PANHANDLE EASTERN PIPE LINE CO LP - 10-K Annual Report

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

OR

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

COMMISSION FILE NO. 1-2921

PANHANDLE EASTERN PIPE LINE COMPANY, LP
(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 77056-5306
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)

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

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each Class Name of each exchange on which registered
4.80% Senior Notes due 2008, Series B New York Stock Exchange
6.05% Senior Notes due 2013, Series B New York Stock Exchange

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]

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

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

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

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PART I

ITEM 1. BUSINESS

OUR BUSINESS

INTRODUCTION

Panhandle Eastern Pipe Line Company, LP (Panhandle Eastern Pipe Line) (formerly
Panhandle Eastern Pipe Line Company, LLC), a Delaware limited partnership
(together with its subsidiaries, Panhandle), is an indirect wholly-owned
subsidiary of Southern Union Company (Southern Union Company and, together with
its subsidiaries, Southern Union) since Southern Union's June 11, 2003
acquisition of Panhandle (Panhandle Acquisition) from CMS Gas Transmission
Company (CMS Gas Transmission), a subsidiary of CMS Energy Corporation (CMS
Energy and, together with CMS Gas Transmission, CMS). See ITEM 8. Financial
Statements and Supplementary Data, Note I -- Corporate Structure. Panhandle is
primarily engaged in the interstate transportation and storage of natural gas
and also provides liquefied natural gas (LNG) terminalling and regasification
services. Panhandle is subject to the rules and regulations of the Federal
Energy Regulatory Commission (FERC). The Panhandle entities include Panhandle
Eastern Pipe Line, Trunkline Gas Company, LLC (Trunkline), a wholly-owned
subsidiary of Panhandle Eastern Pipe Line, Sea Robin Pipeline Company, LLC (Sea
Robin), an indirect wholly-owned subsidiary of Panhandle Eastern Pipe Line,
Trunkline LNG Company, LLC (Trunkline LNG), which is a wholly-owned subsidiary
of Trunkline LNG Holdings, LLC (LNG Holdings), an indirect wholly-owned
subsidiary of Panhandle Eastern Pipe Line, and Pan Gas Storage, LLC (d.b.a.
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 (bcf) per day and 72 bcf 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
bcf of above ground LNG storage capacity.

ACQUISITION OF PANHANDLE. On June 11, 2003, Southern Union acquired Panhandle
from CMS Gas Transmission for approximately $581,729,000 in cash and 3,000,000
shares of Southern Union common stock (before adjustment for subsequent stock
dividends), valued at approximately $48,900,000 based on market prices at
closing of the Panhandle Acquisition and in connection therewith incurred
transaction costs of approximately $31,922,000. At the time of the acquisition,
Panhandle had approximately $1,157,228,000 of debt outstanding that it retained.
Southern Union funded the cash portion of the acquisition with approximately
$437,000,000 in cash proceeds it received from the January 1, 2003 sale of its
Texas operations, approximately $121,250,000 in cash 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 in a manner intended to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended.

Panhandle Eastern Pipe Line and five of its subsidiaries, as well as Southern
Union Panhandle, LLC, converted from Delaware corporations to Delaware limited
liability companies in June 2003. On June 29, 2004, Panhandle Eastern Pipe Line
was converted from a Delaware limited liability company to a limited
partnership. Pursuant to the conversion, all rights and liabilities of Panhandle
Eastern Pipe Line Company, LLC vested in Panhandle Eastern Pipe Line Company,
LP. As a result of the conversion, retained earnings and member's capital were
reclassified as partners' capital. There was no effect on Panhandle's results of
operations (including income taxes), cash flows or financial position as a
result of this conversion. Southern Union Panhandle, LLC serves as the general
partner of Panhandle Eastern Pipe Line and owns a one percent general partner
interest in Panhandle Eastern Pipe Line. Southern Union Company owns a
ninety-nine percent limited partner interest in Panhandle Eastern Pipe Line.

Under the terms of the Panhandle sale agreement, CMS retained ownership of and
all obligations associated with Centennial Pipeline, LLC (Centennial) and
Guardian Pipeline, LLC (Guardian) pipeline projects, as well as certain of
Panhandle's net deferred tax assets of $28,124,000, all tax liabilities of
$17,405,000, net pension liabilities recorded of $42,965,000, certain other net
post-retirement liabilities recorded of $16,351,000 and other net liabilities of
$2,214,000. CMS also retained financial responsibility for all existing stock
options. Panhandle disposed of its interest in Centennial and Guardian and
certain cash collateral related to Guardian was transferred to CMS. Such
disposition to CMS via sale to its partners was recorded at Panhandle's net book
value with no

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gain or loss recognized. See Note V -- Related Party Transactions. The Note
receivable from CMS Capital Corp. (CMS Capital), a subsidiary of CMS, 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
purchase accounting and subsequently extinguished. See Note V -- Related Party
Transactions. On March 1, 2003, certain assets previously held by CMS with a net
book value of $15,149,000 were contributed to Panhandle by CMS and were included
in the Southern Union purchase.

