
sourced by repayments from CMS Capital to Panhandle on its outstanding note
receivable or from internally generated funds.

Effective May 2001, FERC approved Trunkline's rate settlement without
modification. The settlement resulted in Trunkline reducing its maximum rates in
May 2001. The reduction is expected to reduce revenues by approximately $2
million annually. For further information, see Note 3, Regulatory Matters.

UNCERTAINTIES: Panhandle's results of operations and financial position may be
affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cash flows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle; 2) the current market
conditions causing more contracts to be of shorter duration, which may increase
revenue volatility; 3) the increased potential for declining financial condition
of certain customers within the industry due to recession and other factors; 4)
exposure to customer concentration with a significant portion of revenues
realized from a relatively small number of customers; 5) the possibility of
decreased demand for natural gas resulting from a downturn in the economy and
the scaling back of new power plants; 6) the impact of any future rate cases,
for any of Panhandle's regulated operations; 7) the impact of current
initiatives for additional federal rules and legislation regarding pipeline
safety; 8) capital spending requirements for safety, environmental or regulatory
requirements that could result in depreciation expense increases not covered by
additional

19

revenues; 9) the impact of CMS Energy and its subsidiaries' distressed financial
condition and ratings downgrades on Panhandle's liquidity and costs of
operating, including Panhandle's reduced ability to draw on the CMS Capital loan
and current limited access to capital markets; 10) impact of the trend of
increasing costs for employee benefits including medical and retirement related
costs; 11) the effects of changing regulatory and accounting related matters
resulting from current events; and 12) the impact of the proposed acquisition by
Southern Union Panhandle Corp. For further information about uncertainties, see
Note 12, Commitments and Contingencies.

LIQUIDITY

CMS ENERGY FINANCIAL CONDITION

In July of 2002, the credit ratings of the publicly traded securities of CMS
Energy and Panhandle were downgraded by the major rating agencies. The ratings
downgrade for both companies' securities was largely a function of the
uncertainties associated with CMS Energy's financial condition and liquidity,
restatement and re-audit of 2000 and 2001 financial statements, and lawsuits
that directly affects and limits CMS Energy's access to the capital markets.

As a result of certain of these downgrades, contractual right were triggered in
several contractual arrangements between Panhandle and third parties, as
described in the Panhandle Financial Condition section below.

In response to the July debt downgrades, CMS Energy and its subsidiaries
Consumers and Enterprises have replaced or restructured several of their
existing unsecured credit facilities with secured credits. The new facilities
have conditions requiring mandatory prepayment of borrowings from asset sales,
debt issuances and/or equity issuances, impose certain dividend restrictions
and grant the applicable bank groups either first or second liens on the
capital stock of Enterprises and its major direct and indirect domestic
subsidiaries, including Panhandle Eastern Pipe Line (but excluding subsidiaries
of Panhandle Eastern Pipe Line).

CMS Energy's liquidity and capital requirements generally are a function of its
results of operations, capital expenditures, contractual obligations, working
capital needs and collateral requirments. CMS Energy historically has met its
consolidated cash needs through its operating and investing activities and, as
needed, through access to bank financing and the capital markets.

During 2003, CMS Energy has contractual obligations and planned capital
expenditures that would require substantial amounts of cash. As of March 14,
2003, CMS Energy at the parent level had approximately $615 million and
Panhandle had approximately $52 million of publicly issued and credit facility
debt maturing in 2003. CMS Energy has taken significant steps to address its
2003 maturities, as described below. In addition, CMS Energy also could
become subject to liquidity demands pursuant to commercial commitments under
guarantees, indemnities and letters of credit. Management is pursuing
actively plans to refinance debt and to sell assets, including the sale of
Panhandle. In December 2002, CMS Energy signed a definitive agreement to sell
Panhandle for a total of $1.828 billion, which is expected to result in $662
million of cash and $1.166 billion of debt assumption. However, closing of the
sale is pending action by the FTC under the Hart-Scott-Rodino Act. All other
regulatory approvals have been granted. CMS Energy at the parent level is
addressing its near-to-mid-term liquidity and capital requirements through a
financial improvement plan that involves the sale of non-strategic and
under-performing assets of approximately $912 million, receipt of dividends
from its subsidiaries of approximately $262 million, and reduction of
approximately $579 million of outstanding debt along with reduced capital
expenditures, cost reductions and other measures.

20

CMS Energy has reduced debt of approximately $2.7 billion through asset sales
with cash proceeds and associated debt reductions over the past two years.
Through the first quarter of 2003, CMS Energy has accomplished $60 million of
additional asset sales. In January 2003, CMS MST closed on the sale of its
natural gas trading book for $17 million of cash proceeds, and in February 2003
signed a definitive agreement to sell its wholesale power book. In addition,
the sale of the Centennial interest, resulting in proceeds to CMS Energy of $40
million, closed in February 2003.

CMS Energy believes that further targeted asset sales, together with its planned
reductions in operating expenses, capital expenditures, and the suspension of
the common dividend also will contribute to improved liquidity. CMS Energy
believes that, assuming the successful implementation of its financial
improvement plan, its present level of cash and borrowing capacity along with
anticipated cash flows from operating and investing activities will be
sufficient to meet its liquidity needs through 2003. There can be no assurances
that the financial improvement plan will be successful and failure to achieve
its goals could have a material adverse effect on CMS Energy's liquidity and
operations. In such event, CMS Energy would be required to consider the full
range of strategic measures available to companies in similar circumstances.

CMS Energy continues to explore financing opportunities to supplement its
financial improvement plan. These potential opportunities include refinancing
its bank credit facilities; entering into leasing arrangements and/or vendor
financing; refinancing and issuing new capital markets debt, preferred and/or
common equity; and negotiating private placement debt, preferred and/or common
equity. Specifically, as March 31, 2003, CMS Energy has taken the following
action to supplement its financial improvement plan for 2003.

o On March 30, 2003 CMS Energy entered into an amendment and restatement
of its existing $300 million and $295.8 million revolving credit
facilities under which $409 million was then outstanding. The Second
Amended and Restated Senior Credit Agreement includes a $234 million
tranche with a maturity date of April 30, 2004 and a $175 million
tranche with a maturity date of September 30, 2004. The facility is
being underwritten by several banks at a total annual cost to CMS
Energy of approximately ten percent, with includes the initial
commitment fee. Any proceeds of equity issuances by CMS Energy and its
subsidiaries or any asset sales and debt issuances by CMS Energy or its
subsidiaries, other than Consumers Energy, are required to be used to
prepay this facility. This facility is collateralized primarily by the
common stock of Consumers Energy, CMS Enterprises and certain CMS
Enterprises subsidiaries.

o On March 30, 2003 CMS Enterprises entered into a revolving credit
facility in an aggregate amount of $441 million. The maturity date of
this facility is April 30, 2004. The facility is being underwritten by
several banks at a total annual cost to CMS Energy of approximately ten
percent, which includes the initial commitment fee. Proceeds from this
loan will be used for general corporate purposes, to retire debt, and
to collateralize approximately $160 million of letters of credit. Any
proceeds of equity issuances by CMS Energy and its subsidiaries or any
asset sales and debt issuances by CMS Energy or its subsidiaries, other
than Consumers Energy, are required to be used to prepay this facility.
It is expected that proceeds from the Panhandle sale will be used to
pay off this facility in full. This facility is guaranteed by CMS
Energy, whose guaranty is secured by the common stock of Consumers
Energy and CMS Enterprises.

In 1994, CMS Energy executed an indenture with J.P. Morgan Chase Bank pursuant
to CMS Energy's general term notes program. The indenture, through supplements,
contains certain provisions that can trigger a limitation on CMS Energy's
consolidated leverage ratio, as defined in the indenture (essentially the ratio
of consolidated debt to consolidated capital), exceeds 0.75 to 1.0. At December
31, 2002, CMS Energy's consolidated indebtedness. The limitation can be
activated when CMS Energy's consolidated indebtedness. The limitation can be
activated when CMS Energy's consolidated leverage ratio was 0.80 to 1.0. As a
result, CMS Energy will not permit certain material subsidiaries, excluding
Consumers and its subsidiaries, to become liable for new indebtedness. However,
the indenture contains express exceptions to this limitation, and pursuant to
one such exception, CMS Energy and the material subsidiaries may incur revolving
indebtedness to banks of up to $1 billion in the aggregate and refinance
existing effect on CMS Energy's liquidity and operations. In such event, CMS
Energy would be required outstanding of CMS Energy and of its material
subsidiaries. This leverage ratio may be significantly reduced with the proceeds
of CMS Energy's sale of Panhandle, its sale of CMS Field Services, other asset
sales or other options.

In addition, if necessary, CMS Energy also would postpone the $52 million
pension contribution expected to be made in September 2003. Also, CMS Energy
may pursue other avenues of private debt or equity investment.

PANHANDLE FINANCIAL CONDITION

On June 11, 2002, Moody's Investors Service, Inc. lowered its rating on
Panhandle's senior unsecured notes from Baa3 to Ba2 based on concerns
surrounding the liquidity and debt levels of CMS Energy (see discussion in the
CMS Energy Financial Condition section above). On July 15, 2002, Fitch Ratings,
Inc. lowered its rating on these notes from BBB to BB+ and again on September 4,
2002 to BB based on

21

similar concerns. On July 16, 2002, S&P also lowered its rating on these notes
from BBB- to BB, in line with their rating on CMS Energy based on their belief
that CMS Energy and its subsidiaries are at equal risk of default since the
parent relies on its subsidiaries to meet its financial commitments. Effective
with these downgrades, Panhandle's debt is below investment grade which, if not
restored to investment grade, will increase operating and financing costs going
forward. Panhandle's senior unsecured note provisions are not directly impacted
by debt rating reductions, but are subject to other requirements such as the
maintenance of a fixed charge coverage ratio and a leverage ratio which restrict
certain payments if not maintained and limitations on liens. At December 31,
2002, Panhandle was subject to a $ 295 million limitation on additional
restricted payments, including dividends and loans to affiliates. At December
31, 2002, Panhandle was in compliance with all covenants, having received a
waiver for certain matters as discussed below.

Due to liquidity issues related to CMS Energy and subsidiaries as discussed
above, Panhandle's ability to draw on the full amount of the Note Receivable
from CMS Capital, if needed, could be affected.

