PANHANDLE EASTERN PIPE LINE CO - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

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FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

SEPTEMBER 30, 2003

COMMISSION FILE NO. 1-2921

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PANHANDLE EASTERN PIPE LINE COMPANY, LLC
(Exact name of registrant as specified in its charter)

DELAWARE 44-0382470
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5444 WESTHEIMER ROAD, P.O. BOX 4967
HOUSTON, TEXAS 77210-4967
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (713) 989-7000

Securities Registered Pursuant to Section 12(b) of the Act: None

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

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12[b]-2).

Yes [ ] No [X]

PANHANDLE EASTERN PIPE LINE COMPANY, LLC
FORM 10-Q
SEPTEMBER 30, 2003
INDEX

2

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

The accompanying condensed notes are an integral part of these statements.

3

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

ASSETS

The accompanying condensed notes are an integral part of these statements.

4

PANHANDLE EASTERN PIPE LINE COMPANY, LLC
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
OWNER'S EQUITY AND LIABILITIES

The accompanying condensed notes are an integral part of these statements.

5

PANHANDLE EASTERN PIPE LINE COMPANY, LLC
CONSOLIDATED STATEMENTS OF OWNER'S EQUITY

The accompanying condensed notes are an integral part of these statements.

6

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

The accompanying condensed notes are an integral part of these statements.

7

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FINANCIAL STATEMENTS

These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Form 10-K of Panhandle
Eastern Pipe Line Company, LLC, a Delaware LLC, including all of its
subsidiaries (Panhandle), for the year ended December 31, 2002. All dollar
amounts in the tables herein are stated in millions, unless otherwise indicated.
Certain prior period amounts have been reclassified to conform with the current
period presentation.

These interim financial statements are unaudited, but in management's opinion,
reflect all adjustments necessary (including both normal recurring as well as
non-recurring) for a fair presentation of financial position, results of
operations and cash flows for the periods presented. Because of the seasonal
nature of the operations of Panhandle, a direct wholly-owned subsidiary of
Southern Union Panhandle, LLC (Southern Union Panhandle), the results as
presented for this interim period are not necessarily indicative of results to
be achieved for the fiscal year.

As further described below, Panhandle was acquired by Southern Union Company
(Southern Union Company and together with its subsidiary, Southern Union)
effective June 11, 2003. The acquisition was accounted for using the purchase
method of accounting in accordance with accounting principles generally
accepted in the United States of America with Panhandle allocating the purchase
price paid by Southern Union to Panhandle's net assets as of the acquisition
date based on preliminary estimates. The Panhandle assets acquired and
liabilities assumed have been recorded at their estimated fair value and are
subject to further assessment and adjustments pending the results of outside
appraisals. The outside appraisals are expected to be completed prior to
December 31, 2003. Accordingly, the post-acquisition financial statements
reflect a new basis of accounting and pre-acquisition period and post-
acquisition period financial results (separated by a heavy black line) are
presented but are not comparable.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS. Panhandle is an indirect wholly-owned subsidiary of Southern Union
since June 11, 2003 when Southern Union acquired Panhandle (Panhandle
Acquisition) from CMS Gas Transmission Company (CMS Gas Transmission), a
subsidiary of CMS Energy Corporation (CMS Energy Corporation and together with
its subsidiaries, CMS). (See Note 2, Southern Union Acquisition). Panhandle is
primarily engaged in the interstate transportation and storage of natural gas
and also provides liquefied natural gas (LNG) terminalling and regasification
services and is subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC). The Panhandle entities include Panhandle Eastern
Pipe Line Company, LLC (Panhandle Eastern Pipe Line), Trunkline Gas Company, LLC
(Trunkline) a wholly-owned subsidiary of Panhandle Eastern Pipe Line, Sea Robin
Pipeline Company (Sea Robin), a Louisiana joint venture and an indirect
wholly-owned subsidiary of Panhandle Eastern Pipe Line, Trunkline LNG Company,
LLC (Trunkline LNG) a wholly-owned subsidiary of Trunkline LNG Holdings, LLC
(LNG Holdings) and Southwest Gas Storage, LLC (Southwest Gas Storage), a
wholly-owned subsidiary of Panhandle Eastern Pipe Line. Collectively, the
pipeline assets include more than 10,000 miles of interstate pipelines that
transport natural gas from the Gulf of Mexico, South Texas and the Panhandle
regions of Texas and Oklahoma to major U.S. markets in the Midwest and Great
Lakes region. The pipelines have a combined peak day delivery capacity of 5.4
billion cubic feet per day and 72 billion cubic feet of owned underground
storage capacity. Trunkline LNG, located on Louisiana's Gulf Coast, operates one
of the largest LNG import terminals in North America and has 6.3 billion cubic
feet of above ground LNG storage facilities.

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 of accounting.

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PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

USE OF ESTIMATES. The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of America,
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 the
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies" (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, health care trend
rates, inflation rates, future commodity prices, mark-to-market valuations,
investment returns, volatility in the price of Southern Union and CMS 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.
Although these estimates are based on management's knowledge of current expected
future events, actual results could materially differ from those estimates.

SYSTEM GAS AND OPERATING SUPPLIES. System gas and operating supplies consist 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 net gas received
from and owed back to customers is valued at market.

PROPERTY, PLANT AND EQUIPMENT. Property, Plant and Equipment (PP&E) is stated at
cost and includes intangible assets and related amortization. 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 and amortization is generally computed using the straight-line
method.

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. Net imbalances which have reduced
system gas are valued at the cost basis of the system gas, while net imbalances
which have increased system gas and are owed back to customers are priced, along
with the corresponding system gas, at market.

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 underrecovery 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. Prior to the acquisition by Southern Union,
Panhandle had a number of significant transactions with its former parent and
its subsidiaries. These transactions include revenues for the transportation of
natural gas for Consumers Energy Company (Consumers), and other CMS affiliated
entities, which are based on regulated prices, market prices and/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,
as well as allocated benefit plan costs. Subsequent to June 11, 2003, related
party expenses primarily include payments for services provided by Southern
Union. Other income was primarily related to interest income from the Note
receivable - CMS Capital (See Note 5, Related Party Transactions).

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PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A portion of Panhandle's revenues for the transportation of natural gas include
revenues from Missouri Gas Energy, a division of Southern Union that is a gas
utility in Kansas City, Missouri and parts of western Missouri. Contracts for
services were entered into before either the initial agreement between CMS and
Southern Union or closing of the Panhandle acquisition and were based on
regulated prices, market prices and competitive bidding. Currently, Panhandle
supplies less than ten percent of Missouri Gas Energy's total gas delivery
requirements. Missouri Gas Energy's volumes on Panhandle Eastern Pipe Line
represents less than one percent of the total volume of that pipeline's
business.

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).

INTEREST COST CAPITALIZED. Statement of Financial Accounting Standards No. 34,
"Capitalization of Interest Cost", 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.

GOODWILL. Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" (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. Panhandle's
goodwill impairment test upon adoption of SFAS No. 142 in 2002 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.

On June 11, 2003, Southern Union completed its acquisition of Panhandle and its
subsidiaries from CMS. Based on the preliminary purchase price allocations,
which rely on estimates and are subject to further assessment and adjustment
pending the results of third party appraisals, the acquisition results in no
recognition of goodwill.

ACCOUNTING FOR RETIREMENT BENEFITS. Panhandle follows SFAS No. 87, "Employers'
Accounting for Pensions", to account for pension costs and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions", to
account for other postretirement benefit costs. For defined benefit plans, under
certain circumstances, 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 requires the expertise of actuaries and is subject to many assumptions,
including life expectancies, present value discount rates, expected long-term
rate of return

10

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

Prior to the acquisition of Panhandle by Southern Union, Panhandle employees
participated in the CMS Pension Plan, a defined benefit retirement plan for
employees of CMS and its affiliates. Upon the consummation of the Panhandle
Acquisition in June 2003, the CMS Pension Plan assets and obligations associated
with Panhandle employees, as well as obligations with respect to certain
supplemental retirement benefits for management employees were retained by CMS.
In addition, upon the closing of the Panhandle Acquisition, Panhandle employees
became ineligible to accrue additional benefits under the CMS Pension Plan or
other CMS plans. Following the Panhandle Acquisition, Panhandle does not
maintain or participate in a defined benefit retirement plan for its employees,
but instead provides benefits to substantially all employees under a defined
contribution 401(k) plan. Under the 401(k) plan, Panhandle provides a matching
contribution of 50 percent of the employee's contribution to the 401(k) plan
that does not exceed four percent of the employee's eligible pay. In addition,
Panhandle makes additional contributions ranging from 4 to 6 percent of the
employee's eligible pay, depending on the employee's age and years of service.
Panhandle has generally retained the same active employee health insurance
benefits that were offered prior to the acquisition by Southern Union.