The Panhandle 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 (pushdown) the purchase
price paid by Southern Union to Panhandle's net assets as of the acquisition
date. The Panhandle assets acquired and liabilities assumed were recorded based
on their estimated fair value as of the acquisition date based on the results of
outside appraisals. 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. See Note I -- Corporate Structure.

CUSTOMERS

A majority of Panhandle's total operating revenue comes from long-term service
agreements with local distribution company customers and their affiliates.
Panhandle also provides firm transportation services under contract to gas
marketers, producers, other pipelines, electric power generators and a variety
of end-users. In addition, Panhandle's pipelines offer both firm and
interruptible transportation to customers on a short-term or seasonal basis.
Demand for gas transmission on Panhandle's pipeline systems is seasonal, with
the highest throughput and a higher portion of annual total operating revenues
and net earnings occurring in the traditional winter heating season in the first
and fourth calendar quarters. For the years 2000 to 2004, Panhandle's combined
throughput was 1,374 trillion British thermal units (TBtu), 1,335 TBtu, 1,259
TBtu, 1,380 TBtu and 1,284 TBtu, respectively. Beginning in March 2000, the
combined throughput includes Sea Robin's throughput.

Panhandle's customers may change throughout the year as a result of capacity
release provisions that allow them to release all or part of their capacity,
either permanently for the full term of the contract or temporarily. Under the
terms of Panhandle's tariff, a temporary capacity release does not relieve the
original customer from its payment obligations if the replacement customer fails
to pay.

The following table shows the relative contribution to Panhandle's total
operating revenue of each of the major services provided by Panhandle for the
years ended December 31, 2004, 2003 and 2002.

PERCENT OF OPERATING REVENUE FOR
TWELVE MONTHS ENDED
DECEMBER 31,

TYPE OF SERVICE 2004 2003 2002
- ----------------- --------- --------- ---------

Transportation 78% 77% 77%
LNG terminalling 12% 12% 12%
Storage 8% 8% 8%
Other 2% 3% 3%
--------- --------- ---------
Total percentage 100% 100% 100%
========= ========= =========

For additional information, see ITEM 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Results of Operations.

REGULATION

Panhandle is subject to regulation by various federal, state and local
governmental agencies, including those specifically described below. See ITEM 1.
Business - Environmental.

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 of 1938. FERC jurisdiction relates,
among other things, to the acquisition, operation and disposal of assets and
facilities and to the service provided and rates charged.

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FERC has authority to regulate rates and charges for transportation or 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 natural
gas pipelines. Panhandle is also subject to the Hazardous Liquid Pipeline Safety
Act of 1979, which regulates oil and petroleum pipelines.

For a discussion of the effect of certain FERC orders on Panhandle, see ITEM 7.
Panhandle's Management's Discussion and Analysis -- Other Matters and Note III
- -- Regulatory Matters.

PROPERTY

Panhandle's interstate transmission and storage operations have more than 10,000
miles of pipeline in the United States. With approximately 6,500 miles of
pipeline, Panhandle Eastern Pipe Line's natural gas transmission system consists
of four large diameter pipelines extending approximately 1,300 miles from
producing areas in the Anadarko Basin of Texas, Oklahoma and Kansas through the
states of Missouri, Illinois, Indiana, Ohio and into Michigan. Trunkline's
transmission system consists of two large diameter pipelines of approximately
3,500 miles of pipeline which extend approximately 1,400 miles from the Gulf
Coast areas of Texas and Louisiana through the states of Arkansas, Mississippi,
Tennessee, Kentucky, Illinois and Indiana to a point on the Indiana-Michigan
border. Sea Robin's transmission system consists of two offshore Louisiana
natural gas supply systems and is comprised of approximately 400 miles of
pipeline extending approximately 81 miles into the Gulf of Mexico.

In connection with its gas transmission and storage systems, Panhandle owns and
operates 48 compressor stations and has five gas storage fields located in
Illinois, Kansas, Louisiana, Michigan and Oklahoma with an aggregate storage
capacity of 72 bcf. Panhandle also has contracts with third parties for
approximately 15 bcf of storage for a total of approximately 87 bcf of total
storage capacity.