In December 2001, $75 million of the proceeds from the Trunkline LNG
monetization transaction came to Panhandle in the form of a note payable to LNG
Holdings. Panhandle, as a result of its debt ratings downgrade to below
investment grade, could have been required to pay on demand the remaining
principal and accrued interest on the note at any time while such downgrades
exist. At December 31, 2002, Panhandle's remaining balance (which eliminates in
consolidation) on the $75 million note payable to LNG Holdings was approximately
$62 million. In November 2002, Panhandle acquired Dekatherm Investor Trust's
interest for approximately $41 million and subsequently owns 100 percent of LNG
Holdings and will not demand payment on the note payable to LNG Holdings.

In conjunction with the Centennial and Guardian pipeline projects, Panhandle
provided guarantees related to the project financings during the construction
phases and initial operating periods. On July 17, 2002, following the Panhandle
debt ratings downgrades by Moody's and S&P, the lender sent notice to Panhandle,
pursuant to the terms of the guaranty agreements, requiring Panhandle to provide
acceptable credit support for its pro rata portion of those construction loans,
which aggregate $110 million including anticipated future draws. On September
27, 2002, Centennial's other partners provided credit support of $25 million
each in the form of guarantees to the lender to cover Panhandle's obligation of
$50 million of loan guarantees. The partners were paid credit fees by Panhandle
on the outstanding balance of the guarantees for the periods which they were in
effect. On February 10, 2003, Panhandle sold its one-third equity interest in
Centennial for $40 million to Centennial's two other partners, MAPL and TEPPCO.
Panhandle has been released by MAPL, TEPPCO and the lenders for any liabilities
related to Panhandle's $50 million parent guaranty of the project debt. In
December 2002, Panhandle recorded a $26 million pre-tax ($16 million after-tax)
write-down of its investment in Centennial to $40 million as a result of
indicated values upon announcement of the definitive agreement to sell Panhandle
and the associated efforts to sell Centennial.

In October 2002, Panhandle provided a letter of credit to the lenders which
constitutes acceptable credit support under the Guardian financing agreement.
This letter of credit was cash collateralized by Panhandle with approximately
$63 million. Effective March 1, 2003, Panhandle's ownership interest in Guardian
was transferred to CMS Gas Transmission, along with the $63 million of cash
collateral plus accrued interest. Panhandle was released from its guarantee
obligations associated with the Guardian non-recourse guaranty as of March 10,
2003 by Prudential and the other noteholders.

In December 2002 and January 2003, Panhandle secured short-term bank loans in
the amounts of $30 million and $10 million, respectively, with interest payable
at rates of LIBOR plus 4 percent. The loans are due the earlier of December 2003
or upon the sale of Panhandle. The stock of most of Panhandle's

22

subsidiaries were pledged as collateral for the loans, which were utilized to
improve overall liquidity which had been reduced by various cash requirements.
Panhandle is required to provide certified September 30, 2002 financial
statements to the banks by April 30, 2003. Panhandle intends to provide these
statements to the banks prior to April 30, 2003 . Should it be unable to deliver
the certified financial statements or obtain a waiver by that date, Panhandle
could be declared to be in default and the debt could be accelerated and become
immediately due and payable.

As a result of the restatements required, Panhandle was unable to deliver
certified September 30, 2002 financial statements to the LNG Holdings lenders as
required under that credit facility. Panhandle has received a waiver of this
requirement until April 30, 2003 and a waiver of a requirement to provide
certain documentation until June 30, 2003. Panhandle intends to provide these
statements by April 30, 2003. Should it be unable to deliver the certified
financial statements or execute the required documents by the timing indicated,
LNG Holdings could be declared to be in default under its credit facility and
the debt thereunder could be accelerated and become immediately due and payable.

OTHER MATTERS

CUSTOMER CONCENTRATION

During 2002, sales to Proliance Energy, LLC, a nonaffiliated local distribution
company and gas marketer, accounted for 16 percent of Panhandle's consolidated
revenues, sales to BG LNG Services a nonaffiliated gas marketer, accounted for
13 percent and sales to subsidiaries of CMS Energy accounted for 12 percent of
Panhandle's consolidated revenues. No other customer accounted for 10 percent or
more of consolidated revenues during the same period. Aggregate sales to
Panhandle's top 10 customers accounted for 67 percent of revenues during 2002.

ENVIRONMENTAL MATTERS

Panhandle is subject to federal, state, and local laws and regulations governing
environmental quality and pollution control. These laws and regulations under
certain circumstances require Panhandle to remove or remedy the effect on the
environment of the disposal or release of specified substances at its operating
sites.

PCB ASSESSMENT AND CLEAN-UP PROGRAMS: Panhandle previously identified
environmental contamination at certain sites on its systems and undertook
clean-up programs at these sites. The contamination resulted from the past use
of lubricants containing PCBs in compressed air systems and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle is
also taking actions regarding PCBs in paints at various locations. For further
information, see Note 12, Commitments and Contingencies - Environmental Matters.

AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. Based on EPA guidance to these states for development of
SIPS, Panhandle expects future compliance costs to range from $15 to $20 million
for capital improvements to be incurred from 2004 through 2007.

Panhandle expects final rules from the EPA in 2003 and 2004 regarding control of
hazardous air pollutants, and Panhandle expects that some of its engines and
turbines will be affected. In 2002, the Texas Natural Resource Commission
enacted the Houston/Galveston SIP regulations requiring reductions in nitrogen
oxide emissions in an eight-county area surrounding Houston. Trunkline's

23

Cypress compressor station is affected and may require the installation of
emission controls. In 2003, the new regulations will also require all
grandfathered facilities to enter into the new source permit program which may
require the installation of emission controls at five additional facilities. The
company expects future capital costs for these programs to range from $14
million to $29 million.

In 1997, the Illinois Environmental Protection Agency initiated an enforcement
proceeding relating to alleged air quality permit violations at Panhandle's
Glenarm compressor station. On November 15, 2001 the Illinois Pollution Control
Board approved an order imposing a penalty of $850 thousand, plus fees and cost
reimbursements of $116 thousand. Under terms of the sale of Panhandle to CMS
Energy, a subsidiary of Duke Energy was obligated to indemnify Panhandle against
this environmental penalty. The state issued a permit in February 2002 requiring
the installation of certain capital improvements at the facility at a cost of
approximately $3 million. Controls were installed on two engines in 2002 and it
is planned to install controls on two additional engines in 2003 in accordance
with the 2002 permit. For further information on the above environmental
matters, see Note 12, Commitments and Contingencies - Environmental Matters.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS: The SEC
has adopted new rules that require the company to provide, in a separate
captioned subsection of the MD&A, a comprehensive explanation of its off-balance
sheet arrangements that have, or are reasonably likely to have, a current or
future effect on the company that is material to investors. As of December 31,
2002, Panhandle had guarantees related to the Centennial and Guardian pipeline
projects of $50 million and $60 million, respectively, and a letter of credit
for $63 million supporting the Guardian guarantee. Panhandle has since been
released from these guarantees and the letter of credit obligation has been
transferred to CMS Gas Transmission (see Panhandle Financial Condition section
of this MD&A and Note 8, Investment in Affiliates). As of December 31, 2002,
Panhandle has purchased $4 million of surety bonds to indemnify third parties
for unforeseen events which may occur in the course of construction or repair
projects.

TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a five-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back consolidated 2001 and 2002 tax losses to tax years 1996 through 1999 to
obtain refunds of prior years tax payments totaling $250 million. The tax loss
carryback, however, resulted in a reduction in AMT credit carryforwards that
previously had been recorded by CMS Energy as deferred tax assets in the amount
of $47 million. This reduction in AMT credit carryforwards has been reflected in
the tax provision of CMS Energy and allocated to each of its consolidated
subsidiaries according to their contributions to the consolidated CMS Energy tax
loss under the CMS Energy tax sharing agreement. Panhandle's allocable share, $5
million, has been reflected as a return of capital to CMS Energy.

CASH MANAGEMENT: In August 2002, FERC issued a NOPR concerning the management of
funds by certain FERC-regulated companies. The proposed rule could establish
limits on the amount of funds that may be swept from a regulated subsidiary to a
non-regulated parent under cash management programs. The proposed rule would
require written cash management arrangements that would specify the duties and
restrictions of the participants, the methods of calculating interest and
allocating interest income and expenses, and the restrictions on deposits or
borrowings by money pool members. These cash management agreements may also
require participants to provide documentation of certain transactions. In the
NOPR, FERC proposed that to participate in a cash management or money pool
arrangement, FERC-regulated entities would be required to maintain a minimum
proprietary capital balance

24

(stockholder's equity) of 30 percent and both the FERC-regulated entity and its
parent would be required to maintain investment grade credit ratings.

NEW ACCOUNTING STANDARDS

In addition to the identified critical accounting policies discussed above,
future results will be affected by a number of new accounting standards that
recently have been issued.

SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: In June 2001, the
FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is
effective for fiscal years beginning after June 15, 2002. The Statement requires
legal obligations associated with the retirement of long-lived assets to be
recognized at their fair value at the time that the obligations are incurred.
Upon initial recognition of a liability, that cost should be capitalized as part
of the related long-lived asset and allocated to expense over the useful life of
the asset. Panhandle adopted the new rules on asset retirement obligations
effective January 1, 2003. Preliminary results indicate that application of the
new rules will result in an increase in net property, plant and equipment of $11
million, recognition of an asset retirement obligation of $10 million, and a
cumulative effect of adoption that will increase net income and stockholder's
equity by $1 million.

SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB on April 30,
2002, this Statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain lease modifications
that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring and financial statements
issued after May 15, 2002. Panhandle believes there will not be a material
impact on its financial statements upon adoption of this standard.

SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES:
Issued by the FASB in July 2002, this standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146
supersedes previous accounting guidance, EITF No. 94-3, "Liability recognition
for Certain Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred In a Restructuring)." This standard is effective for exit
or disposal activities initiated after December 31, 2002. The scope of SFAS
No.146 includes, (1) costs related to termination benefits of employees who are
involuntarily terminated, (2) costs to terminate a contract that is not a
capital lease, and (3) costs to consolidate facilities or relocate employees.
Any future exit or disposal activities that Panhandle may engage in would be
subject to the provisions of this statement.