In connection with the Panhandle acquisition by Southern Union, CMS, or its
affiliates, also retained liabilities with respect to the post-retirement
benefit plans other than pensions (OPEB) for Panhandle retirees and employees
who were eligible to retire with such benefits as of the closing of the
Panhandle acquisition. CMS, or its affiliates, also retained all of the assets
relating to OPEB, which were $16 million less than the liabilities retained.
Following the Panhandle acquisition, Panhandle provides certain post-retirement
life and health benefits to eligible, active employees (Panhandle Plan). The
accumulated post-retirement benefit obligation with respect to such
post-retirement health and life benefits immediately following the acquisition
is estimated to be approximately $43 million. Panhandle agreed to provide, or
supplement, post-retirement health benefits under the Panhandle Plan for certain
employees eligible to receive retiree health benefits under the CMS plan, if the
most valuable of the options under the CMS plan becomes less valuable than the
most valuable option under the Panhandle Plan. Currently, no benefits are
expected to be provided under the Panhandle Plan with respect to those eligible
employees who elect to receive benefits as retirees under the CMS plan, and no
liability is currently recognized for such employees.

ACCOUNTING FOR DERIVATIVES. 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. 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), or 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 swap agreements 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, but may also convert fixed
rate debt into floating. Interest differentials to be paid or received due to
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 cash flow
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. Current

11

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

market pricing models were used to estimate fair values of interest rate swap
agreements.

Panhandle is party to interest rate swap agreements with an aggregate notional
amount of $204 million as of September 30, 2003 that fix the interest rate
applicable to floating rate long-term debt and which qualify for hedge
accounting. As of September 30, 2003, the ineffectiveness of the interest rate
swap agreements is not significant. As of September 30, 2003, floating rate
London InterBank Offered Rate (LIBOR) based interest payments were exchanged for
weighted fixed rate interest payments of 5.08%. As such, payments or receipts on
interest rate swap agreements are recognized as adjustments to interest expense.
As of June 11, 2003 (the acquisition date), September 30, 2003 and December 31,
2002, the fair value liability position of the swaps was $27.7 million, $22.3
million and $22.4 million, respectively. As of September 30, 2003 and since the
acquisition date, an unrealized gain of $1.8 million, net of tax, was included
in accumulated other comprehensive income related to these swaps, of which
approximately $0.2 million, net of tax, is expected to be reclassified to
interest expense during the next twelve months as the hedged interest payments
occur.

ACCOUNTING FOR GAINS AND LOSSES ON DEBT EXTINGUISHMENT. These statements have
been revised to reflect the application of SFAS No. 145, "Rescission of
Financial Accounting Standards Board (FASB) Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No. 145),
which dictates that gains and losses on debt extinguished are no longer
classified as extraordinary items. This provision is effective for transactions
occurring and financial statements issued after May 15, 2002. Panhandle has
adopted SFAS No. 145 and the implementation resulted in a reclassification of $1
million of amounts related to debt retirements previously reflected as
Extraordinary Gain to Other Income, Net for the three and nine months ended
September 30, 2002. During the third quarter of 2003, Panhandle recorded a
pre-tax gain on the extinguishment of debt of approximately $6.1 million ($3.7
million, net of tax) and is classified as Other Income, Net, pursuant to the
requirements of SFAS No. 145.

ACCOUNTING FOR TAXES. For federal and certain state income tax purposes, after
converting to LLCs, Panhandle and certain subsidiaries are not treated as a
separate taxpayer. Instead, its income is taxable to Southern Union. Pursuant to
a tax sharing agreement with Southern Union, which is subject to modification or
amendment, Panhandle will pay its share of taxes based on its taxable income,
which will generally equal the liability which would have been incurred as a
separate taxpayer. Panhandle will receive credit from Southern Union for
differences in tax depreciation resulting from the like-kind exchange over the
taxable life of the related assets, as described in Note 2, Southern Union
Acquisition.

Deferred income taxes have been provided for temporary differences. Temporary
differences occur when events and transactions recognized for financial
reporting result in taxable or non-taxable amounts in different periods.

NEW ACCOUNTING STANDARDS

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

SFAS NO. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS" (SFAS NO. 143): In
June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("ARO"), which is effective for fiscal years beginning after June
15, 2002. The standard 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, 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 on January 1, 2003. Adoption of the new rule resulted in
an increase in net property, plant and equipment of $10 million, recognition of
an asset retirement obligation of $6 million,

12

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

and a cumulative effect of adoption that increased net income and stockholder's
equity by $2 million, net of tax; and there were no settlements during the 2003
periods presented. Accretion expense during 2003 through June 11, 2003 was
approximately $0.3 million, and $0.2 million for the period June 12 through
September 30, 2003. Accretion expense for the first three quarters of 2002 would
have been approximately $0.3 million on a pro forma basis as if the accounting
pronouncement had been applied during such period.

The fair value of ARO liabilities has been calculated using an expected present
value technique. This technique reflects assumptions, such as costs, inflation,
and profit margin that third parties would consider in order to take on the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in Panhandle's ARO fair value estimate since a reasonable estimate
could not be made. If a reasonable estimate of fair value cannot be made in the
period the asset retirement obligation is incurred, such as assets with an
indeterminate life, the liability will be recognized when a reasonable estimate
of fair value can be made. Generally, property such as onshore transmission
assets has an indeterminate life, retirement cash flows cannot be determined and
there is a low probability of a retirement date. Therefore no liability has been
recorded for these assets. The initial measurement of the ARO liability for some
of Panhandle's offshore lateral lines is based largely on cost estimates from
third parties.

The following table is a general description of the ARO and its associated
long-lived assets.

The following table is a reconciliation of the carrying amount of the ARO.

During the second quarter of 2003 Panhandle reclassified $27 million of negative
salvage previously included in accumulated depreciation to other non-current
liabilities for amounts collected for asset retirement obligations on certain
assets which are not recordable as SFAS No. 143 liabilities but represent other
legal obligations.

SFAS NO. 145: Issued by the FASB on April 30, 2002, this Standard rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt" (SFAS No. 4),
and SFAS No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements" (SFAS No. 64). 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 Accounting Principles Board Opinion (APB) No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This provision is effective for fiscal years beginning after May
15, 2002. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases" (SFAS No.
13), to require sale-leaseback

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PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

accounting for certain lease modifications that have similar economic impacts to
sale-leaseback transactions (SFAS No. 13). This provision is effective for
transactions occurring and financial statements issued after May 15, 2002.
Panhandle has adopted SFAS No. 145 and the implementation resulted in a
reclassification of $1 million of amounts related to debt retirements which were
previously reflected as Extraordinary Gain to Other Income, Net for the three
and nine months ended September 30, 2002. During the third quarter of 2003
Panhandle recognized a $6.1 million ($3.7 million, net of tax) gain on debt
extinguishment and is classified as Other Income, Net, pursuant to the
requirements of SFAS No. 145.

SFAS NO. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES"
(SFAS NO. 146): 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, FASB's Emerging
Issues Task Force No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" (EITF No. 94-3). 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 will be
subject to the provisions of this statement. Panhandle adopted SFAS No. 146
during the first quarter of 2003 and has determined the application of SFAS No.
146 has no impact on its consolidated financial position or results of
operations.

SFAS NO. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123" (SFAS NO. 148): 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, "Accounting for Stock-Based
Compensation" (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 adopted the fair value based method of accounting for stock-based
employee compensation effective December 31, 2002, the amounts of which were
immaterial during the fourth quarter of 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 since
January 1, 2002, which resulted in no expense recorded during the 2003 periods
presented. CMS retained financial responsibility for all stock options issued
prior to June 11, 2003, and no options have been subsequently granted.

SFAS NO. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" (SFAS NO. 149): In April 2003, the FASB issued SFAS No. 149, which
is effective for contracts entered into or modified after June 30, 2003, with
certain exceptions. The standard (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (2) clarifies when a derivative contains a financing component, (3)
amends the definition of an underlying to conform it to language used in FASB
Interpretation No. 45, and (4) amends certain other existing pronouncements.
Panhandle adopted SFAS No. 149 during the third quarter of 2003 and has
determined that the application of SFAS No. 149 has no impact on its
consolidated financial position or results of operations.