Trunkline LNG owns a liquefied natural gas (LNG) terminal in Lake Charles,
Louisiana. The LNG terminal has a sustainable send out capacity of approximately
..63 bcf per day and is one of the largest operating LNG terminals in North
America, based on current send out capacity. Trunkline LNG is currently in the
process of an approximately $137 million, plus capitalized interest, expansion
(Phase I) of the LNG terminal, which would increase sustainable send out
capacity to 1.2 bcf per day by the end of 2005. On September 17, 2004, as
modified on September 23, 2004, FERC approved Trunkline LNG's incremental
expansion project (Phase II). Phase II is estimated to cost approximately $77
million, plus capitalized interest, and would increase the LNG terminal
sustainable send out capacity to 1.8 bcf per day. Phase II has an expected
in-service date of mid-2006. In September 2004, Trunkline received approval from
the FERC of a 30-inch diameter, 23-mile natural gas pipeline loop from the LNG
terminal. The pipeline creates additional transport capacity in association with
the Trunkline LNG expansion and also includes new and expanded delivery points
with major interstate pipelines. On November 5, 2004, Trunkline filed an amended
application with the FERC to change the size of the pipeline from 30-inch
diameter to 36-inch diameter to better position Trunkline to provide
transportation service for expected future LNG volumes and increase operational
flexibility. The amendment was approved by FERC on February 11, 2005. The
Trunkline natural gas pipeline loop associated with the LNG terminal is
estimated to cost $50 million, plus capitalized interest.

ENVIRONMENTAL

Panhandle is subject to extensive federal, state and local laws and regulations
relating to the protection of the environment. These evolving laws and
regulations require expenditures in connection with construction of new
facilities, the operation of existing facilities, and for remediation at various
operating sites over a long period of time to address environmental impacts.
Panhandle has established programs and procedures for the ongoing evaluation of
its operations to identify potential environmental issues and address compliance
with regulatory requirements.

4

Panhandle's gas transmission operations are subject to federal, state and local
regulations regarding water quality, hazardous and solid waste management, air
quality control and other environmental matters. Panhandle has previously
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 implemented a program to remediate such
contamination in accordance with federal, state and local regulations. Air
quality control regulations include rules relating to regional ozone control and
hazardous air pollutants. The regional ozone control rules, known as the
nitrogen oxide (NOx) State Implementation Plans (SIP Call), are designed to
control the release of NOx compounds. The rules related to hazardous air
pollutants, known as Maximum Achievable Control Technology (MACT) rules, are the
result of the 1990 Clean Air Act amendments that regulate the emission of
hazardous air pollutants from internal combustion engines and turbines.

See ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition - Cautionary Statement Regarding Forward-Looking Information
and Note XIV -- Commitments and Contingencies in the Notes to the Consolidated
Financial Statements.

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's direct competitors
include 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.

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

INSURANCE

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

EMPLOYEES

At December 31, 2004, Panhandle had 1,026 full-time equivalent employees. Of
these employees, 230 were represented by the Paper, Allied-Industrial Chemical
and Energy Workers International Union, AFL-CIO, CLC. In June 2003, Panhandle
entered into a new agreement with this union that expires in May 2006. The new
agreement caps wage increases at three percent annually.

In conjunction with its acquisition by Southern Union, Panhandle initiated a
plan to reduce its workforce by approximately five 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 workforce
reduction initiative costs of approximately $10,000,000 are included in the
$31,922,000 of transaction costs incurred in connection with the Panhandle
Acquisition. See Item 1. Business - Acquisition of Panhandle.

In conjunction with Southern Union's investment in CCE Holdings, LLC (CCE) and
CCE's acquisition of Cross Country Energy, LLC (CrossCountry) from Enron Corp.
and certain subsidiaries of Enron, Panhandle initiated an additional workforce
reduction plan designed to reduce the workforce by approximately an additional
six percent. Certain of the approximately $7.7 million of the resulting
severance and related costs are reimbursable by CCE pursuant to agreements
between the parties involved, with the reimbursable portion totaling
approximately $6 million.

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AVAILABLE INFORMATION

Panhandle Eastern Pipe Line files annual, quarterly and special reports and
other information with the Securities and Exchange Commission (SEC). Any
document Panhandle Eastern Pipe Line files with the SEC may be read or copied at
the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for information on the public
reference room. Panhandle Eastern Pipe Line's SEC filings are also available at
the SEC's website at http://www.sec.gov.

ITEM 2. PROPERTIES

A description of Panhandle's properties is contained in ITEM 1. Business --
Property.

ITEM 3. LEGAL PROCEEDINGS

Panhandle and certain of its affiliates are parties to routine lawsuits and
administrative proceedings incidental to their businesses involving, for
example, claims for personal injury and property damage, contractual matters,
various tax matters, and rates and licensing. Reference is made to ITEM 1.
Business -- Regulation, as well as to ITEM 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition and ITEM 8. Financial
Statements and Supplementary Data -- Notes to Consolidated Financial Statements
included herein for additional information regarding various pending
administrative and judicial proceedings involving regulatory, environmental and
other legal matters.