SFAS NO. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Panhandle has decided to voluntarily adopt the fair value
based method of accounting for stock-based employee compensation effective
December 31, 2002, applying the prospective method of adoption

25

which requires recognition of all employee awards granted, modified, or settled
after the beginning of the year in which the recognition provisions are first
applied. Panhandle has adopted SFAS No. 148 for new awards granted in 2002, and
the implementation of SFAS No. 148 resulted in a $0.4 million charge to expense
during 2002.

FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation expands on existing disclosure
requirements for most guarantees, and clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
The interpretation is effective for guarantees issued or modified on and after
January 1, 2003. Panhandle will be required to recognize a liability for any
guarantees it may issue after January 1, 2003, but will not change the
accounting for guarantees it may have issued before that date.

FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Panhandle, the
consolidation requirements apply to pre-existing entities beginning July 1,
2003. Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Panhandle will be required to
consolidate any entities that meet the requirements of the interpretation.
Panhandle is in the process of studying the interpretation, and has yet to
determine the effects, if any, on its consolidated financial statements.

26

PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions)

The accompanying notes are an integral part of these statements.

27

PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

The accompanying notes are an integral part of these statements.

28

PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)

The accompanying notes are an integral part of these statements.

29

PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)

The accompanying notes are an integral part of these statements.

30

PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
(IN MILLIONS)

The accompanying notes are an integral part of these statements.

31

PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This form 10-K includes Panhandle's restated financial results for the year
ended December 31, 2001, pursuant to audit adjustments resulting from the
re-audit of the consolidated financial statements for the years 2001 and 2000 of
CMS Energy, Panhandle's parent company, which included audit work at Panhandle.
The restatements have been reflected in Form 10-K/A for 2001 and Form 10-Q/A for
the periods ended September 30, 2002 filed with the SEC.

1. CORPORATE STRUCTURE

Panhandle is a wholly owned subsidiary of CMS Gas Transmission and ultimately
CMS Energy. Panhandle was incorporated in Delaware in 1929. Panhandle is
primarily engaged in interstate transportation and storage of natural gas, owns
a LNG regasification plant and related facilities, and is subject to the rules
and regulations of the FERC. It conducts operations in the central, gulf coast,
midwest, and southwest regions of the United States.

In March 2000, Trunkline, a subsidiary of Panhandle, acquired the Sea Robin
Pipeline from El Paso Energy Corporation for cash of approximately $74 million
and certain other contractual arrangements valued at $15 million (See Note 10,
Debt). Sea Robin is a 1 bcf per day capacity natural gas and condensate pipeline
system located in the Gulf of Mexico offshore Louisiana west of Trunkline's
existing Terrebonne system.

In December 2001, Panhandle completed a $320 million monetization transaction of
its Trunkline LNG business and the value created by long-term contracts for
capacity at the Trunkline LNG Lake Charles terminal. The transaction included
the formation of LNG Holdings, which owns 100 percent of Trunkline LNG. LNG
Holdings and its $281 million of debt at December 31, 2002, is consolidated with
Panhandle.

On December 21, 2002, CMS Energy announced that it had reached a definitive
agreement to sell Panhandle to Southern Union Panhandle Corp. The agreement
calls for Southern Union Panhandle Corp., a newly formed entity owned by
Southern Union Company and AIG Highstar Capital, L.P. to pay $662 million in
cash and assume $1.166 billion in debt. Under terms of the agreement, CMS Energy
retained Panhandle's ownership interests in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net deferred tax assets, all tax
liabilities, and pension assets and liabilities. Panhandle has since sold its
interest in Centennial and the Guardian interest and the related cash collateral
has been transferred to Panhandle's direct parent, CMS Gas Transmission. The
sale of Panhandle to Southern Union Panhandle Corp. has been approved by the
Board of Directors of each company and is subject to customary closing
conditions and action by the FTC under the Hart-Scott-Rodino Act.

On March 1, 2003, certain assets held by CMS Field Services were contributed to
Panhandle by its parent, CMS Gas Transmission, to be included in the sale to
Southern Union Panhandle Corp.

32

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

PRINCIPLES OF CONSOLIDATIONS: The consolidated financial statements include the
accounts of Panhandle and all majority-owned subsidiaries, after eliminating
significant intercompany transactions and balances. Investments in businesses
not controlled by Panhandle, but over which it has significant influence, are
accounted for using the equity method.

USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and 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. The principles of SFAS No. 5 guide the
recording of contingent liabilities within the financial statements. Although
these estimates are based on management's knowledge of current and expected
future events, actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS: All liquid investments with maturities at date of
purchase of three months or less are considered cash equivalents.

SIGNIFICANT CUSTOMERS AND CREDIT RISK: Panhandle's operations are primarily
concentrated in the natural gas industry and its major customers' operations are
also in the same industry. Panhandle manages trade credit risks to minimize
exposure to uncollectible trade receivables. Prospective and existing customers
are reviewed for creditworthiness based upon pre-established standards.
Customers that do not meet minimum standards are required to provide additional
credit support.

SYSTEM GAS AND OPERATING SUPPLIES: System gas and operating supplies consists of
gas held for operations and materials and supplies, carried at the lower of
weighted average cost or market. The gas held for operations that is not
expected to be consumed in operations in the next twelve months has been
reflected in non-current assets. All system gas and materials and supplies
purchased are recorded at the lower of cost or market, while gas received from
and owed back to customers is valued at market. For the year ended December 31,
2001, $23 million of lower of cost or market write-downs were recorded to
Panhandle's system gas.

GAS IMBALANCES: Gas imbalances occur as a result of differences in volumes of
gas received and delivered. Gas imbalance in-kind receivables and payables are
valued at cost or market, based on whether net imbalances have reduced or
increased system gas balances, respectively.

FUEL TRACKER: Liability accounts are maintained for net volumes of fuel gas owed
to customers collectively. Trunkline records an asset whenever fuel is due from
customers from prior under recovery based on contractual and specific tariff
provisions which support the treatment as an asset. Panhandle's other companies
that are subject to fuel tracker provisions record an expense when fuel is under
recovered. The pipelines' fuel reimbursement is in-kind and non-discountable.

PROPERTY, PLANT AND EQUIPMENT: PP&E is stated at cost. Panhandle capitalizes all
construction-related direct labor and material costs, as well as indirect
construction costs. The cost of replacements and betterments that extend the
useful life of PP&E is also capitalized. The cost of repairs and replacements of
minor items of PP&E is charged to expense as incurred. Depreciation is generally

33

computed using the straight-line method. The composite weighted-average
depreciation rates were 3.1, 3.0 and 2.9 percent for 2002, 2001 and 2000,
respectively.

When PP&E is retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income.

IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: Panhandle accounts for
long-lived assets in accordance with the provisions of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. This Statement requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. In
accordance with APB Opinion No. 18, Panhandle evaluates the potential impairment
of its investments in projects based on various analyses, including the
projection of undiscounted cash flows, whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. If such decline in value is determined to be other than temporary,
an impairment loss is recognized and the investment is written down to its
estimated fair value.

UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: Panhandle amortizes premiums,
discounts and expenses incurred in connection with the issuance of long-term
debt consistent with the terms of the respective debt instrument.

ENVIRONMENTAL EXPENDITURES: Environmental expenditures that relate to an
existing condition caused by past operations that do not contribute to current
or future revenue generation are expensed. Environmental expenditures relating
to current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or clean-ups are
probable and the costs can be reasonably estimated.

REVENUES: Revenues on transportation, storage and terminalling of natural gas
are recognized as service is provided. Receivables are subject to normal trade
terms and are carried net of an allowance for doubtful accounts. Prior to final
FERC approval of filed rates, Panhandle is exposed to risk that the FERC will
ultimately approve the rates at a level lower than those requested. The
difference is subject to refund and reserves are established, where required,
for that purpose. (See Note 3, Regulatory Matters).

During 2002 and 2001, sales to Proliance Energy, LLC, a nonaffiliated local
distribution company and gas marketer, accounted for 16 percent and 15 percent
of Panhandle's consolidated revenues, respectively. Also during 2002, sales to
BG LNG Services, a nonaffiliated gas marketer, accounted for 13 percent of
Panhandle's consolidated revenue. Sales to subsidiaries of CMS Energy, primarily
Consumers, accounted for 12 percent of Panhandle's consolidated revenues during
2002, 15 percent during 2001, and 12 percent during 2000. No other customer
accounted for 10 percent or more of consolidated revenues during 2002, 2001, or
2000. Aggregate sales to Panhandle's top ten customers accounted for 67%, 60%
and 53% of revenues during 2002, 2001 and 2000, respectively.

34

INTEREST COST CAPITALIZED: SFAS No. 34 requires capitalization of interest on
certain qualifying assets that are undergoing activities to prepare them for
their intended use. Interest costs incurred during the construction period are
capitalized and amortized over the life of the assets. Gross interest expense
for the twelve months ended December 31, 2002 and 2001 was $79 million and $86
million, respectively, of which $3 million was capitalized for projects under
construction for both periods.

GOODWILL: Goodwill represents the excess of costs over fair value of assets of
businesses acquired. Panhandle adopted the provisions of SFAS No. 142 as of
January 1, 2002. Goodwill acquired in a purchase business combination and
determined to have an indefinite useful life is not amortized, but instead
tested for impairment annually in accordance with the provisions of SFAS No.
142. SFAS No. 142's transitional goodwill impairment evaluation required
Panhandle to perform an assessment of whether there was an indication that
goodwill was impaired as of the date of adoption. Panhandle's goodwill, which
resulted from CMS Energy's acquisition in March 1999, was tested for impairment
as of January 1, 2002, based on valuations by independent appraisers. As defined
in SFAS No. 142, Panhandle was considered a single reporting unit. The fair
value of the reporting unit was determined using a combination of the income
approach based on discounted cash flows and a market approach using public
guideline companies and market transactions. The goodwill impairment amount was
determined by comparing the fair value of goodwill to book value. Panhandle has
completed the goodwill impairment testing required upon adoption of SFAS No.
142, which resulted in a $601 million pre-tax write-down ($369 million
after-tax) under the new standard. The impact has been reflected retroactively
to the first quarter of 2002 as the cumulative effect of a change in accounting
for goodwill, pursuant to the requirements of SFAS No. 142.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: Panhandle utilizes
interest-rate related derivative instruments to manage its exposure on its debt
instruments and does not enter into derivative instruments for any purpose other
than hedging purposes. That is, Panhandle does not speculate using derivative
instruments. All derivatives are recognized on the balance sheet at their fair
value. On the date the derivative contract is entered into, Panhandle designates
the derivative as either a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment ("fair value" hedge), a hedge of
a forecasted transaction or the variability of cash flows to be received or paid
related to a recognized asset or liability ("cash flow" hedge).