SFAS NO. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY" (SFAS NO. 150): In May 2003, the FASB issued
SFAS No. 150, which becomes effective at the beginning of the first interim
period beginning after June 15, 2003. The standard establishes guidelines on how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The standard further defines and
requires that certain

14

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

instruments within the scope of SFAS No. 150 be classified as liabilities on the
financial statements. Panhandle adopted SFAS No. 150 during the third quarter of
2003 and has determined that the application of SFAS No. 150 has no impact on
its consolidated financial position or results of operations.

FASB INTERPRETATION NO. 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
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. For contracts that are within the initial recognition and
measurement provision of this interpretation, the provisions are to be applied
to guarantees issued or modified after December 31, 2002.

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.
Certain disclosure requirements apply to all financial statements initially
issued after January 31, 2003. Panhandle has adopted the interpretation
effective January 1, 2003 and the implementation had no impact on the financial
statements presented.

On October 3, 2003, the Financial Accounting Standards Board directed FASB staff
to issue a FASB Staff Position deferring the effective date for applying the
provisions of Interpretation No. 46 for a decision maker that receives fees paid
by a variable interest entity if the fee has no variability and decision maker
has no exposure to the expected losses of the entity and no right to expected
residual returns of the entity. In those circumstances, the decision maker
should not apply the provisions of Interpretation No. 46 to that variable
interest entity until the Board has completed its consideration of a
modification to the application of Interpretation No. 46 that may affect those
parties. The current FASB Staff Position should not impact Panhandle's financial
statements presented.

2. SOUTHERN UNION ACQUISITION

On June 11, 2003, Southern Union acquired Panhandle from CMS Energy Corporation
for approximately $582 million in cash and three million shares of Southern
Union common stock (before adjustment for subsequent stock dividends) valued at
approximately $49 million based on market prices at closing and in connection
therewith incurred transaction costs estimated at approximately $30 million.
Southern Union also incurred additional deferred state income tax liabilities
estimated at $18 million as a result of the transaction. At the time of the
acquisition, Panhandle had approximately $1.159 billion of debt outstanding that
it retained. Southern Union funded the cash portion of the acquisition with
approximately $437 million in cash proceeds it received for the January 1, 2003
sale of its Texas operations, approximately $121 million of the net proceeds it
received from concurrent common stock and equity units offerings and with
working capital available to Southern Union. Southern Union structured the
Panhandle acquisition and the sale of its Texas operations to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended. Panhandle, and five of its subsidiaries, as well as the
Southern Union subsidiary that became Panhandle's direct parent upon the
acquisition, converted from Delaware corporations to Delaware limited liability
companies in June 2003.

Under the terms of the Panhandle sale agreement, CMS was entitled to retain
Panhandle's ownership interests in and obligations associated with the
Centennial Pipeline, LLC (Centennial) and Guardian Pipeline, L.L.C. (Guardian)
pipeline projects, as well as certain of Panhandle's net deferred tax assets of

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PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

$28 million, all tax liabilities of $17 million, net pension liabilities
recorded of $43 million, other net postretirement liabilities recorded of $16
million and other net liabilities of $3 million. CMS also retained financial
responsibility for all existing stock options. Panhandle disposed of its
interest in Centennial and Guardian and the Guardian related cash collateral was
transferred to CMS. The Note Receivable from CMS Capital Corp. (CMS Capital), a
subsidiary of CMS Energy Corporation was eliminated in the sale as the purchase
by Southern Union from CMS included the offsetting Note Payable of CMS Capital
and thus the note was eliminated in pushdown accounting and subsequently
extinguished. For further information, see Note 5, Related Party Transactions.
On March 1, 2003, certain assets previously held by CMS with a net book value of
$15 million were contributed to Panhandle by CMS and was included in the
Southern Union purchase.

The acquisition was accounted for using the purchase method of accounting in
accordance with accounting principles generally accepted in the United States of
America with Panhandle allocating the purchase price paid by Southern Union to
Panhandle's net assets as of the acquisition date based on preliminary
estimates. Accordingly, the post-acquisition financial statements reflect a new
basis of accounting and pre-acquisition period and post-acquisition period
financial results (separated by a heavy black line) are presented but are not
comparable.

The following table summarizes the changes in owner's equity associated with the
acquisition as of June 11, 2003 including details of the estimated fair value
adjustment to the pre-acquisition carrying amounts of the net assets acquired.
Panhandle is in the process of obtaining outside appraisals of the assets
acquired and liabilities assumed, which are expected to be completed by December
31, 2003; thus, the allocation of the purchase price is preliminary and subject
to change.

Based on the preliminary purchase price allocations which are subject to change,
the acquisition resulted in the recognition of intangible assets relating to
customer relationships of approximately $20 million as of the acquisition date.
These intangibles are currently being amortized over a period of five years,
pending final determination of estimated remaining useful life. As of June 30,
2003 and September 30, 2003, the carrying amount of these intangibles was
approximately $20 million and $19 million, respectively, and is included in
Property, Plant and Equipment on the Consolidated Balance Sheet. The accumulated
amortization expense for the three month period ended September 30, 2003 related
to these intangibles was $1 million.

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PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3. REGULATORY MATTERS

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. The
settlement provides for the producers to refund and the customers to accept a
reduction from the amounts originally billed to the 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. However, certain producers and the state of Missouri
elected not to participate in the settlement. A FERC hearing to resolve all
outstanding issues was held on October 16, 2003; initial briefs are due November
20, 2003, reply briefs are due December 19, 2003 and an initial decision is
scheduled to be issued in February 2004. At September 30, 2003 and December 31,
2002, accounts receivable included $8 million for tax collections due from
natural gas producers. At September 30, 2003 and December 31, 2002, other
current liabilities included $12 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 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.

In December 2002, FERC approved a Trunkline LNG 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. BG LNG Services, Inc., a subsidiary of BG Group of the United Kingdom (BG
LNG Services) has contract rights for the 570 million cubic feet per day of
additional capacity. Construction on the Trunkline LNG expansion project
commenced in September 2003. In October 2003, FERC approved an amended filing
with certain facility modifications. The filing included modifications which
will not affect the authorized additional storage capacity and daily sendout
capability and confirms the revised in-service date of January 1, 2006.

4. 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 its
acquisition by CMS in March 1999, was tested for impairment as of January 1,
2002, based on valuations by outside 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. The goodwill impairment test
resulted in a $601 million pre-tax write-down ($369 million after-tax) and was
recorded retroactive 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.

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PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On June 11, 2003, Southern Union completed its acquisition of Panhandle from
CMS. Based on the preliminary purchase price allocations, which rely on
estimates and are subject to change based on the final outside appraisal, the
acquisition results in no recognition of goodwill as of the acquisition date.
The final appraisal may result in some of the purchase price being allocated to
goodwill.

5. RELATED PARTY TRANSACTIONS

(a) Includes allocated benefit plan costs

Panhandle has a number of significant transactions with former related parties.
Revenue transactions, primarily for the transportation of natural gas for
Consumers and other CMS affiliates which were related parties until June 11,
2003, are based on regulated prices, market prices or competitive bidding.
Panhandle will continue transporting gas for these former related parties under
the contracts currently in effect, and thereafter if contracts are renewed.
Panhandle has transportation revenues with Missouri Gas Energy, a Southern Union
division, which accounts for approximately 1 percent of annual consolidated
revenues.

Prior to June 12, 2003, related party expenses include payments for services
provided by former affiliates, as well as allocated CMS benefit plan costs.
Panhandle, through CMS, provided retirement benefits under a number of different
plans, including certain health care and life insurance under OPEB, benefits to
certain management employees under a supplemental executive retirement plan
(SERP), and benefits to substantially all its employees under a trusteed,
non-contributory, deferred benefit pension plan and a defined contribution
401(k) plan. Following the June 11, 2003 acquisition by Southern Union,
Panhandle instituted certain retiree health care and life insurance benefits
under OPEB and added certain benefits to substantially all of its employees
under a defined contribution 401(k) plan. Effective January 1, 2003, and until
the sale of Panhandle on June 11, 2003, CMS ceased charging Panhandle management
and royalty fees. Subsequent to June 11, 2003, related party expenses primarily
include payments for services provided by Southern Union, including corporate
services and management and royalty fees implemented by Southern Union.

Other operating revenue for the three and nine month periods ended September 30,
2002 includes equity losses primarily related to Centennial. On February 10,
2003, Panhandle sold its one-third interest in Centennial for $40 million to
Centennial's two unaffiliated other partners. There was no income or loss
related to Centennial in the first quarter of 2003. In March 2003, $40 million
of cash from the sale of

18

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Centennial was distributed to CMS as a return of capital.