ENVIRONMENTAL MATTERS. Panhandle and its 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 present knowledge and subject to future legal and
factual developments, Panhandle's management believes that it is unlikely that
these actions, individually or in the aggregate, will have a material adverse
effect on its financial condition. See ITEM 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition and ITEM 8. Financial
Statements and Supplementary Data -- Notes to Consolidated Financial Statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 4. Submission of Matters to a Vote of Security Holders has been omitted
from this report pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

All of Panhandle Eastern Pipe Line's partnership interests are privately held by
Southern Union Panhandle, LLC and Southern Union. See Note I -- Corporate
Structure.

ITEM 6. SELECTED FINANCIAL DATA

ITEM 6. Selected Financial Data has been omitted from this report pursuant to
the reduced disclosure format permitted by General Instruction I to Form 10-K.

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

Management's Discussion and Analysis of Results of Operations and Financial
Condition is provided as a supplement to the accompanying consolidated financial
statements and footnotes to help provide an understanding of Panhandle's
financial condition, results of operations and changes in financial condition.
The following section includes an overview of Panhandle's business as well as
recent developments that Panhandle believes are important in understanding its
results of operations and in anticipating future trends in those operations.
Subsequent sections include an analysis of Panhandle's results of operations on
a consolidated basis and information relating to Panhandle's liquidity and
capital resources, quantitative and qualitative disclosures about market risk,
an outlook perspective for Panhandle, and other matters. The information
required by this Item is presented in a reduced disclosure format pursuant to
General Instruction I to Form 10-K. The Notes to Consolidated Financial
Statements contain information that is pertinent to the analysis of Panhandle's
financial condition and its results of operations, including a discussion of
Panhandle's significant accounting policies.

OVERVIEW

Panhandle is primarily engaged in the interstate transportation and storage of
natural gas and also provides LNG terminalling and regasification services. The
Panhandle entities include Panhandle Eastern Pipe Line, Trunkline, Sea Robin,
Trunkline LNG and Southwest Gas Storage. 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 bcf per day, 72 bcf
of owned underground storage capacity and 6.3 bcf of above ground LNG storage
capacity. Trunkline LNG, located on Louisiana's Gulf Coast, operates one of the
largest LNG import terminals in North America.

On June 11, 2003, Southern Union acquired Panhandle from CMS Gas Transmission
for approximately $581,729,000 in cash and 3,000,000 shares of Southern Union
common stock (before adjustment for subsequent stock dividends) valued at
approximately $48,900,000 based on market prices at closing. The Panhandle
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 and acquisition costs incurred by Southern Union to Panhandle's net assets
as of the acquisition date. The Panhandle assets acquired and liabilities
assumed have been recorded based on their estimated fair value as of the
acquisition date based on the results of outside appraisals. 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. Panhandle's management views this presentation as
meaningful in discussing its operating results due to the continuity during both
periods of its ongoing operations. The most significant impacts of the new basis
of accounting going forward are expected to be higher depreciation expense due
to the step-up of depreciable assets, 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. See Item 1. Business -- Acquisition of Panhandle.

MAJOR BUSINESS DRIVERS AND RISKS. Long-term supply for each of Panhandle's
pipelines is critical. Revenues generated by Panhandle's transmission contracts
ultimately depend on the volume of natural gas transported. As the reserves
available through the supply basins connected to Panhandle's systems are
naturally declining, a decrease in development or production activities could
cause a decrease in the volume of reserves available for transmission.
Investments by third parties in the development of new natural gas reserves
connected to Panhandle's facilities depend on energy prices. If there are
reductions in the average volume of natural gas Panhandle transports, its
business, results of operations and financial condition could be materially
adversely affected.

Long-term demand in the natural gas markets that Panhandle's pipelines serve is
also critical. Federal and state regulation of natural gas interstate pipelines
has changed dramatically in the last two decades and could continue to change.
These regulatory changes have resulted and may continue to result in increased
competition in the pipeline business. In order to meet competitive challenges,
Panhandle will need to adapt its marketing strategies, the type of
transportation and storage services it offers to its customers and its pricing
and rate responses to competitive forces. Panhandle will also need to respond to
changes in state regulations in their market areas that

7

allow direct sales to all retail end-user customers or, at least, broader
customer classes than now allowed. Panhandle is not able to predict the
financial consequences of these changes at this time, but they could have a
material adverse effect on its business, results of operations and financial
condition.