Interest rate swaps are used to reduce interest rate risks and to manage
interest expense. By entering into these agreements, Panhandle generally
converts floating-rate debt into fixed-rate debt or may also convert fixed-rate
debt to floating. Interest differentials paid or received under the swap
agreements are reflected as an adjustment to interest expense. These interest
rate swaps are financial derivative instruments that qualify for hedge
treatment. For derivatives treated as hedges of future cash flows, the effective
portion of changes in fair value is recorded in other comprehensive income until
the related hedge items impact earnings. Any ineffective portion of a hedge is
reported in earnings immediately. For derivatives treated as a hedge of the fair
value of a debt instrument, the effective portion of changes in fair value are
recorded as an adjustment to the hedged debt. The ineffective portion of a fair
value hedge is recognized in earnings. Upon termination of a fair value hedge of
a debt instrument, the resulting gain or loss is amortized to income through the
maturity date of the debt instrument.

35

In March 2002, Panhandle executed a fixed-to-floating interest rate swap with
notional amounts totaling $175 million related to existing notes to take
advantage of lower short-term interest rates, which reduced interest expense on
the Consolidated Income Statement compared to the prior year. In June 2002, the
swaps were unwound to monetize an increase in the market value of the fixed to
floating rate position. The resulting cash gain of approximately $3 million is
being amortized to income through the second and third quarters of 2004, which
are the maturity dates of the original debt instruments that were hedged.
Interest cost decreases due to reductions in debt principal and amortization of
the gain on the swaps unwind were partially offset by credit fees and other
interest charges of $3 million during 2002 related to Centennial, Guardian and
LNG Holdings. Panhandle did not have a gain or loss associated with the
ineffective portion of a hedge for any period presented. Interest expense
associated with the cash flow hedge was approximately $2 million in 2002.

The negative fair value of interest rate swap agreements was $22 million
pre-tax, $13 million net of tax at December 31, 2002. Current market pricing
models were used to estimate fair values of interest rate swap agreements. In
accordance with SFAS No. 133, an unrealized loss of $13 million after-tax was
recorded to accumulated other comprehensive loss.

INCOME TAXES: CMS Energy and its subsidiaries file a consolidated federal income
tax return. Federal income taxes have been provided by Panhandle on the basis of
its separate company income and deductions and are settled in accordance with
the established practices of the tax sharing agreement of the consolidated
group which provides for, among others, the allocation of tax attributes among
its participating members. Deferred income taxes have been provided for
temporary differences. Temporary differences occur when events and transactions
recognized for financial reporting result in taxable or tax-deductible amounts
in different periods.

RECLASSIFICATIONS: Certain prior year amounts have been reclassified in the
consolidated financial statements to conform to the current presentation.

NEW ACCOUNTING STANDARDS

SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: In June 2001, the
FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is
effective for fiscal years beginning after June 15, 2002. The Statement requires
legal obligations associated with the retirement of long-lived assets to be
recognized at their fair value at the time that the obligations are incurred.
Upon initial recognition of a liability, that cost should be capitalized as part
of the related long-lived asset and allocated to expense over the useful life of
the asset. Panhandle will adopt the new rules on asset retirement obligations on
January 1, 2003. Preliminary results indicate that application of the new rules
will result in an increase in net property, plant and equipment of $11 million,
recognition of an asset retirement obligation of $10 million, and a cumulative
effect of adoption that will increase net income and stockholder's equity by $1
million.

SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB on April 30,
2002, this Statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain lease modifications
that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring and financial statements
issued after May 15, 2002. Panhandle believes there will not be a material
impact on its financial statements upon adoption of this standard.

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SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES:
Issued by the FASB in July 2002, this standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146
supersedes previous accounting guidance, EITF No. 94-3, "Liability recognition
for Certain Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred In a Restructuring)." This standard is effective for exit
or disposal activities initiated after December 31, 2002. The scope of SFAS
No.146 includes, (1) costs related to termination benefits of employees who are
involuntarily terminated, (2) costs to terminate a contract that is not a
capital lease, and (3) costs to consolidate facilities or relocate employees.
Any future exit or disposal activities that Panhandle may engage in after any
potential sale would be subject to the provisions of this statement.

SFAS NO. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Panhandle has decided to voluntarily adopt the fair value
based method of accounting for stock-based employee compensation effective
December 31, 2002, applying the prospective method of adoption which requires
recognition of all employee awards granted, modified, or settled after the
beginning of the year in which the recognition provisions are first applied.
Panhandle has adopted SFAS No. 148 for new awards granted in 2002, and the
implementation of SFAS No. 148 resulted in a $0.4 million charge to expense
during 2002.

FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation expands on existing disclosure
requirements for most guarantees, and clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
The interpretation is effective for guarantees issued or modified on and after
January 1, 2003. Panhandle will be required to recognize a liability for any
guarantees it may issue after January 1, 2003, but will not change the
accounting for guarantees it may have issued before that date.

FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Panhandle, the
consolidation requirements apply to pre-existing entities beginning July 1,
2003. Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Panhandle will be required to
consolidate any entities that meet the requirements of the interpretation.
Panhandle is in the process of studying the interpretation, and has yet to
determine the effects, if any, on its consolidated financial statements.

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3. REGULATORY MATTERS

Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. In September 1999, Trunkline filed a FERC settlement
agreement to resolve certain issues in this proceeding. FERC approved this
settlement in February 2000 and required refunds of approximately $2 million
that were made in April 2000, with supplemental refunds of $1.3 million in June
2000. In January 2001, Trunkline filed a settlement that included the remaining
issues in this proceeding. In April 2001, the FERC approved Trunkline's
uncontested settlement, without modification. As part of the settlement,
Trunkline reduced its maximum rates in May 2001 and made the remaining refunds
totaling approximately $8 million in June 2001.

In conjunction with a FERC order issued in September 1997, FERC required certain
natural gas producers to refund previously collected Kansas ad-valorem taxes to
interstate natural gas pipelines, including Panhandle Eastern Pipe Line. FERC
ordered these pipelines to refund these amounts to their customers. In June
2001, Panhandle Eastern Pipe Line filed with the FERC a proposed settlement,
which was supported by most of the customers and affected producers. In October
2001, the FERC approved that settlement. The settlement provided for a
resolution of the Kansas ad-valorem tax matter on the Panhandle Eastern Pipe
Line system for a majority of refund amounts. Certain producers and the state of
Missouri elected to not participate in the settlement. A FERC hearing to resolve
all outstanding issues has been scheduled for October 16, 2003. At December 31,
2002 and December 31, 2001, accounts receivable included $8 million for tax
collections due from natural gas producers. At December 31, 2002 and December
31, 2001, other current liabilities included $11 million for tax collections due
to customers. On January 2, 2003, the Commission issued an order indicating its
intention to cease collection efforts for approximately $5 million of the
amounts due from affected producers. Remaining amounts collected but not
refunded are subject to refund pending resolution of issues remaining in the
FERC docket and Kansas intrastate proceeding.

In March 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing was in conjunction with Centennial, a joint venture in
which Panhandle owned a one-third equity interest, converting the line from
natural gas transmission service to a refined products pipeline, which began
full commercial service in April 2002. Effective April 2001, the 26-inch
pipeline was conveyed to Centennial and the book value of the asset, including
related goodwill, is reflected in Investments in Affiliates. On February 10,
2003, Panhandle sold its one-third equity interest in Centennial for $40 million
to Centennial's two other partners, MAPL and TEPPCO.

In July 2001, Panhandle Eastern Pipe Line filed a settlement with customers on
FERC Order 637 matters to resolve issues including capacity release and
imbalance penalties, among others. On October 12, 2001 and December 19, 2001
FERC issued orders approving the settlement, with modifications. The settlement
changes became final effective February 1, 2002 and Panhandle recognized
approximately $3 million of income after-tax, including interest. Management
believes that this matter will not have a material adverse effect on
consolidated results of operations or financial position.

In August 2001, an offer of settlement of Trunkline LNG rates sponsored jointly
by Trunkline LNG, BG LNG Services and Duke LNG Sales was filed with the FERC and
was approved on October 11, 2001. The settlement was placed into effect on
January 1, 2002. This is expected to result in reduced revenues for Trunkline
LNG from 2001 levels but less volatility due to a 22-year contract with BG LNG
Services.

In December 2001, Trunkline LNG filed with the FERC a certificate application to
expand the Lake Charles facility to approximately 1.2 billion cubic feet per day
of sendout capacity versus the current capacity of 630 million cubic feet per
day. The BG Group has contract rights for all of this additional

38

capacity. On December 18, 2002, the FERC issued an order approving the LNG
terminal expansion.

Panhandle has sought refunds from the State of Kansas concerning certain
corporate income tax issues for the years 1981 through 1984. On January 25,
2002, the Kansas Supreme Court entered an order affirming a previous Board of
Tax Court finding that Panhandle was entitled to refunds which with interest
total approximately $26 million. Pursuant to the provisions of the purchase
agreement between CMS Energy and a subsidiary of Duke Energy, Duke retains the
benefits of any tax refunds or liabilities for periods prior to the date of the
sale of Panhandle to CMS Energy.

In February 2002, Trunkline Gas filed a settlement with customers on Order 637
matters to resolve issues including capacity release and imbalance penalties,
among others. On July 5, 2002, FERC issued an order approving the settlement,
with modifications. On October 18, 2002, Trunkline Gas filed tariff sheets with
the FERC to implement Order 637 changes effective November 1, 2002. On February
12, 2003, FERC issued an order approving the settlement, effective November 1,
2002. Management believes that this matter will not have a material adverse
effect on consolidated results of operations or financial position.