Interest income includes zero and $2 million for the three months ended
September 30, 2003 and September 30, 2002, respectively, and $6 million and $6
million for the period January 1 through June 11, 2003 and the nine months ended
September 30, 2002, respectively, related to interest on the Note receivable
from CMS Capital. The Note receivable from CMS Capital of $185 million as of the
acquisition date ($60 million at December 31, 2002) has since been eliminated
under pushdown accounting effective June 12, 2003, following the acquisition of
Panhandle by Southern Union. (See Note 2, Southern Union Acquisition). The $150
million portion of the note classified as a reduction to equity as of the
acquisition date was also eliminated.

Net cash generated by Panhandle in excess of operating, investing or financing
needs was previously loaned to CMS Capital and is reflected as Note
receivable-CMS Capital on the Consolidated Balance Sheet at December 31, 2002.
Panhandle was credited with interest on the note at the 30-day commercial paper
rate plus 125 basis points through July 2002. In August of 2002, the interest
rate was increased to a one-month Libor plus 300 basis points.

Panhandle has loaned $74 million to Southern Union during the third quarter of
2003 pursuant to a demand note with Southern Union under a cash management
program. Panhandle is credited with interest on the note at a one month LIBOR
rate.

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

The Panhandle acquisition by Southern Union was treated as an asset acquisition
for tax purposes, which eliminated Panhandle's deferred tax assets and
liabilities and gave rise to a new tax basis in Panhandle's assets equal to
their purchase price. The book assets were recorded at fair value and the tax
assets were recorded at the tax basis of the Southern Union assets that were
exchanged (part of the assets that were acquired were treated as a like-kind
exchange for tax purposes). The resulting transaction generated approximately
$85 million in a deferred tax liability at the acquisition date and a
corresponding receivable from Southern Union reflected as a reduction to owner's
equity on Panhandle's consolidated balance sheet.

At December 31, 2002, Panhandle had an intercompany tax receivable of $4 million
representing an estimated amount to be received from CMS for federal income
taxes. The $4 million tax receivable balance was eliminated with the sale of
Panhandle to Southern Union.

On March 10, 2003, Panhandle's ownership interest in Guardian was transferred to
CMS as a return of capital at the book value of $28 million and Panhandle was
released from its guarantee obligations

19

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

associated with the Guardian non-recourse guaranty by the note holders (see Note
7, Commitments and Contingencies). As a result, the $63 million in special
deposits which collateralized the guaranty and had been reflected as restricted
cash in Panhandle's financial statements were advanced to CMS Capital as part of
the demand Note Receivable from CMS Capital and were then made available to CMS
Gas Transmission.

On March 1, 2003, certain assets held by CMS with a net book value of $15
million were contributed to Panhandle by CMS and so were included in Southern
Union's acquisition of Panhandle.

6. DEBT

In accordance with the purchase method of accounting and accounting principles
generally accepted in the United States of America, the debt retained by
Panhandle when it was acquired by Southern Union was recorded at its fair value
on Panhandle's balance sheet as of June 11, 2003. The valuation resulted in debt
premiums being recorded of $63 million in excess of the principal amount of the
debt due to lower current market interest rates for comparable debt. During the
third quarter of 2003, approximately $5 million of the debt premium was
amortized as a reduction in interest expense. Also, $31.1 million of the
remaining $57.2 million of debt premium was retired during the third quarter of
2003 as a result of the Panhandle tender offer, resulting in $26.1 million to be
amortized. These premiums will be amortized over the remaining life of the
respective debt issues.

In June 2003, Panhandle retired approximately $33 million of remaining balance
of the $30 million and $10 million of short-term loans which were obtained in
December 2002 and January 2003, respectively.

Panhandle has $1.211 billion of debt recorded at September 30, 2003, of which
$210 million is current. A total of $938 million of Panhandle's debt principal
is at fixed rates ranging from 4.8 percent to 8.25 percent, with $273 million of
variable rate bank loans secured by the Trunkline LNG facilities.

Panhandle's senior unsecured note provisions are not directly impacted by debt
rating changes, 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 September 30, 2003,
Panhandle was subject to a $114 million limitation on additional restricted
payments, including dividends and loans to affiliates.

At September 30, 2003, Panhandle had scheduled debt payments of $3 million, $210
million, $13 million, $14 million, $232 million and $739 million for the
remainder of 2003 and for the years 2004 through 2007 and thereafter,
respectively.

Based on the terms of an agreement between Southern Union and Missouri Public
Service Commission (MPSC), Southern Union is prohibited from making loans or
investing additional funds in Panhandle or providing guarantees of Panhandle
obligations without prior approval of the MPSC.

In July 2003 Panhandle announced a tender offer for any and all of the $747
million outstanding principal amount of five of its series of senior notes
outstanding at that point in time (the Panhandle Tender Offer) and also called
for the redemption of all of the outstanding $135 million principal amount of
its two series of debentures that were outstanding (the Panhandle Calls).
Panhandle repurchased approximately $378 million of the principal amount of its
outstanding debt through the Panhandle Tender Offer for total consideration of
approximately $396 million plus accrued interest through the purchase date.
Panhandle also redeemed its approximately $135 million of debentures for total
consideration of $139 million including the specified call premium, plus accrued
interest through the redemption dates. As a result of these transactions,
Panhandle has recorded a pre-tax gain on the extinguishment of debt of
approximately $6.1 million ($3.7 million, net of tax) in the third quarter of
2003 due to increases in interest rates

20

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

subsequent to the acquisition date, which has been classified as Other Income,
Net, pursuant to the requirements of SFAS No. 145. In August 2003, Panhandle
issued $550 million of senior notes, of which $300 million is a new five year
senior note at 4.8 percent and $250 million is a new ten year senior note at
6.05 percent, principally to refinance the repurchased notes and redeemed
debentures. Panhandle's new five year and new ten year notes are subject to
requirements such as the maintenance of a fixed charge coverage ratio and a
leverage ratio which restricts certain payments if not maintained and
limitations on liens. Also in August and September 2003, Panhandle repurchased
$3.2 million principal amount of its senior notes on the open market through two
transactions for total consideration of $3.4 million, plus accrued interest
through the repurchase date. Listed below are the principal amounts of notes
tendered as of August 14, 2003.

7. COMMITMENTS AND CONTINGENCIES

CONTRACTUAL OBLIGATIONS: Panhandle has contractual obligations with regards to
future payments of operating leases and natural gas storage service. The
following table summarizes Panhandle's expected contractual obligations and
commitments at September 30, 2003.

1) Lease of various assets utilized for operations

2) Charges for third party storage capacity

CAPITAL EXPENDITURES: Panhandle estimates expenditures associated with the LNG
terminal expansion to be $22 million for the remainder of 2003, $65 million in
2004 and $28 million in 2005. These estimates were developed for budgetary
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

21

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

disposition of these proceedings will not have a material adverse effect on its
consolidated results of operations, liquidity or financial position.

ENVIRONMENTAL MATTERS: Panhandle's interstate natural gas transportation
operations are subject to federal, state and local regulations regarding water
quality, hazardous and solid waste disposal and other environmental matters.
Panhandle has identified environmental contamination at certain sites on its gas
transmission systems and has undertaken cleanup programs at these sites. The
contamination resulted from the past use of lubricants containing
polychlorinated bi-phenyls (PCBs) in compressed air systems; the past use of
paints containing PCBs; and the prior use of wastewater collection facilities
and other on-site disposal areas. Panhandle has developed and is implementing a
program to remediate such contamination in accordance with federal, state and
local regulations. Some remediation is being performed by former Panhandle
affiliates in accordance with indemnity agreements that also indemnify against
certain future environmental litigation and claims.

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 a United
States Environmental Protection Agency (EPA) approved process to remediate this
PCB contamination in accordance with federal, state and local regulations. One
site has been decontaminated per the EPA approved process as prescribed in the
EPA 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 three former waste oil
disposal sites in Illinois. Panhandle and 21 other non-affiliated parties
conducted an initial investigation of one of the sites. Based on the information
found during the initial investigation, Panhandle and the 21 other
non-affiliated parties have decided to further delineate the extent of
contamination by authorizing a Phase II investigation at this site. Once data
from the Phase II investigation is evaluated, Panhandle and the 21 other
non-affiliated parties will determine what additional 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
Corporation (Duke Energy), a non-affiliated company, to range from $11 million
to $18 million. Panhandle has accrued approximately $15 million of such costs,
of which $4 million is included in Other Current Liabilities for the estimated
current amounts and $11 million is included in Other Non-current Liabilities on
the Consolidated Balance Sheet at September 30, 2003. At December 31, 2002,
Panhandle had $4 million included in Other Current Liabilities and $18 million
included in Other Non-current Liabilities.

AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires Panhandle to place controls on engines in five Midwestern
states. The part of the rule that affects Panhandle was challenged in court by
various states, industry and other interests, including Interstate Natural Gas
Association of America (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. The final rule is expected no earlier than early

22

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2004. Based on an EPA guidance document negotiated with gas industry
representatives in 2002, it is believed that Panhandle Energy will be required
to reduce nitrogen oxide (Nox) emissions by 82% on the identified large internal
combustion (IC) engines and will be able to trade off engines within a company
and State in an effort to create a cost effective NOx reduction solution. The
implementation date is expected to be May 2007. The rule impacts 20 large
internal combustion engines on the Panhandle system in Illinois and Indiana at
an approximate cost of $17 million for capital improvements, consistent with
budget projections.

EPA proposed various Maximum Achievable Control Technology (MACT) rules in late
2002 and early 2003. The rules require that Panhandle Eastern Pipe Line and
Trunkline control Hazardous Air Pollutants (HAPS) emitted from Major sources by
90% of carbon monoxide (CO) emissions. Most of Panhandle Eastern Pipe Line and
Trunkline compressor stations are major sources. The HAP's pollutant of concern
for Panhandle Eastern Pipe Line and Trunkline is formaldehyde. As proposed, the
rule seeks to reduce CO emissions as a surrogate for formaldehyde. For IC
engines, the control technology would be the use of non-selective catalytic
reduction catalysts and the expected implementation date is February 2007. For
Turbines, the control technology would be the use of oxidation catalysts and the
expected implementation date is December 2007. Panhandle Eastern Pipe Line and
Trunkline have 28 IC engines and two turbines subject to the rules. It is
expected that compliance with these regulations will cost approximately $8
million, consistent with budget projections.

The Illinois Environmental Protection Agency issued a permit in February of
2002, requiring the installation of certain capital improvements at the Glenarm
compressor station facility at a cost of approximately $3 million. Controls were
installed on two engines in 2002 and on two additional engines in 2003 in
accordance with the 2002 permit.

ACCOUNTING FOR RETIREMENT BENEFITS: Until June 11, 2003, Panhandle, through its
former parent company, participated in a non-contributory defined benefit
retirement plan which covered most employees with a minimum of one year vesting
service and provided additional retirement benefits under a number of different
plans, including certain health care and life insurance under OPEB, benefits to
certain management employees under SERP, and benefits to substantially all its
employees under a defined benefit pension plan and a defined contribution 401(k)
plan. No portion of the assets or liabilities related to the defined benefit
retirement plan and OPEB plan was transferred with the sale of Panhandle.
Panhandle employees, following the sale, are no longer eligible to accrue
benefits or make contributions to these plans.

Following the June 11, 2003 acquisition by Southern Union, Panhandle instituted
certain retiree health care and life insurance benefits under OPEB and added
certain benefits to substantially all of its employees under a defined
contribution 401(k) plan. Panhandle now offers a contribution match of 50
percent (two percent maximum) of the employee's contribution up to four percent
of salary. Panhandle also makes additional contributions ranging from 4 to 6
percent of the employee's eligible pay based on age and years of service.
Panhandle has generally retained the same active employee health insurance
benefits that were offered prior to the acquisition by Southern Union. The new
OPEB plan resulted in the recording of a $43 million liability as of June 11,
2003 and Panhandle continues to fund the plan at approximately $8 million per
year. Since retirement eligible active employees have primary coverage through a
benefit they are eligible to receive from CMS, no liability is currently
recognized for these employees under the new Panhandle plan.

CONTROLLED GROUP PENSION LIABILITIES: Southern Union (including certain of its
divisions) sponsors a number of defined benefit pension plans arising from any
of its (including any of its present or former divisions) or a predecessor's
business at some time before or when Southern Union acquired Panhandle. Under
applicable pension and tax laws, upon being acquired by Southern Union, each of
Panhandle and its subsidiaries became a member of Southern Union's "controlled
group" with respect to those plans, and,

23

PANHANDLE EASTERN PIPE LINE, LLC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

along with Southern Union and any other members of that group, is jointly and
severally liable for any failure by Southern Union (along with any other persons
that may be or become a sponsor of any such plan) to fund any of these pension
plans or to pay any unfunded liabilities that these plans may have if they are
ever terminated. In addition, if any of the obligations of any of these pension
plans is not paid when due, a lien in favor of that plan or the Pension Benefit
Guaranty Corporation may be created against the assets of each member of
Southern Union's controlled group, including Panhandle and each of its
subsidiaries. As of June 30, 2003, the aggregate amount of the projected benefit
obligations of these pension plans was approximately $337 million and the
estimated fair value of all of the assets of these plans was approximately $237
million.

OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek, through its Minerals Management
Service (MMS), 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 materially adverse effect on
consolidated results of operations, liquidity or financial position.

In conjunction with its acquisition by Southern Union, Panhandle initiated a
workforce reduction initiative designed to reduce the workforce by approximately
5 percent. The workforce reduction initiative was an involuntary plan with a
voluntary component, and was fully implemented by the end of the third quarter
of 2003. Total estimated workforce reduction initiative costs are approximately
$9 million which are a portion of the $30 million of additional transaction
costs incurred (see Note 2, Southern Union Acquisition).

Hope Land Mineral Corporation contends that it owns the storage rights to
property that contains a portion of Panhandle's Howell storage field. During
June 2003, the Michigan Court of Appeals reversed the trial court's previous
order, which had granted summary judgment in favor of Panhandle and dismissed
the case. Panhandle filed an appeal of the Court of Appeals order with the
Michigan Supreme Court. Panhandle does not believe the outcome of this case will
have a material adverse effect on its consolidated financial position or results
of operations.

On September 10, 2003, Panhandle provided a guarantee to CB&I Constructors,
Inc., for the full performance by Trunkline LNG, its subsidiary, of the
engineering, procurement and construction contract (the "Contract") between
Trunkline LNG and CB&I Constructors, Inc. The Contract is for the construction
of the expansion of the Trunkline LNG Lake Charles facility, and covers
approximately $90 million of the remaining cost of the expansion over the next
three years. Under the terms of the guarantee, Panhandle would be required to
perform should Trunkline LNG be in default of its obligation, as it relates to
services already rendered. The terms of this guarantee, in general, coincides
with the terms of the underlying agreement. There are no amounts being carried
as liabilities for Panhandle's obligations under these guarantees.

24

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ACQUISITION OF PANHANDLE

See Note 2 of the Condensed Notes to the Consolidated Financial Statements.

On June 11, 2003, Southern Union acquired Panhandle from CMS Energy Corporation
for approximately $582 million in cash and three million shares of Southern
Union common stock (before adjustment for subsequent stock dividends) valued at
approximately $49 million based on market prices at closing and in connection
therewith incurred transaction costs estimated at approximately $30 million.
Southern Union also incurred additional deferred state income tax liabilities
estimated at $18 million as a result of the transaction. At the time of the
acquisition, Panhandle had approximately $1.159 billion of debt outstanding that
it retained. Southern Union funded the cash portion of the acquisition with
approximately $437 million in cash proceeds it received for the January 1, 2003
sale of its Texas operations, approximately $121 million of the net proceeds it
received from concurrent common stock and equity units offerings and with
working capital available to Southern Union. Southern Union structured the
Panhandle acquisition and the sale of its Texas operations to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended. Panhandle and five of its subsidiaries as well as the
Southern Union subsidiary that became Panhandle's direct parent upon the
acquisition converted from Delaware corporations to Delaware limited liability
companies in June 2003.

Under the terms of the Panhandle sale agreement, CMS was entitled to retain
Panhandle's ownership interests in and obligations associated with the
Centennial and Guardian pipeline projects, as well as certain of Panhandle's net
deferred tax assets, all tax liabilities, and pension and other postretirement
assets and liabilities. In accordance with the agreement, Panhandle disposed of
its interest in Centennial and Guardian and the Guardian related cash collateral
has been transferred to CMS. The Note Receivable from CMS Capital was eliminated
in the sale as the purchase by Southern Union from CMS included the offsetting
Note Payable of CMS Capital and thus the note was eliminated in pushdown
accounting. For further information, see Note 5, Related Party Transactions. On
March 1, 2003, certain assets previously held by CMS with a net book value of
$15 million were contributed to Panhandle by CMS and so was included in the
Southern Union purchase.