Panhandle's transportation fees are primarily fixed and based on the reserved
capacity for each customer. It is critical that Panhandle is able to contract
with customers to reserve capacity made available as existing contracts expire.
The weighted average remaining life of firm transportation contracts at December
31, 2004 for Panhandle Eastern Pipe Line and Trunkline are three years and ten
years, respectively. Firm transportation contracts for Sea Robin represent only
approximately three percent of annual flow and have a one year remaining life
but are evergreen and tied to the life of the reserves.

The weighted average remaining life of firm storage contracts at December 31,
2004 for Panhandle Eastern Pipe Line and Trunkline are three years.

Beginning January 2002, Trunkline LNG entered into a twenty-two year contract
with BG LNG Services for all the uncommitted capacity at the Lake Charles,
Louisiana facility.

Panhandle Eastern Pipe Line and/or one or more of its subsidiaries have
contracts with four significant customers, Proliance, BG LNG Services, CMS
Energy and Ameren Corp, which contributed fifty-four percent of consolidated
operating revenues in 2004. Contracts with Proliance were extended in 2003 and
have an average remaining term of five years. BG LNG Service's contracts will
expand with the completion of Phase I in late 2005 and Phase II in mid-2006, and
are expected to increase annual gross reservation revenues by approximately $39
million and $22 million, respectively, as these projects are completed. See Note
III -- Regulatory Matters. BG LNG Service's transportation contract with
Trunkline will increase in volume proportionally with the Phase I and Phase II
expansions and is expected to increase reservation revenues by $11 million and
$5 million, respectively, from 2004 firm transport levels. Panhandle has
recently amended and extended through 2008 certain contracts with Consumers
Energy, a subsidiary of CMS Energy, that were originally set to expire in late
2005. These contracts will result in a reduction in CMS Energy's revenue
contribution to Panhandle in calendar year 2006, the first full year of
effectiveness. It is expected that the reduction in revenue will be such that,
if the new contract had been in effect for the year ended 2004, total
consolidated operating revenue and CMS Energy's percent of operating revenue
would have been approximately two percent lower. The majority of Panhandle
Eastern Pipe Line and Trunkline contracts with Ameren Corp subsidiaries Union
Electric, Central Illinois Light Company, Illinois Power and Central Illinois
Public Service expire in 2006.

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RESULTS OF OPERATIONS

PRE-
POST-ACQUISITION ACQUISITION COMBINED
---------------------------- ----------- YEAR
JANUARY 1 - JUNE 12 - JANUARY 1 - ENDED TWELVE
DECEMBER 31, DECEMBER 31, JUNE 11, DECEMBER 31, MONTHS
2004 2003 2003 2003 CHANGE
----------- ----------- ----------- ----------- -----------

Operating revenue:
Reservation revenue $ 350,699 $ 193,385 $ 160,030 $ 353,415 $ (2,716)
LNG terminalling revenue 56,537 33,389 26,750 60,139 (3,602)
Commodity revenue 72,312 37,207 36,378 73,585 (1,273)
Other revenue 9,832 5,110 11,112 16,222 (6,390)
----------- ----------- ----------- ----------- -----------
Total operating revenue 489,380 269,091 234,270 503,361 (13,981)

Operating expenses:
Operation, maintenance and general 212,106 117,930 90,800 208,730 3,376
Depreciation and amortization 60,182 33,129 23,110 56,239 3,943
Taxes, other than on income and revenues 26,867 14,684 12,478 27,162 (295)
----------- ----------- ----------- ----------- -----------
Total operating expenses 299,155 165,743 126,388 292,131 7,024
----------- ----------- ----------- ----------- -----------
Operating income 190,225 103,348 107,882 211,230 (21,005)

Other income (expense):
Interest (expense), net (48,429) (25,537) (35,416) (60,953) 12,524
Other, net 2,193 6,962 6,077 13,039 (10,846)
----------- ----------- ----------- ----------- -----------
Total other expense, net (46,236) (18,575) (29,339) (47,914) 1,678

----------- ----------- ----------- ----------- -----------
Earnings before income taxes 143,989 84,773 78,543 163,316 (19,327)

Income taxes 56,056 33,321 30,532 63,853 (7,797)
----------- ----------- ----------- ----------- -----------
Net earnings from continuing operations 87,933 51,452 48,011 99,463 (11,530)
----------- ----------- ----------- ----------- -----------

Cumulative effect of change in
accounting principles, net of tax - - 2,003 2,003 (2,003)
----------- ----------- ----------- ----------- -----------

Net earnings $ 87,933 $ 51,452 $ 50,014 $ 101,466 $ (13,533)
=========== =========== =========== =========== ===========