4. GOODWILL IMPAIRMENT

Goodwill represents the excess of costs over fair value of assets of businesses
acquired. Panhandle adopted the provisions of SFAS No. 142 as of January 1,
2002. Goodwill acquired in a purchase business combination and determined to
have an indefinite useful life is not amortized, but instead tested for
impairment annually in accordance with the provisions of SFAS No. 142. SFAS No.
142's transitional goodwill impairment evaluation required Panhandle to perform
an assessment of whether there was an indication that goodwill was impaired as
of the date of adoption. Panhandle's goodwill, which resulted from CMS Energy's
acquisition in March 1999, was tested for impairment as of January 1, 2002,
based on valuations by independent appraisers. As defined in SFAS No. 142,
Panhandle was considered a single reporting unit. The fair value of the
reporting unit was determined using a combination of the income approach based
on discounted cash flows and a market approach using public guideline companies
and market transactions. The goodwill impairment amount was determined by
comparing the fair value of goodwill to book value. Panhandle has completed the
goodwill impairment testing required upon adoption of SFAS No. 142, which
resulted in a $601 million pre-tax write-down ($369 million after-tax) under the
new standard. The impact has been reflected retroactively to the first quarter
of 2002 as the cumulative effect of a change in accounting for goodwill,
pursuant to the requirements of SFAS No. 142.

For purposes of comparison, the following table presents what net income would
have been during the periods presented had there been no amortization of
goodwill, cumulative effect of change in accounting principle, net of tax, and
extraordinary income, net of tax, in those periods.

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5. RELATED PARTY TRANSACTIONS

- ----------

(a) Includes allocated benefit plan costs

Panhandle has a number of significant transactions with related parties. Revenue
transactions, primarily for the transportation of natural gas for Consumers, CMS
MST and the MCV Partnership, all related parties, are based on regulated prices,
market prices or competitive bidding. Related party expenses

40

include payments for services provided by affiliates and payment of overhead
costs to CMS Gas Transmission and CMS Energy, as well as allocated benefit plan
costs.

Other operating revenue for the twelve month periods ended December 31, 2002 and
2001, includes equity losses related to Centennial of $8 million and $1 million,
respectively.

Interest income includes $9 million, $9 million and $8 million for the period
ended December 31, 2002, 2001 and 2000, respectively for interest on the Note
receivable from CMS Capital.

In June 2001, Panhandle received a $150 million capital contribution from CMS
Gas Transmission. In June 2001, Panhandle also loaned CMS Capital $150 million.
At December 31, 2002, Note receivable - CMS Capital, totaled $210 million, of
which $150 million is reflected as a reduction to shareholder's equity and $60
million is reflected as current. Net cash generated by Panhandle, including
funds from the Trunkline LNG monetization transaction, in excess of operating,
investing or financing needs, has been loaned to CMS Capital and is reflected as
Note receivable-CMS Capital on the Consolidated Balance Sheet. Panhandle was
credited with interest on the note at the 30 day commercial paper rate plus 12.5
basis points through July 2002. In August of 2002, the interest rate was
increased to a one-month Libor plus 300 basis points.

Due to liquidity issues related to CMS Energy and subsidiaries, Panhandle's
ability to draw on the full amount of the Note Receivable from CMS Capital, if
needed, could be affected.

A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows:

At December 31, 2002 and 2001, Panhandle had an intercompany tax receivable of
$4 million and $51 million, respectively. These represent estimated amounts to
be received from CMS Energy over the next twelve months for federal income
taxes. In December 2002, Panhandle received approximately $29 million in refunds
from CMS Energy for 2001 federal income taxes. The estimated amounts from
December 2001 not received in 2002 represent tax credits and loss carryovers now
reflected on the consolidated balance sheet as deferred tax assets.

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6. INCOME TAXES

The separate components of income tax expense (benefit) consist of:

The actual income tax expense differs from the amount computed by applying the
statutory federal tax rate to income before income taxes as follows:

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The principal components of Panhandle's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:

At December 31, 2002, Panhandle had AMT credit carryforwards in the amount of
$13 million that do not expire, general business credit carryforwards in the
amount of $2 million that expire in 2005, and tax loss carryforwards in the
amount of $69 million that expire in 2022.

Panhandle has a deferred state tax asset attributable to temporary differences
reflecting state tax loss carryforwards of $15 million as of December 31, 2002.
These carryforwards expire after 15 years, and their application for reduction
of future taxes is dependent on Panhandle's taxable income being utilized until
2013 and beyond when these assets begin to expire. The possibility exists that
this deferred tax asset may not be fully realized, and a valuation allowance may
be required at some point in the future.

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7. PROPERTY, PLANT AND EQUIPMENT

At December 31, 2002 and 2001, accumulated depreciation and amortization
included $26 million and $18 million, respectively, for amortization of
intangibles, excluding goodwill.

8. INVESTMENT IN AFFILIATES

GUARDIAN. In November 2001, CMS Gas Transmission conveyed its one-third interest
in Guardian to Panhandle. Guardian, also owned by Viking Gas Transmission, a
subsidiary of Xcel Corporation, and WICOR, a subsidiary of Wisconsin Energy
Corporation, constructed a 141-mile, 36-inch pipeline from Illinois to Wisconsin
for the transportation of natural gas, which began service in December 2002.
Trunkline Gas currently operates and maintains the pipeline. As of December 31,
2002, Panhandle had provided $25 million of equity contributions to Guardian. On
March 10, 2003, Panhandle transferred its interest in Guardian back to CMS Gas
Transmission and was released from its guarantee obligations associated with the
Guardian non-recourse guaranty by Prudential and the other noteholders (See Note
12, Commitments and Contingencies).

CENTENNIAL. Until February 10, 2003, Panhandle owned a one-third interest in the
Centennial Pipeline LLC along with TEPPCO and MAPL. The joint venture operates
an interstate refined petroleum products pipeline extending from the U.S. Gulf
Coast to Illinois. Effective April 2001, Trunkline conveyed an existing 26-inch,
720-mile pipeline to Centennial and the book value of the asset, including
related goodwill, is reflected in Investments on the Consolidated Balance Sheet.
The pipeline began commercial service in April 2002. On February 10, 2003,
Panhandle sold its one-third equity interest in Centennial for $40 million to
Centennial's two other partners, MAPL and TEPPCO. Panhandle has been released by
MAPL, TEPPCO and the lenders for any liabilities, including credit fees, related
to Panhandle's $50 million parent guaranty of the project debt (See Note 12,
Commitments and Contingencies).

LEE 8 STORAGE. Panhandle owns a 29 percent interest in the Lee 8 partnership,
which operates a 1.4 bcf natural gas storage facility in Michigan. Panhandle
initially held a 40 percent interest in Lee 8. In July 2002, Panhandle entered
into transactions with MG Ventures Storage Corporation and Proliance Energy
which resulted in a reduction in equity ownership from 40 percent to the current
29 percent. The

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remaining interest in the Lee 8 partnership is owned by Proliance Energy (51
percent) and Howard Energy Company (20 percent).

9. FINANCIAL INSTRUMENTS

Panhandle's financial instruments include approximately $1.2 billion and $1.3
billion of long-term debt at December 31, 2002 and 2001, respectively, with an
approximate fair value of $1.1 billion and $1.2 billion as of December 31, 2002
and 2001, respectively. Estimated fair value amounts of long-term debt were
obtained from independent parties. Judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
determined as of December 31, 2002 and 2001 are not necessarily indicative of
the amounts Panhandle could have realized in current market exchanges.

The $60 million Note Receivable from CMS Capital is at fair value and the
interest portion is calculated using a floating rate which is updated monthly
(See Note 5, Related Party Transactions).

LNG Holdings is required by its credit agreement to have fixed interest rates on
a portion of its bank notes for a period of five years. An interest rate swap
fixing interest rates was entered effective December 21, 2001 on the initial
notional amount of $150 million to conform to that requirement on $200 million
of the notes. Subsequently, an additional interest rate swap of $67 million was
entered on March 22, 2002 for the requirement on an additional $90 million of
notes issued. These interest rate swaps are financial derivative instruments
that qualify as cash flow hedges.

The negative fair value of interest rate swap agreements was $22 million
pre-tax, $13 million net of tax at December 31, 2002. Current market pricing
models were used to estimate fair values of interest rate swap agreements. In
accordance with SFAS No. 133, an unrealized loss of $13 million after-tax was
recorded to accumulated other comprehensive loss.

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10. DEBT

Short-term debt: In December 2002 and January 2003, Panhandle secured short-term
bank loans in the amounts of $30 million and $10 million, respectively, with
interest rates of LIBOR plus 4 percent. The loans are due the earlier of
December 2003 or upon the sale of Panhandle. The stock of most of Panhandle's
subsidiaries were pledged as collateral for the loans, which were utilized to
improve overall liquidity which had been reduced by various cash requirements.

Long-term debt consists of the following:

In December 2001, Panhandle entered into a structured transaction to monetize a
portion of the value of a long-term terminalling contract of its LNG subsidiary.
LNG Holdings obtained $290 million of new floating rate long-term loans due in
2007 which are secured by LNG Holdings assets.

The total amount of debt principal retired in 2002 was $138 million. Panhandle
incurred $1 million, net of tax, of related early retirement of debt costs which
are reflected as an extraordinary gain on Panhandle's Consolidated Statements of
Operations.

On March 27, 2000, Panhandle issued $100 million of 8.25 percent senior notes
due 2010. Panhandle used the funds primarily to finance the purchase of Sea
Robin (See Note 1, Corporate Structure); the remaining funds were loaned to CMS
Capital. In July 2000, these notes were exchanged for substantially identical
SEC-registered notes. In December 2001, $40 million of these notes were retired
with funds received from the Trunkline LNG monetization transaction. At December
31, 2002, $60 million of these notes remained outstanding.

On March 29, 1999, CMS Panhandle Holding privately placed $800 million of senior
notes (See Note 1, Corporate Structure) including: $300 million of 6.125 percent
senior notes due 2004; $200 million of 6.5 percent senior notes due 2009; and
$300 million of 7.0 percent senior notes due 2029. On June 15, 1999, CMS
Panhandle Holding was merged into Panhandle and the obligations of

46

CMS Panhandle Holding under the notes and the indenture were assumed by
Panhandle. In September 1999, Panhandle completed an exchange offer which
replaced the $800 million of notes originally issued by CMS Panhandle Holding
with substantially identical SEC-registered notes. In December 2001, $111
million of these notes were retired with funds received from the Trunkline LNG
monetization transaction. During 2002, $102 million of these notes were retired
with funds received from CMS Capital demand loan repayment. At December 31,
2002, $587 million of these notes remained outstanding.