The acquisition was accounted for using the purchase method of accounting in
accordance with accounting principles generally accepted within the United
States of America with Panhandle allocating the purchase price paid by Southern
Union to Panhandle's net assets as of the acquisition date based on preliminary
estimates. Accordingly, the post-acquisition financial statements reflect a new
basis of accounting and pre-acquisition period and post-acquisition period
financial results (separated by a heavy black line) are presented but are not
comparable. Assets acquired and liabilities assumed are recorded at their
estimated fair value and are subject to further assessment and adjustment
pending the results of third party appraisals of the assets and liabilities.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The Management's Discussion and Analysis of Financial Condition and other
sections of this Form 10-Q may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements constitute forward-looking statements that are based on current
expectations, estimates and projections about the industry in which Panhandle
operates and Management's beliefs and assumptions. These forward-looking
statements are not historical facts, but rather reflect current expectations
concerning future results and events. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. Similarly, statements that describe objectives, plans or goals are
or may be forward-looking statements.

25

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These statements are not guarantees of future performance and involve various
risks, uncertainties and assumptions, which are difficult to predict and many of
which are outside Panhandle's control. Therefore, actual results, performance
and achievements may differ materially from what is expressed or forecasted in
such forward-looking statements. Prospective investors may review Panhandle's
reports filed in the future with the Commission for more current descriptions of
developments that could cause actual results to differ materially from such
forward-looking statements. However, prospective investors should not place
undue reliance on forward-looking statements, which speak only as of the date of
this Form 10-Q, or, in the case of documents incorporated by reference, the date
of those documents.

Factors that could cause actual results to differ materially from those
expressed in the forward-looking statements include, but are not limited to, the
following: customer growth; gas throughput volumes and available sources of
natural gas; discounting of transportation rates due to competition, which could
adversely affect Panhandle's results of operations; abnormal weather conditions
in Panhandle's service territories; new legislation and government regulations
affecting or involving Panhandle; ability to comply with or to challenge
successfully existing or new environmental regulations; the outcome of pending
and future litigation; the impact of relations with labor unions of
bargaining-unit union employees; the impact of future rate cases or regulatory
rulings; ability to control costs successfully and achieve operating
efficiencies, including the purchase and implementation of new technologies for
achieving such efficiencies; the nature and impact of any extraordinary
transactions, such as any acquisition or divestiture of a business unit or any
assets; the economic climate and growth in our industry and service territories
and competitive conditions of energy markets in general; inflationary trends;
changes in gas or other energy market commodity prices and interest rates; the
current market conditions causing more customer contracts to be of shorter
duration, which may increase revenue volatility; exposure to customer
concentration with a significant portion of revenues realized from a relatively
small number of customers and any credit risks associated with the financial
position of those customers; Panhandle or any of its affiliates' debt securities
ratings; factors affecting operations such as maintenance or repairs,
environmental incidents or gas pipeline system constraints; the possibility of
war or terrorist attacks; and other risks and unforeseen events.

In light of these risks, uncertainties and assumptions, the results reflected in
the forward-looking statements contained or incorporated by reference in this
Form 10-Q might not occur. In addition, Panhandle could be affected by general
industry and market conditions, and general economic conditions, including
interest rate fluctuations, federal, state and local laws and regulations
affecting the retail gas industry or the energy industry generally. Other
factors that could cause actual results to differ materially from estimates and
projections contained in forward-looking statements are described in the
documents that are incorporated by reference.

We do not undertake any obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained throughout this Form 10-Q.

CRITICAL ACCOUNTING POLICIES

See Note 1 of the Condensed Notes to the Consolidated Financial Statements.

Panhandle's consolidated financial statements are based on the application of
accounting principles generally accepted in the United States of America. The
application of these principles often requires management to make certain
judgments, assumptions and estimates that may result in different financial
presentations. Panhandle believes that certain accounting principles are
critical in terms of understanding its consolidated financial statements. These
principles include the use of estimates in accounting for contingencies and
long-lived assets, accounting for derivatives and financial instruments,
regulatory accounting and accounting for pension and postretirement benefits.

26

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

USE OF ESTIMATES: The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of America,
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,
health care trend rates, inflation rates, future commodity prices,
mark-to-market valuations, investment returns, volatility in the price of
Southern Union and CMS 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. Although these estimates are based on management's knowledge of
current expected future events, actual results could materially differ from
those estimates.

RESULTS OF OPERATIONS

On June 11, 2003, Southern Union acquired Panhandle from CMS. The acquisition
was accounted for using the purchase method of accounting in accordance with
accounting principles generally accepted in the United States of America with
Panhandle allocating the purchase price paid by Southern Union to Panhandle's
net assets as of the acquisition date based on preliminary estimates.
Accordingly, the post-acquisition financial statements reflect a new basis of
accounting and pre-acquisition period and post-acquisition period financial
results (separated by a heavy black line) are presented but are not comparable.
However, since results for the matching prior year stub periods are not
available the results of operations below are being presented on a combined
pre-acquisition and post-acquisition basis and we view this presentation as
meaningful in discussing our operating results. Assets acquired and liabilities
assumed are recorded at their estimated fair value and are subject to further
assessment and adjustment pending the results of outside appraisals of the
assets acquired and liabilities assumed, which are expected to be completed by
December 31, 2003. The most significant impacts of the new basis of accounting
going forward are expected to be, based on preliminary estimates, higher
depreciation expense due to the step-up of depreciable assets and assignment of
purchase price to certain amortizable intangible assets, and lower interest
costs (though not cash payments) for the remaining life of debt due to its
revaluation and related debt premium amortization.

27

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

28

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the three months ended September 30, 2003, Panhandle had net income of $20
million. The increase of $7 million from the three months ended September 30,
2002 is primarily due to higher natural gas transportation volumes resulting
from colder weather in 2003 and low storage volumes leading to heavier storage
refill volumes being transported by customers.

For the combined nine months ended September 30, 2003, Panhandle had net income
of $75 million. The increase of $390 million from the nine months ended
September 30, 2002 is primarily due to a goodwill impairment charge of $601
million ($369 million after-tax) in the first quarter of 2002 which was recorded
in conjunction with the adoption of SFAS No. 142 and higher natural gas
transportation volumes.

RESERVATION REVENUE: For the three and combined nine months ended September 30,
2003, reservation revenue increased $2 million and $9 million, respectively,
compared to 2002, due to higher average reservation rates realized on Panhandle
due to increased demand during the period.

LNG TERMINALLING REVENUE: For the three and combined nine months ended September
30, 2003, LNG terminalling revenue increased $1 million and $2 million,
respectively, compared to 2002 due to higher LNG volumes on the BG LNG Services
contract. Trunkline LNG's 22-year agreement with BG LNG Services for the
existing uncommitted long-term capacity at the LNG facility became effective in
January 2002 (see Note 3, Regulatory Matters).

COMMODITY REVENUE: For the three and combined nine months ended September 30,
2003, commodity revenue increased $2 million and $9 million, respectively,
compared to 2002. The change in the three and combined nine months ended
September 30, 2003 was primarily due to an increase in commodity volumes.
Volumes increased 14 percent for the three months ended

29

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

September 30, 2003 compared to 2002 and 12 percent for the combined nine months
ended September 30, 2003, compared to 2002 primarily due to a colder winter in
the midwest market area during the first quarter of 2003 and heavier volumes
transported to fill storage in the second and third quarters of 2003.

EQUITY AND OTHER REVENUE: Equity and other revenue for the three and combined
nine months ended September 30, 2003 increased $1 million and $6 million,
respectively, compared to 2002. The sale of Panhandle's one-third equity
interest in Centennial in February 2003, which had been written down to the
estimated selling price in the fourth quarter of 2002, resulted in no income
recognition for the Centennial equity investment during the first quarter of
2003, while start-up related losses of $2 million and $5 million occurred during
the three and nine months ended September 30, 2002, respectively. In addition,
gas imbalance cash-out gains in the first quarter of 2003, recouping prior
losses, were comparable to a gain of $4 million for the settlement of Order 637
matters related to capacity release and imbalance penalties during the first
quarter of 2002 (see Note 3, Regulatory Matters).

OPERATION, MAINTENANCE AND GENERAL: Operation, maintenance and general expenses
increased by $3 million and $4 million for the three and combined nine months
ended September 30, 2003, compared to 2002, primarily due to higher benefit
costs, under recovered Panhandle fuel costs and higher power and fuel costs
offset partially by lower corporate charges, which were down approximately $2
million.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased by $3
million for the three and combined nine months ended September 30, 2003 compared
to 2002 primarily due to the step-up of depreciable assets and assignment of
purchase price to certain shorter-lived amortizable intangible assets related to
the Panhandle acquisition offset partially by certain intangible assets becoming
fully depreciated in March 2003.