OPERATING REVENUE. For the twelve months ended December 31, 2004, operating
revenue decreased $13,981,000 versus the same time period during 2003. The
decrease was affected by non-recurring imbalance cash out net gains of
approximately $5,505,000 realized during 2003 and lower LNG terminalling
revenues of $3,602,000 primarily due to reduced LNG volumes received in 2004.
Additionally, reservation revenues decreased $2,716,000 during 2004 versus 2003
primarily due to lower storage capacity sold and certain contract expirations on
Trunkline during 2004 at lower average reservation rates than were in effect in
2003, partially offset by higher average reservation rates on Panhandle Eastern
Pipe Line's capacity. Commodity revenues were also lower by $1,273,000 primarily
due to a reduction in commodity throughput volumes of seven percent, associated
with a six percent decrease of heating degree days resulting from a cooler
winter during 2003 versus 2004 and lower subsequent storage refills, partially
offset by higher parking revenue activity in 2004. Commodity revenues are
dependent upon a number of variable factors, including weather, storage levels,
and customer demand for firm, interruptible and parking services.

OPERATING EXPENSES. Operating expenses for the twelve months ended December 31,
2004 increased $7,024,000 versus 2003, primarily due to an increase of
$3,943,000 in depreciation and amortization expense resulting from the step-up
of depreciable assets and assignment of purchase price to certain shorter-lived
amortizable intangible assets related to the Panhandle Acquisition. Operation,
maintenance and general expenses increased $3,376,000 primarily due to an
increase in corporate charges of $9,201,000 caused by a

9

reduction during the first half of 2003 by CMS due to Panhandle being a
discontinued operation, an increase in insurance of $3,832,000 due to higher
premiums and payments on property claims, an increase in other operating
expenses of approximately $3,000,000 primarily due to maintenance projects
delayed during 2003 due to higher throughput loads, and $1,700,000 of
severance-related costs incurred in conjunction with the integration of
CrossCountry. These increases were partially offset by the net overrecovery of
approximately $5,600,000 in 2004 of previously underrecovered fuel volumes
versus a net underrecovery of approximately $2,784,000 of fuel volumes in 2003,
a decrease in power costs of $2,174,000 due to lower LNG volumes received in
2004, a decrease in contract storage of $2,090,000 associated with a reduction
in contracted storage capacity beginning March 2004, and a decrease in benefit
costs of $1,671,000 associated with the change in benefit plans subsequent to
the acquisition of Panhandle by Southern Union.

INTEREST EXPENSE, NET. Interest expense, net, for the twelve months ended
December 31, 2004, versus the same time period during 2003, was reduced by
$12,524,000 primarily due to amortization of debt premiums established in
purchase accounting related to the Panhandle Acquisition by Southern Union,
reduced cash interest charges as a result of Panhandle's debt refinancing during
the third quarter of 2003 and the refinancing of the debt that matured in March
2004 and August 2004. For further discussion of Panhandle's long-term debt, see
Note XII -- Debt.

OTHER, NET. Other income, net, for the twelve months ended December 31, 2004
decreased $10,846,000 versus the same time period during 2003, primarily due to
a non-recurring $6,123,000 gain on debt extinguishment during the third quarter
of 2003. In addition, related party interest income decreased by $4,869,000
versus the same time period during 2003 due to lower average rates and balances
in 2004. For further discussion of Panhandle's related party interest income,
see Note V -- Related Party Transactions.

INCOME TAXES. Income taxes during the twelve months ended December 31, 2004,
versus the same time period during 2003, decreased $7,797,000 due to decreases
in pretax income, which reflects an effective tax rate of approximately 38.9,
39.3 and 38.9 percent for the post-acquisition year ended December 31, 2004 and
for the period from June 12, 2003 to December 31, 2003, and the pre-acquisition
period from January 1, 2003 to June 11, 2003, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Based on Panhandle's current level of operations, management believes that cash
flow from operations, available existing cash, and other sources, including
liquid working capital and new borrowings, will be adequate to meet liquidity
needs for the next several years, although no assurances can be given as to the
sufficiency of cash flows or the ability to refinance existing obligations.

OPERATING ACTIVITIES. Cash flows from operating activities for the twelve months
ended December 31, 2004 were $183 million versus $223 million for the same time
period during 2003. Changes in operating assets and liabilities provided cash of
$1 million for the twelve months ended December 31, 2004 and $18 million for the
same time period during 2003. The decrease in cash flows from operating
activities for the twelve months ended December 31, 2004 versus the same time
period during 2003 was primarily attributable to the timing of payments and cash
receipts related to Panhandle's working capital accounts.