In conjunction with the application of purchase accounting, Panhandle's existing
notes and debentures totaling $300 million were revalued resulting in a net
premium recorded of approximately $5 million. The 7.2 percent - 7.95 percent
debentures have call options whereby Panhandle has the option to repay the debt
early beginning in 2003 at a specified premium. In December 2001, $39 million of
the debentures were retired with funds received from the Trunkline LNG
monetization transaction. In 2002, $27 million of the debentures were retired
with funds received from CMS Capital demand loan repayments. At December 31,
2002, $135 million of the debentures remained outstanding, along with $100
million of notes.

Panhandle's senior unsecured note provisions are subject to requirements such as
the maintenance of a fixed charge coverage ratio and a leverage ratio which
restrict certain payments if not maintained and limitations on liens. At
December 31, 2002, Panhandle was subject to a $295 million limitation on
additional restricted payments, including dividends and loans to affiliates. At
December 31, 2002 Panhandle was in compliance with all covenants, having
received a waiver for certain matters as discussed in Note 12, Commitments and
Contingencies.

11. DEBT RATING DOWNGRADES

On June 11, 2002, Moody's Investors Service, Inc. lowered its rating on
Panhandle's senior unsecured notes from Baa3 to Ba2 based on concerns
surrounding the liquidity and debt levels of CMS Energy. On July 15, 2002, Fitch
Ratings, Inc lowered its rating on these notes from BBB to BB+ and again on
September 4, 2002 to BB based on similar concerns. On July 16, 2002, S&P also
lowered its rating on these notes from BBB- to BB, in line with their rating on
CMS Energy based on their belief that CMS Energy and its subsidiaries are at
equal risk of default since the parent relies on its subsidiaries to meet its
financial commitments. Effective with this downgrade, Panhandle's debt is below
investment grade. Each of the three major ratings services currently have
negative outlooks for CMS Energy and its subsidiaries, due to uncertainties
associated with CMS Energy's financial condition and liquidity pending
resolution of the round trip trading investigations and lawsuits, financial
statement restatement and re-audit, and access to the capital markets.

Panhandle, as a result of the ratings downgrade by both Moody's and S&P to below
investment grade levels, can be required to pay the balance of the demand loan
owed LNG Holdings including the remaining principal and accrued interest at any
time such downgrades exist. In November 2002, Panhandle acquired Dekatherm
Investor Trust's interest, and owns 100% of LNG Holdings and will not demand
payment on the note payable to LNG Holdings.

In conjunction with the Centennial and Guardian pipeline projects, Panhandle has
provided guarantees related to the project financings during the construction
phases and initial operating periods. On July 17, 2002, following the debt
downgrades by Moody's and S&P, the lender sent notice to Panhandle, pursuant to
the terms of the Guaranty Agreement, requiring Panhandle to provide acceptable
credit support for its

47

pro rata portion of these construction loans, which aggregate $110 million. On
September 27, 2002, Panhandle's Centennial partners provided credit support of
$25 million each in the form of guarantees to the lender to cover Panhandle's
obligation of $50 million of loan guarantees. The partners were paid credit fees
by Panhandle on the outstanding balance of the guarantees for the periods for
which they were in effect. On February 10, 2003, Panhandle sold its one-third
equity interest in Centennial for $40 million to Centennial's two other
partners, MAPL and TEPPCO. Panhandle has been released by MAPL, TEPPCO and the
lenders for any liabilities, including credit fees, related to Panhandle's $50
million parent guaranty of the project debt.

In October 2002, Panhandle provided a letter of credit to the lenders which
constitutes acceptable credit support under the Guardian financing agreement.
This letter of credit was cash collateralized by Panhandle with approximately
$63 million. On March 10, 2003, Panhandle's ownership interest in Guardian was
transferred back to CMS Gas Transmission and Panhandle was released from its
guarantee obligations associated with the Guardian non-recourse guaranty by the
partners, Prudential and the other noteholders.

On March 13, 2003, CMS Energy Corporation and Southern Union received requests
for additional information ("Second Requests") from the FTC under the
Hart-Scott-Rodino Antitrust Improvements Act relating to Southern Union's
acquisition of Panhandle Eastern Pipe Line Company. CMS Energy and Southern
Union intend to respond to the Second Requests as quickly as practicable,
however, the Second Requests will delay the closing of the transaction beyond
March 31, 2003. The sale has been approved by the Massachusetts Department of
Telecommunications and Energy and the Missouri Public Service Commission. CMS
Energy is a party to a $295.8 million revolving credit facility that has
approximately $124 million outstanding and had an original maturity date of
March 31, 2003. CMS Energy had planned to use the proceeds from the sale of
Panhandle to pay down the facility. Although CMS Energy and Southern Union are
not able to close the sale of Panhandle by March 31, 2003, CMS Energy has
adequate cash reserves to retire the credit facility. See Note 16, Subsequent
Events - CMS Energy.

12. COMMITMENTS AND CONTINGENCIES

CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and investments,
excluding interest costs capitalized, to be $112 million in 2003, $124 million
in 2004 and $105 million in 2005. These amounts include expenditures associated
with the LNG terminal expansion which was filed with FERC on December 26, 2001.
The expansion expenditures are estimated to be $33 million in 2003, $66 million
in 2004 and $27 million in 2005. Capital expenditures are funded using cash from
operations, repayment of loans to CMS Capital on the outstanding note receivable
(see Note 5, Related Party Transactions) and contributions from the parent.
These estimates were developed for budget planning purposes and are subject to
revision.

LITIGATION: Panhandle is involved in legal, tax and regulatory proceedings
before various courts, regulatory commissions and governmental agencies
regarding matters arising in the ordinary course of business, some of which
involve substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS No. 5 in order to provide for such matters. Management
believes the final disposition of these proceedings will not have a material
adverse effect on consolidated results of operations, liquidity, or financial
position.

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ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken cleanup
programs at these sites. The contamination resulted from the past use of
lubricants containing PCBs in compressed air systems and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle cleanup programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Duke Energy's cleanup activities have been completed on
all but one of the agreed-upon sites. Should additional information be requested
regarding sites where compliance information has been submitted, Panhandle would
be obligated to respond to these requests.

As part of the cleanup program resulting from contamination due to the use of
lubricants containing PCBs in compressed air systems, Panhandle Eastern Pipe
Line and Trunkline have identified PCB levels above acceptable levels inside the
auxiliary buildings that house the air compressor equipment at thirty-two
compressor station sites. Panhandle has developed and is implementing an
EPA-approved process to remediate this PCB contamination in accordance with
federal, state and local regulations.

At some locations, PCBs have been identified in paint that was applied many
years ago. In accordance with EPA regulations, Panhandle is implementing a
program to remediate sites where such issues have been identified during
painting activities. If PCBs are identified above acceptable levels, the paint
is removed and disposed of in an EPA-approved manner. Approximately 15 percent
of the paint projects in the last few years have required this special
procedure.

The Illinois EPA notified Panhandle Eastern Pipe Line and Trunkline, together
with other non-affiliated parties, of contamination at former waste oil disposal
sites in Illinois. Panhandle and 21 other non-affiliated parties conducted an
investigation of one of the sites and are evaluating the report to determine
what actions will be taken. Panhandle Eastern Pipe Line's and Trunkline's
estimated share for the costs of assessment and remediation of the sites, based
on the volume of waste sent to the facilities, is approximately 17 percent.

Panhandle expects these cleanup programs to continue for several years and has
estimated its share of remaining cleanup costs not indemnified by Duke Energy to
range from $18 million to $25 million. Panhandle has accrued approximately $22
million of such costs, of which $4 million is included in Other Current
Liabilities and $18 million is included in Other Non-current Liabilities on the
Consolidated Balance Sheet at December 31, 2002. Environmental costs of $21
million are included in Other Non-current Liabilities on the Consolidated
Balance Sheet at December 31, 2001.

AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded to the EPA the sections of
the rule that affected Panhandle. Based on EPA guidance to these states for
development of SIPs, Panhandle expects future compliance costs to range from $15
million to $20 million for capital improvements to be incurred from 2004 through
2007.

49

As a result of the 1990 Clean Air Act Amendments, the EPA must issue MACT rules
controlling hazardous air pollutants from internal combustion engines and
turbines. These rules are expected in late 2003 and mid 2004. Beginning in 2002,
the Texas Natural Resource Conservation Commission enacted the Houston/Galveston
SIP regulations requiring reductions in nitrogen oxide emissions in an eight
county area surrounding Houston. Trunkline's Cypress compressor station is
affected and may require the installation of emission controls. In 2003, the new
regulations will also require all "grandfathered" facilities to enter into the
new source permit program which may require the installation of emission
controls at five additional facilities. The company expects future capital costs
for these programs to range from $14 million to $29 million.

In 1997, the Illinois Environmental Protection Agency initiated an enforcement
proceeding relating to alleged air quality permit violations at Panhandle's
Glenarm compressor station. On November 15, 2001 the Illinois Pollution Control
Board approved an order imposing a penalty of $850 thousand, plus fees and cost
reimbursements of $116 thousand. Under terms of the sale of Panhandle to CMS
Energy, a subsidiary of Duke Energy was obligated to indemnify Panhandle against
this environmental penalty. The state issued a permit in February of 2002,
requiring the installation of certain capital improvements at the facility at a
cost of approximately $3 million. Controls were installed on two engines in 2002
and it is planned to install controls on two additional engines in 2003 in
accordance with the 2002 permit.

SEC INVESTIGATION: As a result of the round-trip trading transactions at CMS
MST, CMS Energy's Board of Directors established a special committee of
independent directors to investigate matters surrounding the transactions and
retained outside counsel to assist in the investigation. The committee completed
its investigation and reported its findings to the Board of Directors in October
2002. The special committee concluded, based on an extensive investigation, that
the round-trip trades were undertaken to raise CMS MST's profile as an energy
marketer with the goal of enhancing its ability to market its services. The
committee found no apparent effort to manipulate the price of CMS Energy stock
or affect energy prices. The special committee also made recommendations
designed to prevent any reoccurrence of this practice, most of which have
already been implemented. Previously, CMS Energy terminated its speculative
trading business and revised its risk management policy. The Board of Directors
adopted, and CMS Energy has begun implementing, the remaining recommendations of
the special committee.