GENERAL TAXES: General taxes increased by $2 million and $4 million for the
three and combined nine months ended September 30, 2003 primarily due to higher
franchise and payroll taxes.

OTHER INCOME, NET: Other income, net, for the three and combined nine months
ended September 30, 2003, increased $4 million and $5 million, respectively,
compared to 2002, primarily due to a $6 million gain on debt extinguishment in
2003 partially offset by a $1 million gain recorded in 2002.

INTEREST CHARGES: Interest charges for the three and combined nine months ended
September 30, 2003 decreased $9 million and $8 million, respectively, compared
to 2002 due to elimination of interest on $129 million of long-term debt
principal retired in April 2002 and May 2002, amortization of debt premiums of
$4.5 million and $6.4 million for the three and combined nine months ended
September 30, 2003, respectively, which were recorded in purchase accounting
related to the Panhandle acquisition and reduced interest charges associated to
the Panhandle Tender Offering. For further discussion of Panhandle's long-term
debt and guarantees, see Note 7, Commitments and Contingencies - Other
Commitments and Contingencies.

MINORITY INTEREST: Minority interest decreased $1 million and $3 million for the
three and combined nine months ended September 30, 2003, respectively, compared
to 2002 due to Panhandle purchasing Dekatherm Investor Trust's interest in LNG
Holdings, a directly and indirectly wholly-owned subsidiary of Panhandle
Holdings, LLC, during November 2002 for approximately $41 million. As a result,
Panhandle owns 100 percent of LNG Holdings and therefore no minority interest
exists subsequent to that purchase.

INCOME TAXES: Income taxes during the three and combined nine months ended
September 30, 2003, compared to 2002, increased $5 million and $11 million,
respectively, due to increases in pretax income, which reflects an effective tax
rate of approximately 39 percent and 40 percent for the periods ended September
30, 2003 and September 30, 2002, respectively.

30

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES. Available sources of liquidity, including new borrowings
from capital markets are expected to cover the refinance obligations of existing
debt, of which $146 million of principal matures in March 2004 and an additional
$52 million matures in August 2004. Based on our current level of operations,
Management believes that cash flow from operations and available cash will be
adequate to meet other liquidity needs for at least the next 12 months, although
no assurances can be given as to the sufficiency of cash flows or the ability to
refinance existing obligations. Future operating performance and ability to
extend or refinance our indebtedness will be dependent on future economic
conditions and financial, business and other factors beyond our control.

INVESTING ACTIVITIES. Historically, Panhandle's capital requirements have
generally been satisfied through operating cash flow, except that Panhandle
relies on access to capital markets for refinancing maturing debt and
extraordinary capital expenditures. Capital expenditures associated with the
Lake Charles LNG terminal expansion are estimated to be $22 million for the
remainder of 2003, $65 million in 2004 and $28 million in 2005. These estimates
have been developed for budget planning purposes and are subject to revision.

FINANCING ACTIVITIES. In June and July of 2002, the major debt ratings services
lowered their ratings on Panhandle's senior unsecured debt from BBB to BB based
on concerns surrounding the liquidity and debt levels of CMS, Panhandle's former
indirect parent. Following Panhandle's acquisition by Southern Union, Fitch
Ratings, Inc. and Standard & Poors restored Panhandle's ratings to BBB and
Moody's raised its rating on Panhandle to Baa3. Panhandle's senior unsecured
note provisions are not directly impacted by debt rating changes, 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 September 30, 2003, Panhandle was subject to a $114
million limitation on additional restricted payments, including dividends and
loans to affiliates. At September 30, 2003, Panhandle was in compliance with all
covenants.

At September 30, 2003, Panhandle had scheduled debt payments of $3 million, $210
million, $13 million, $14 million, $232 million and $749 million for the
remainder of 2003 and for the years 2004 through 2007 and thereafter,
respectively.

Based on the terms of an agreement between Southern Union and the MPSC, Southern
Union is prohibited from making loans to or investing additional funds in
Panhandle or providing any guarantees of Panhandle obligations without prior
approval by the MPSC.

In July 2003, Panhandle announced the Panhandle Tender Offer for any and all of
the $747 million outstanding principal amount of five of its series of senior
notes outstanding at that point in time and also the Panhandle Calls which
called for the redemption of all of the outstanding $135 million principal
amount of its two series of debentures that were outstanding. Panhandle
repurchased approximately $378 million of the principal amount of its
outstanding debt through the Panhandle Tender Offer for total consideration of
approximately $396 million plus accrued interest through the purchase date.
Panhandle also redeemed its approximately $135 million of debentures for total
consideration of $139 million including the specified

31

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

call premium, plus accrued interest through the redemption dates. As a result of
these transactions, Panhandle has recorded a pre-tax gain on the extinguishment
of debt of approximately $6.1 million ($3.7 million, net of tax) in the third
quarter of 2003 due to increases in interest rates subsequent to the acquisition
date, which has been classified as Other Income, Net, pursuant to the
requirements of SFAS No. 145. In August 2003, Panhandle issued $550 million of
new five and ten year senior notes principally to refinance the repurchased
notes and redeemed debentures. Also in August and September 2003, Panhandle
repurchased $3.2 million principal amount of its senior notes on the open market
through two transactions for total consideration of $3.4 million, plus accrued
interest through the repurchase date. Listed below are the principal amounts of
notes tendered as of August 14, 2003.

On September 10, 2003, Panhandle provided a guarantee to CB&I Constructors, Inc.
for the full performance by Trunkline LNG, its subsidiary, of the engineering,
procurement and construction contract (the "Contract") between Trunkline LNG and
CB&I Constructors, Inc. (See Note 7, Commitments and Contingencies).

OTHER MATTERS

CUSTOMER CONCENTRATION: For the nine months ended September 30, 2003, 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 16
percent, and sales to subsidiaries of CMS, the former indirect parent, also
accounted for 13 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 71 percent
of revenues for the nine months ended September 30, 2003.

During the first nine months of 2002, sales to Proliance Energy, LLC, a
nonaffiliated gas marketer, accounted for 15 percent of Panhandle's consolidated
revenues, sales to BG LNG Services LLC, a nonaffiliated gas marketer, accounted
for 13 percent and sales to subsidiaries of CMS Energy accounted for 13 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 the
first nine months of 2002.

REGULATION

Panhandle is subject to regulation by various federal, state and local
governmental agencies, including those specifically described below.

FERC has comprehensive jurisdiction over Panhandle Eastern Pipe Line, Southwest
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.

32

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FERC has authority to regulate rates and charges for both transportation and
storage of natural gas in interstate commerce. 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 Southwest
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.

The Secretary of Energy regulates the importation and exportation of natural gas
and has delegated various aspects of this jurisdiction to FERC and the
Department of Energy'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 regulate the safety of gas
pipelines. Panhandle is also subject to the Hazardous Liquid Pipeline Safety Act
of 1979, which regulates oil and petroleum pipelines.

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 primarily competes 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 alternate
fuels, and other factors, including weather and natural gas storage levels,
affect the demand for natural gas in the areas served by Panhandle.

ENVIRONMENTAL MATTERS

Panhandle's interstate natural gas transportation operations are subject to
federal, state and local regulations regarding water quality, hazardous and
solid waste disposal and other environmental matters. Panhandle has identified
environmental contamination at certain sites on its gas transmission systems and
has undertaken cleanup programs at these sites. The contamination resulted from
the past use of lubricants containing PCBs in compressed air systems; the past
use of paints containing PCBs; and the prior use of wastewater collection
facilities and other on-site disposal areas. Panhandle has developed and is
implementing a program to remediate such contamination in accordance with
federal, state and local regulations. Some remediation is being performed by
former Panhandle affiliates in accordance with indemnity agreements that also
indemnify against certain future environmental litigation and claims. Panhandle
is also subject to various federal, state and local laws and regulations
relating to air quality control. These regulations include rules relating to
regional ozone control and hazardous air pollutants. The regional ozone control
rules are known as SIP and are designed to control the release of NOx compounds.
The rules related to hazardous air pollutants are known as MACT rules and are
the result of the 1990 Clean Air Act Amendments that regulate the emission of
hazardous air pollutants from internal combustion engines and turbines.

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

33

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 7, 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
these SIPs, Panhandle expects future compliance costs to be approximately $17
million for capital improvements to be incurred from 2004 through 2007.