INVESTING ACTIVITIES. Historically, Panhandle's capital requirements have
generally been satisfied through operating cash flow, except that Panhandle may
utilize access to capital markets for extraordinary capital expenditures.
Panhandle estimates remaining expenditures associated with Phase I and Phase II
LNG terminal expansion and the Trunkline 36-inch diameter, 23-mile natural gas
pipeline loop from the LNG terminal to be approximately $107 million in 2005 and
approximately $8 million in 2006. These estimates were developed for budget
planning purposes and are subject to revision.

Cash flows used in investing activities for the twelve months ended December 31,
2004 decreased by approximately $32 million versus the same time period in 2003
primarily due to a $147 million decrease in loans made to affiliated companies
during 2004 and a decrease in purchases of system gas of approximately $7
million, partially offset by an increase in capital expenditures of
approximately $79 million during 2004 primarily related to the LNG expansion and
by proceeds from the sale of Centennial in the first quarter of 2003 of $40
million.

FINANCING ACTIVITIES. As of December 31, 2004, Panhandle's debt is rated BBB by
Fitch Ratings, Inc. and Standard & Poor's and Baa3 by Moody's. Panhandle's note
provisions are subject to the maintenance of a fixed charge coverage ratio and a
leverage ratio which restrict certain payments if not maintained, and
limitations on

10

liens. At December 31, 2004, Panhandle was subject to a $344,226,000 limitation
on additional restricted payments, including dividends and loans to affiliates,
based on the current most restrictive covenant, and a limitation of $327,373,000
of additional secured indebtedness based on a limitation on liens covenant. If
Panhandle's debt ratings were to fall below Baa3 by Moody's and below BBB- by
Standard and Poor's, then the allowable restricted payments would be reduced to
$294,152,000. At December 31, 2004, Panhandle was in compliance with all
covenants.

At December 31, 2004, Panhandle had scheduled debt principal payments of
$12,548,000, $13,969,000, $431,916,000, $300,000,000, $60,623,000 and
$356,805,000 for the years 2005 through 2009 and in total thereafter,
respectively.

On March 12, 2004, Panhandle issued $200,000,000 of 2.75 percent Senior Notes
due 2007, Series A, in reliance on an exemption from the registration
requirements of the Securities Act of 1933 for offers and sales of securities
not involving a public offering or sale, in order to refinance Panhandle's
maturing debt. Panhandle used a portion of the net proceeds to retire
$146,080,000 of 6.125 percent Senior Notes which matured on March 15, 2004, as
well as for other general corporate purposes. A portion of the remaining net
proceeds was also used to pay off the $52,455,000 of 7.875 percent Senior Notes
which matured August 15, 2004. On June 25, 2004, Panhandle completed an exchange
of the unregistered 2.75 percent Senior Notes due 2007, Series A, for
substantially identical securities registered under the Securities Act of 1933.

In July 2003, Panhandle announced a tender offer for any and all of the
$747,370,000 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 $134,500,000 principal amount of
its two series of debentures that were outstanding. Panhandle repurchased
approximately $378,257,000 of the principal amount of its outstanding debt
through the Panhandle Tender Offer for total consideration of approximately
$396,445,000 plus accrued interest through the purchase date. Panhandle also
redeemed its approximately $134,500,000 of debentures for total consideration of
$139,411,000 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 $6,123,000
($3,674,000, 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, net, pursuant to the requirements of SFAS No. 145. During 2004, Panhandle
recorded an additional pre-tax gain on the extinguishment of debt of
approximately $231,000 ($139,000, net of tax), which is classified as Other,
net. In August 2003, Panhandle issued $550,000,000 of senior notes, of which
$300,000,000 is a new series of five year senior notes at 4.8 percent and
$250,000,000 is a new series of ten year senior notes at 6.05 percent,
principally to refinance the repurchased notes and redeemed debentures. The
issuance of the $550,000,000 of senior notes resulted in a debt discount
recorded of $2,573,000. Also in August and September 2003, Panhandle repurchased
$3,150,000 principal amount of its senior notes on the open market through two
transactions for total consideration of $3,398,000, plus accrued interest
through the repurchase date and which also resulted in $270,000 of retired
premium.

Cash flows from financing activities for the twelve months ended December 2004
increased by approximately $80 million versus the same period in 2003 primarily
due to the transfer of the Centennial sale proceeds to CMS of $40 million during
2003, a decrease in net debt retirements and related net issuance costs of
approximately $26 million and an increase in bank overdrafts of approximately
$14 million.

OUTLOOK

Panhandle is a leading United States interstate natural gas pipeline system and
also owns one of the largest operating LNG regasification terminals in North
America. Panhandle's business strategy is to optimize results through expansion
and better utilization of its existing facilities and construction of new
facilities. This involves providing additional transportation, storage and other
value-added services to Panhandle's customers, which include gas-fueled power
plants, local distribution companies, industrial end-users, marketers and
others. Panhandle conducts operations primarily in the central, gulf coast,
midwest, great lakes, and southwest regions of the United States. Pipeline
revenues are generally higher in the first and fourth quarters of each year
primarily due to higher contract rates and the increase in customer demand
levels for gas due to the colder weather during these periods.