ACCOUNTING FOR RETIREMENT BENEFITS: Panhandle follows SFAS No. 87 to account for
pension costs and SFAS No. 106 to account for other postretirement benefit
costs. These statements require liabilities to be recorded on the balance sheet
at the present value of these future obligations to employees net of any plan
assets. The calculation of these liabilities and associated expenses require the
expertise of actuaries and are subject to many assumptions, including life
expectancies, present value discount rates, expected long-term rate of return on
plan assets, rate of compensation increase and anticipated health care costs.
Any change in these assumptions can significantly change the liability and
associated expenses recognized in any given year.

The Pension Plan is a CMS Energy plan for CMS Energy and affiliates, of which
Panhandle is a participating affiliate. The Pension Plan includes amounts for
employees of CMS Energy and affiliates, including Panhandle, which were not
distinguishable from the Pension Plan's total assets. On December 21, 2002, a
definitive agreement was executed to sell Panhandle. The sale is expected to
close in 2003. The Pension Plan obligation associated with Panhandle employees
will be retained by CMS. When the Southern Union Panhandle Corp. transaction
closes, none of the Panhandle employees will be eligible to accrue additional
benefits under the Pension Plan. However, the Pension Plan will retain pension
payment obligations under the Pension Plan for Panhandle employees who are
vested under the Pension Plan.

50

The significant downturn in the equities markets has affected the value of the
Pension Plan's assets. The estimated fair value of the Pension Plan's assets at
December 31, 2002 was $607 million and the Accumulated Benefit Obligation was
estimated at $1.055 billion. The Pension Plan's Accumulated Benefit Obligation
thus exceeded the value of the assets at December 31, 2002, and as a result,
Panhandle and the other participants of the plan were required to recognize an
additional minimum liability for this excess in accordance with SFAS No. 87. As
of December 31, 2002, the additional minimum liability allocated to Panhandle
was $48 million, of which $6 million was recorded as an intangible asset, and
$42 million was charged to other comprehensive income ($26 million after-tax).

OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. Panhandle Eastern Pipe Line and Trunkline, with respect
to certain producer contract settlements, may be contractually required to
reimburse or, in some instances, to indemnify producers against such royalty
claims. The potential liability of the producers to the government and of the
pipelines to the producers involves complex issues of law and fact which are
likely to take substantial time to resolve. If required to reimburse or
indemnify the producers, Panhandle Eastern Pipe Line and Trunkline may file with
FERC to recover a portion of these costs from pipeline customers. Management
believes these commitments and contingencies will not have a material adverse
effect on consolidated results of operations, liquidity or financial position.
At December 31, 2002 and 2001, Panhandle has accrued approximately $14 million
in Non-current Liabilities on the Consolidated Balance Sheet related to this
matter.

In December 2001, Panhandle contributed its interest in Trunkline LNG to LNG
Holdings which then raised $30 million from the issuance of equity to Dekatherm
Investor Trust and $290 million from non-recourse bank loans. Panhandle
guaranteed repayment of $90 million of these loans if the joint venture had not
obtained replacement lenders by March 2002. Replacement lenders were found by
LNG Holdings, and Panhandle was not required to perform under the guaranty,
which is now expired. Panhandle Eastern Pipe Line has provided indemnities to
certain parties involved in the transaction for pre-closing claims and
liabilities, and subsidiaries of Panhandle have provided indemnities for certain
post-closing expenses and liabilities as the manager/operator of LNG Holdings.
In November 2002, Panhandle acquired Dekatherm Investor Trust's interest in
Trunkline LNG for approximately $41 million and subsequently owns 100 percent of
LNG Holdings.

In May 2001, Panhandle provided a guaranty related to project financing
associated with its investment in Centennial in an amount up to $50 million
during the initial operating period of the project. Due to rating agency
downgrades of Panhandle's debt, the Centennial lender required additional credit
support from Panhandle. On September 27, 2002 Panhandle's partners provided
credit support of $25 million each in the form of guarantees to the Centennial
lender to cover Panhandle's $50 million obligation. The partners were paid
credit fees by Panhandle on the outstanding balance of the guarantees for the
periods for which they were in effect. On February 10, 2003, Panhandle sold its
one-third equity interest in Centennial for $40 million to Centennial's two
other partners, MAPL and TEPPCO. Panhandle has been released by MAPL, TEPPCO and
the lenders for any liabilities related to Panhandle's $50 million parent
guaranty of the project debt.

51

In November 2001, in conjunction with the Guardian project, Panhandle provided
a $60 million guaranty related to project financing during the construction and
initial operating period of the project. The guaranty is released when Guardian
reaches certain operational and financial targets. Due to rating agency
downgrades of Panhandle's debt, the Guardian lender assessed credit fees and
required additional credit support from Panhandle. In October 2002, Panhandle
provided a letter of credit to the lenders which constitutes acceptable credit
support under the Guardian financing agreement. This letter of credit was cash
collateralized by Panhandle with approximately $63 million which, including
accumulated interest, is reflected as Restricted Cash on the Consolidated
Balance Sheet at December 31, 2002. On March 10, 2003, Panhandle's ownership
interest in Guardian was transferred back to CMS Gas Transmission, along with
the $63 million cash collateral. Panhandle was also released from the guarantee
obligations associated with the Guardian non-recourse debt as of March 10, 2003,
by the partners, Prudential and the other noteholders.

In December 2002 and January 2003, Panhandle secured short-term bank loans in
the amounts of $30 million and $10 million, respectively, with interest payable
at rates of LIBOR plus 4 percent. The loans are due the earlier of December
2003 or upon the sale of Panhandle. The stock of most of Panhandle's
subsidiaries were pledged as collateral for the loans, which were utilized to
improve overall liquidity which had been reduced by various cash requirements.
Panhandle is required to provide certified September 30, 2002 financial
statements to the banks by April 30, 2003. Panhandle intends to provide these
statements to the banks prior to April 30, 2003. Should it be unable to deliver
the certified financial statements or obtain a waiver by that date, Panhandle
could be declared to be in default and the debt could be accelerated and become
immediately due and payable.

Panhandle was unable to deliver certified September 30, 2002 financial
statements to the LNG Holdings lenders as required under that credit facility.
Panhandle has received a waiver of this requirement until April 30, 2003 and a
waiver of a requirement to provide certain documentation until June 30, 2003.
Panhandle intends to provide the financial statements to the banks by April 30,
2003. Should it be unable to deliver the certified financial statements or
execute the required documents by the timing indicated, LNG Holdings could be
declared to be in default under its credit facility and the debt thereunder
could be accelerated and become immediately due and payable.

Occasionally, Panhandle will purchase surety bonds to indemnify third parties
for unforeseen events which may occur in the course of construction or repair
projects. As of December 31, 2002, Panhandle has purchased $4 million of these
surety bonds.

LEASES: Panhandle utilizes assets under operating leases in several areas of
operation. Consolidated rental expense amounted to $14 million in 2002, $11
million in 2001 and $13 million in 2000. Future minimum rental payments under
Panhandle's various operating leases for the years 2003 through 2007 are $12
million, $12 million, $11 million, $10 million and $3 million, respectively, and
$4 million thereafter.

SALE OF PANHANDLE

On March 13, 2003, CMS Energy Corporation and Southern Union Company received
requests for additional information ("Second Requests") from the Federal Trade
Commission under the Hart-Scott-Rodino Antitrust Improvements Act relating to
Southern Union's acquisition of Panhandle Eastern Pipe Line Company. CMS Energy
and Southern Union intend to respond to the Second Requests as quickly as
practicable, however, the Second Requests will delay the closing of the
transaction beyond March 31, 2003. The sale has been approved by the
Massachusetts Department of Telecommunications and Energy and the Missouri
Public Service Commission. CMS Energy is a party to a $295.8 million revolving
credit facility that has approximately $124 million outstanding and had an
original maturity date of March 31, 2003. CMS Energy had planned to use the
proceeds from the sale of Panhandle to pay down the facility. Although CMS
Energy and Southern Union are not able to close the sale of Panhandle by March
31, 2003, CMS Energy has adequate cash reserves to retire the credit facility.
See Note 16, Subsequent Events - CMS Energy.

52

13. EXECUTIVE INCENTIVE COMPENSATION

Panhandle participates in CMS Energy's Performance Incentive Stock Plan. Under
the plan, restricted shares of Common Stock of CMS Energy, as well as stock
options and stock appreciation rights related to Common Stock may be granted to
key employees based on their contributions to the successful management of CMS
Energy and its subsidiaries. Awards under the plan may consist of any class of
Common Stock. Certain plan awards are subject to performance-based business
criteria. The plan reserves for awards not more than five percent, as amended
January 1, 1999, of Common Stock outstanding on January 1 each year, less (i)
the number of shares of restricted Common Stock awarded and (ii) Common Stock
subject to options granted under the plan during the immediately preceding four
calendar years. The number of shares of restricted Common Stock awarded under
this plan cannot exceed 20 percent of the aggregate number of shares reserved
for award. Any forfeiture of shares previously awarded will increase the number
of shares available to be awarded under the plan. At December 31, 2002, awards
of up to 1,716,856 shares of CMS Energy Common Stock may be issued.

Restricted shares of Common Stock are outstanding shares with full voting and
dividend rights. These awards vest over five years at the rate of 25 percent per
year after two years. The restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides additional awards. Restricted shares vest fully if control of
CMS Energy changes, as defined by the plan. At December 31, 2002, 28,500 of the
87,750 shares of restricted CMS Energy Common Stock outstanding are subject to
performance objectives.

Under the plan, stock options and stock appreciation rights relating to Common
Stock are granted with an exercise price equal to the closing market price on
each grant date. Some options may be exercised upon grant; others vest over five
years at the rate of 25 percent per year beginning at the end of the first year
and others vest over three years at a rate of 33-1/3 percent per year after one
year. All options expire up to ten years and one month from date of grant.

53

The status of the restricted stock and options granted to Panhandle's key
employees under the Performance Incentive Stock Plan follows:

The following table summarizes information about CMS Energy's Common Stock
options outstanding and exercisable at December 31, 2002:

The weighted average fair value of options granted for CMS Energy Common Stock
in February 2002 was $3.84 and $1.44 in July 2002. In 2001 and 2000, the
weighted average fair value of options granted for CMS Energy Common Stock were
$6.43 and $2.04, respectively. Fair value is estimated using the Black-Scholes
model, a mathematical formula used to value options traded on securities
exchanges, with

54

the following assumptions. For 2002 the assumptions listed are for the February
grant, followed by the July grant:

In 2002 Panhandle adopted the fair value method of accounting for stock based
compensation under SFAS No. 123 as amended by SFAS No. 148 on a perspective
method. Accordingly Panhandle recognized the $0.4 million fair value of stock
based awards granted, modified or settled in 2002 in operating expenses.