Panhandle expects final rulings from the EPA in 2003 and 2004 regarding control
of hazardous air pollutants, and expects that some of its engines and turbines
will be affected. In 2002, the Texas Commission on Environmental Quality enacted
the Houston/Galveston SIP regulations requiring reductions in NOx 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 to incur future
capital costs of approximately $8 million in order to comply with these
programs.

For further information on the above environmental matters, see Note 7,
Commitments and Contingencies - Environmental Matters.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

The United States Securities and Exchange Commission (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 Liquidity and Capital Resources section of this MD&A).

CONTRACTUAL COMMITMENTS: Panhandle has contractual obligations with regard to
future payments of operating leases and natural gas storage service. The
following table summarizes Panhandle's expected contractual obligations and
commitments at September 30, 2003.

1) Lease of various assets utilized for operations

2) Charges for third party storage capacity

34

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CASH MANAGEMENT

FERC issued Order No. 634, effective December 1, 2003. Order No. 634 requires
all FERC-regulated entities that participate in cash management programs (i) to
establish and file with FERC for public review written cash management
procedures including specification of duties and responsibilities of cash
management program participants and administrators, specification of the methods
for calculating interest and allocation of interest income and expenses, and
specification of any restrictions on deposits or borrowings by participants, and
(ii) to document monthly cash management activity. Order No. 634 also requires a
FERC-regulated entity to notify FERC within 45 days when its proprietary capital
ratio falls below 30 percent or subsequently returns to or exceeds 30 percent.

NEW FERC REPORTING REQUIREMENTS

On June 29, 2003, the FERC proposed substantial new quarterly reporting
requirements for each FERC-regulated entity. The Notice of Proposed Rulemaking
(NOPR) is proposed to be effective for reporting first quarter 2004 results.
Panhandle is currently studying the implications of the NOPR to Panhandle
Eastern Pipe Line, Trunkline, Trunkline LNG, Sea Robin and Southwest Gas
Storage.

MARKETING AFFILIATE NOTICE OF PROPOSED RULEMAKING

In September 2001, the FERC issued a NOPR proposing to apply the standards of
conduct governing the relationship between interstate pipelines and marketing
affiliates to all energy affiliates. The proposed regulations, if adopted by the
FERC, would dictate how energy affiliates conduct business and interact with
interstate pipelines. At this time, Panhandle cannot predict the outcome of the
NOPR, but adoption of the regulations in their proposed form would, at a
minimum, result in additional administrative and operational burdens.

PIPELINE SAFETY NOTICE OF PROPOSED RULEMAKING

In January 2003, the U.S. Department of Transportation issued a NOPR proposing
to establish a rule requiring pipeline operators to develop integrity management
programs to comprehensively evaluate their pipelines, and take measures to
protect pipeline segments located in what the notice refers to as "high
consequence areas." The proposed rule resulted from the enactment of the
Pipeline Safety Improvement Act of 2002, a new bill signed into law in December
2002. Comments on the NOPR were filed on April 30, 2003. Although we cannot
predict the outcome of this rulemaking, we do not expect the order to have a
material effect on us.

CONTROLLED GROUP PENSION LIABILITIES

Southern Union (including certain of its divisions) sponsors a number of defined
benefit pension plans arising from any of its (including any of its present or
former divisions) or a predecessor's business at some time before or when
Southern Union acquired us. Under applicable pension and tax laws, upon being
acquired by Southern Union, each of us and our subsidiaries became a member of
Southern Union's "controlled group" with respect to those plans, and, along with
Southern Union and any other members of that group, is jointly and severally
liable for any failure by Southern Union (along with any other persons that may
be or become a sponsor of any such plan) to fund any of these pension plans or
to pay any unfunded liabilities that these plans may have if they are ever
terminated. In addition, if any of the obligations of any of these pension plans
is not paid when due, a lien in favor of that plan or the Pension Benefit
Guaranty Corporation may be created against the assets of each member of
Southern Union's controlled group, including us and each of our subsidiaries. As
of June 30, 2003, the aggregate amount of the projected benefit obligations of
these pension plans was approximately $337 million and the estimated fair value
of all of the assets of these plans was approximately $237 million.

35

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk is contained in Part
I: PANHANDLE'S MD&A, which is incorporated by reference herein.

CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We performed an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), and with the participation of personnel from our Legal, Internal
Audit, Risk Management and Financial Reporting Departments, of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of
the end of the period covered by this report. Based on that evaluation, our CEO
and CFO concluded that our disclosure controls and procedures were effective as
of September 30, 2003 and have communicated that determination to the Audit
Committee of our Board of Directors.

CHANGES IN INTERNAL CONTROLS

There have been no significant changes in Panhandle's internal controls or in
factors that could significantly affect internal controls subsequent to
September 30, 2003 except for the continuing effects of changes beginning June
11, 2003 because our affiliation with CMS ended, and we and each of our
subsidiaries became indirect wholly-owned or controlled subsidiaries of Southern
Union that is subject to Southern Union's policies, procedures and practices
related to internal controls, and disclosure controls and procedures including:
Southern Union executives replacing all the members of our Board; departures
from and additions to our management group, in particular, Southern Union
officers have become our principal executive, operating, financial and legal
officers, each of whom has or will have important functions involving, or
responsibilities under or for, our internal controls and our disclosure controls
and procedures, which now include those of Southern Union because we and our
subsidiaries are required to comply with them pursuant to Southern Union policy
or laws or regulations applicable to Southern Union; actual or prospective
changes affecting our information systems and technology, particularly new
systems and technology, and sharing of any new systems and technology,
particularly new technology, and sharing of any such systems and technology with
Southern Union's other businesses; and any other factors arising from our recent
change in control from CMS to Southern Union.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in Panhandle's Form 10-K for the year ended December 31, 2002.
Reference is also made to the CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS, in particular Note 12 - Commitments and Contingencies - Litigation
for Panhandle, included herein for additional information regarding various
pending administrative and judicial proceedings involving rate, operating,
regulatory 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 its present knowledge and subject to future legal
and factual developments, Panhandle believes that it is unlikely that these
actions, individually or in total, will

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have a material adverse effect on its financial condition. See Panhandle's MD&A;
and Panhandle's CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) LIST OF EXHIBITS

3(a) Certificate of Formation of Panhandle Eastern Pipe Line
Company, LLC (Filed as Exhibit 3(a) to the Form 10-Q for the
quarter ended June 30, 2003).

3(b) Certificate of Conversion from a Corporation to a Limited
Liability Company (Filed as Exhibit 3(b) to the Form 10-Q
for the quarter ended June 30, 2003).

3(c) Certificate of Amendment to Certificate of Formation (Filed
as Exhibit 3(c) to the Form 10-Q for the quarter ended June
30, 2003).

4(a) Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company and NBD
Bank, as Trustee (Filed as Exhibit 4(a) to the Form 10-Q for
the quarter ended March 31, 1999.

4(b) 1st Supplemental Indenture dated as of March 29, 1999, among
CMS Panhandle Holding Company, Panhandle Eastern Pipe Line
Company and NBD Bank, as Trustee, including a form of
Guarantee by Panhandle Eastern Pipe Line Company of the
obligations of CMS Panhandle Holding Company (Filed as
Exhibit 4(b) to the Form 10-Q for the quarter ended March
31, 1999).

4(c) 2nd Supplemental Indenture dated as of March 27, 2000,
between Panhandle, as Issuer and Bank One Trust Company,
National Association, as Trustee (filed as Exhibit 4(e) to
the Form S-4 filed on June 22, 2000).

4(d) 3rd Supplemental Indenture dated as of August 18, 2003,
between Panhandle, as Issuer and Bank One Trust Company,
National Association, as Trustee (Filed herein).

4(e) Indenture dated as of February 1, 1993, between Panhandle
and Morgan Guaranty Trust Company effective January 1, 1982,
as amended December 3, 1999 (Filed as Exhibit 4 to the Form
S-3 filed February 19, 1993).

31(a) Rule 13a - 14(a)/15(d) - 14a Certification of Chief
Executive Officer

31(b) Rule 13a - 14(a)/15(d) - 14a Certification of Chief
Financial Officer

32(a) Section 1350 Certification (Joint)

(B) REPORTS OF FORM 8-K

NA

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Panhandle Eastern Pipe Line Company, LLC has duly caused this
Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto
duly authorized, on the November 14, 2003.

PANHANDLE EASTERN PIPE LINE COMPANY, LLC

By /s/ Thomas F. Karam
--------------------------------------
Thomas F. Karam
Chief Executive Officer

By /s/ David J. Kvapil
--------------------------------------
David J. Kvapil
Executive Vice President and
Chief Financial Officer

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INDEX TO EXHIBIT