Panhandle applied APB Opinion No. 25 and related interpretations in accounting
for the Performance Incentive Stock Plan. Prior to 2002, stock options were
granted at market price; no compensation cost was recognized for stock options
granted under the plan. The compensation cost charged against income for
restricted stock was $.4 million, $.1 million and $.2 million in 2002, 2001 and
2000, respectively. If compensation cost for stock options had been determined
in accordance with SFAS No. 123 for all years, Panhandle's net income would have
decreased by approximately $.3 million, $.3 million and $.1 million in 2002,
2001 and 2000, respectively.

14. RETIREMENT BENEFITS

Panhandle currently participates in CMS Energy's non-contributory defined
benefit retirement plan covering most employees with a minimum of one year
vesting service. Panhandle, through CMS Energy, provides retirement benefits
under a number of different plans, including certain health care and life
insurance benefits under OPEB, benefits to certain management employees under
SERP, and benefits to substantially all its employees under a trusteed,
non-contributory, defined benefit pension plan and a defined contribution 401
(k) plan.

The Pension Plan is a CMS Energy plan for CMS Energy and its affiliates, of
which Panhandle is a participating affiliate. The Pension Plan includes amounts
for employees of CMS Energy and affiliates, including Panhandle; assets for each
affiliate are not distinguishable from the Pension Plan's total assets. On
December 21, 2002, CMS Energy announced that it had reached a definitive
agreement to sell Panhandle to Southern Union Panhandle Corp. The agreement
calls for Southern Union Panhandle Corp., a newly formed entity owned by
Southern Union and AIG Highstar Capital, L.P., to pay $662 million in cash and
assume $1.166 billion in debt. The sale is expected to close in 2003. No portion
of the Pension Plan assets or liabilities will be transferred with the sale of
Panhandle. Upon close of the sale, none of the employees of Panhandle will be
eligible to accrue additional benefits under the Pension Plan. The Pension Plan
will retain pension payment obligations under the Pension Plan for Panhandle
employees who are vested under the Pension Plan.

55

WEIGHTED-AVERAGE ASSUMPTIONS:

CMS Energy's Net Pension Plan, SERP, and OPEB benefit consist of the
following:

SENSITIVITY TO CHANGES IN ASSUMED HEALTH CARE COST TREND RATES FOR PANHANDLE

The funded status of CMS Energy and affiliates Pension Plan, SERP, and OPEB is
reconciled with the liability recorded at December 31 as follows:

The Pension Plan's net unrecognized transition obligation, resulting from the
implementation of accrual accounting, is amortized over 16 years and 11 years
for the SERP on a straight-line basis over the average remaining service period
of active employees.

SERP is not a qualified plan under the Internal Revenue Code, and as such,
earnings of the SERP Plan are taxable and SERP assets are included in
consolidated assets. At December 31, 2002 and 2001, SERP Plan assets for
Panhandle were $5 million and $3 million, respectively, and were classified as
other non-current assets. In 2002 and 2001, the accumulated benefit obligation
for SERP for Panhandle employees were $7 million and $6 million, respectively.

With respect to the CMS Energy OPEB plan, the fair value of the plan assets was
$509 million at December 31, 2002 as compared to the projected benefit
obligation of $984 million. At December 31, 2001, the fair value of the plan
assets was $508 million versus projected benefit obligations of $956 million.
The plan assets at December 31, 2002 consists primarily of stocks and bonds,
including CMS Energy Common Stock of $1.3 million, based on a share price of
$9.44. As of March 14, 2003, the market value of CMS Energy Common Stock in the
OPEB plan assets was $0.5 million, based on a share price of $3.52.

It is Panhandle's and CMS Energy's general policy to fund accrued postretirement
health care costs. Panhandle accrues health care and life insurance benefit
costs over the active service period of employees to the date of full
eligibility for the benefits. Panhandle's net periodic postretirement benefit
cost, as allocated by CMS Energy, was $6 million in 2002. In 2001 and 2000,
Panhandle's net periodic postretirement benefit cost was $5 million and $3
million, respectively.

For measurement purposes, a 8.50 percent weighted average rate of increase in
the per capita cost of covered health care benefits was assumed for 2002. The
rate is based on assumptions that it will decrease gradually to 5.50 percent in
2010 and thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for Panhandle's health care plans.

56

The significant downturn in the equities markets and a decrease in the price of
CMS Energy Common Stock has affected the value of the Pension Plan assets. The
Pension Plan's Accumulated Benefit Obligation exceeded the value of these assets
at December 31, 2002, and as a result, CMS Energy was required to recognize an
additional minimum liability for this excess in accordance with SFAS No. 87. The
estimated fair value of the Pension Plan assets at December 31, 2002 was $607
million, including CMS Energy Common Stock which had a market value of $49
million based on a market price $9.44. As of March 14, 2003, the market value of
CMS Energy Common Stock in the Pension Plan was $18 million based on a share
price of $3.52. As of December 31, 2002, the Accumulated Benefit Obligation was
estimated at $1.055 billion and the additional minimum liability was $426
million, of which $53 million was recorded as an intangible asset, and $373
million was charged to other comprehensive income ($242 million after-tax). As
of December 31, 2002, the additional minimum liability allocated to Panhandle
was $48 million, of which $6 million was recorded as an intangible asset, and
$42 million charged to other comprehensive income ($26 million after-tax).

Contributions to the 401(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan by Panhandle were $3 million in 2001
and 2000, and no incentives were recorded in 2002. Effective September 1, 2002,
the employer's match for the 401(k) plan was suspended until January 1, 2005.

57

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

16. SUBSEQUENT EVENTS (UNAUDITED)

LNG EXPANSION: On March 18, 2003, the FERC denied a request for rehearing of the
order approving the LNG terminal expansion. Trunkline LNG received FERC
authorization on March 21, 2003 to commence construction. The expanded facility
is expected to be in operations by January 2006.

CMS ENERGY: In March 2003, the CMS Energy'S $300 million and $295.8 million
revolving credit facilities under which $409 million was then outstanding were
amended and restated. The Second Amended and Restated Senior Credit Agreement
includes a $249 million tranche with a maturity date of April 30, 2004 and a
$175 million tranche with a maturity date of September, 2004.

58

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholder
Panhandle Eastern Pipe Line Company:

We have audited the accompanying consolidated balance sheets of Panhandle
Eastern Pipe Line Company as of December 31, 2002 and 2001, and the related
consolidated statements of operations, common stockholder's equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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. An audit
also includes 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Panhandle Eastern
Pipe Line Company as of December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 21, 2002 in conformity with accounting principles generally
accepted in the United States.

As discussed in Note 4 to the accompanying consolidated financial statements,
the Company changed its method of accounting for goodwill effective January 1,
2002.

Houston, Texas
March 14, 2003

59

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

In April 2002, CMS Energy's and Panhandle's Board of Directors, upon
the recommendation of the Audit Committee of CMS Energy's and Panhandle's Board,
voted to discontinue using Arthur Andersen to audit Panhandle's financial
statements for the year ending December 31, 2002. CMS Energy and Panhandle
previously retained Arthur Andersen to review their financial statements for the
quarter ended March 31, 2002. In May 2002, the Board of Directors engaged Ernst
& Young to audit its financial statements for the year ending December 31, 2002.
Ernst & Young audited the years 2000, 2001 and 2002. As a result, Panhandle
restated its 2000 and 2001 financial statements. An amended Form 10-K/A and Form
10-Q/A were filed in February 2003 and March 2003, respectively.

60

PART III

ITEM 14. CONTROLS AND PROCEDURES

Panhandle's CEO and CFO are responsible for establishing and
maintaining Panhandle's disclosure controls and procedures. Management,
under the direction of Panhandle's principal executive and financial
officers, has evaluated the effectiveness of Panhandle's disclosure
controls as of a date within 90 days of the filing of this annual
report on Form 10-K. It is their opinion that, based on this
evaluation, Panhandle's disclosure controls and procedures are
effective to ensure that material information has been presented and
properly disclosed. There have been no significant changes in
Panhandle's internal controls that could significantly affect internal
controls subsequent to such evaluation.

61

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements and Reports of Independent Public Auditors for
Panhandle are listed in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA and are incorporated by reference herein.

(a)(2) Reports of Independent Auditors for Panhandle are listed after the
Notes to Consolidated Financial Statements. Financial Statement
Schedules are listed after the Exhibits in the Index to Financial
Statement Schedules, and are incorporated by reference herein.

(a)(3) Exhibits for Panhandle are listed after Item (c) below and are
incorporated by reference herein.

(b) Reports on Form 8-K for Panhandle

During the fourth quarter of 2002, Panhandle filed a Current Report on
December 23, 2002 covering matters reported pursuant to ITEM 5. OTHER EVENTS.

(c) Exhibits, including those incorporated by reference (see also Exhibit
volume).

62

PANHANDLE EXHIBITS

63

Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.

64

INDEX TO FINANCIAL STATEMENT SCHEDULES

Schedules have been omitted because they are either not required, not applicable
or the required information is shown in the financial statements or notes
thereto.

65

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Panhandle Eastern Pipe Line Company has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 24th day of March 2003.

PANHANDLE EASTERN PIPE LINE COMPANY

By: /s/ William J. Haener
-------------------------------------
William J. Haener
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
Panhandle Eastern Pipe Line Company and in the capacities and on the 24th day of
March, 2003.

66

CERTIFICATIONS

I, Christopher A. Helms, certify that:

1. I have reviewed the annual report on Form 10-K of Panhandle Eastern
Pipe Line Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: March 24, 2003 By /s/ Christopher A. Helms
--------------------------
Christopher A. Helms
President and
Chief Executive Officer

67

I, Thomas J. Webb, certify that:

1. I have reviewed the annual report on Form 10-K of Panhandle Eastern
Pipe Line Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

d) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

e) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and

f) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

c. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

d. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: March 24, 2003 By /s/ Thomas J. Webb
--------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer

68

EXHIBITS INDEX