Trunkline LNG entered into a 22-year contract with BG LNG Services beginning
January 2002, for all the uncommitted capacity at the Lake Charles, Louisiana
facility. Trunkline LNG announced the planned expansion of the Lake Charles
facility to approximately 1.2 bcf per day of send out capacity, up from its
current send out

11

capacity of .63 bcf per day and in December 2002 FERC approved the expansion of
the LNG regasification terminal. The expanded facility is currently expected to
be in operation by the end of 2005. In September 2004, FERC approved Trunkline
LNG's further incremental LNG expansion project. This expansion will increase
the LNG terminal's sustainable send out capacity to 1.8 bcf per day by mid-2006.
BG LNG Services has contracted for all the proposed additional capacity subject
to Trunkline LNG achieving certain construction milestones at this facility.

On February 11, 2005, Trunkline received approval from the FERC of a 36-inch
diameter, 23-mile natural gas pipeline loop from the LNG terminal. The pipeline
creates additional transport capacity in association with the Trunkline LNG
expansion and also includes new and expanded delivery points with major
interstate pipelines.

OTHER MATTERS

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, Trunkline,
Sea Robin, Trunkline LNG, and Southwest Gas Storage as natural gas companies
within the meaning of the Natural Gas Act of 1938. FERC jurisdiction relates,
among other things, to the acquisition, operation and disposal of assets and
facilities and to the service provided and rates charged.

FERC has authority to regulate rates and charges for 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, 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.

In 1993, the U.S. Department of the Interior announced its intention to seek,
through its Mineral 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 these costs from pipeline customers. Management believes these
commitments and contingencies will not have a material adverse effect on
Panhandle's business, financial condition or results of operations.

On November 22, 2004, FERC issued a Notice of Inquiry (NOI) in "Policy for
Selective Discounting By Natural Gas Pipelines," Docket No. RM05-2, et al. In
the NOI, FERC requested comments from the industry on whether the selective
discounting policy should continue (including its policy in rate cases to allow
pipelines to downward adjust volumes flowing at a discounted rate, for the
purpose of determining rates), be modified, or eliminated entirely. On March 2,
2005, numerous industry comments were filed on the NOI. Because it is unclear
what action the FERC will take, Panhandle cannot predict what effect the outcome
of this proceeding will have on its business, financial condition or results of
operations.

Pursuant to a FERC NOI issued December 2, 2004, the FERC is reconsidering the
availability of a tax allowance in ratemaking for entities that do not pay
federal income tax, such as partnerships and limited liability companies that
elect to be treated as partnerships for federal income tax purposes. Panhandle's
FERC-regulated companies have income tax allowances currently embedded in their
rates and could be potentially affected in the future by a change in FERC policy
on tax allowances.

12

In November 2004, the FERC issued an industry-wide Proposed Accounting Release
which, if enacted as written, would require pipeline companies to expense rather
than capitalize certain costs related to mandated pipeline integrity programs.
The accounting release is proposed to be effective January 2005 following a
period of public comment on the release. Panhandle is currently reviewing the
release and has not determined what impact this release will have on its
consolidated financial statements or results of operations.

ENVIRONMENTAL MATTERS. Panhandle's gas transmission operations are subject to
federal, state and local regulations regarding water quality, hazardous and
solid waste management, air quality control and other environmental matters.
Panhandle has previously 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 implemented a program to remediate such
contamination in accordance with federal, state and local regulations. Air
quality control regulations include rules relating to regional ozone control and
hazardous air pollutants. The regional ozone control rules, known as SIP Call,
are designed to control the release of NOx compounds. The rules related to
hazardous air pollutants, known as MACT rules, 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 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 XIV -- 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 twenty-two states, including five states
in which Panhandle operates. Panhandle has completed installation of NOx
controls on four engines and anticipates placing NOx controls on engines at a
total of six compressor station locations. This program is expected to be
completed by May 2007.

In 2004, final rules were promulgated by the EPA regarding control of hazardous
air pollutants. Twenty-two Panhandle engines require controls. MACT controls
must be installed by June 2007. 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 requires the installation of emission
controls. New regulations also require certain grandfathered facilities to enter
into the new source permit program which may require the installation of
emission controls at five additional facilities. The rule affects six company
facilities in Texas. Panhandle expects controls to be installed by March 2007.
For further information, see Note XIV -- Commitments and Contingencies -
Environmental Matters.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS. Panhandle
Eastern Pipe Line provided a guarantee related to the bridge financing entered
into by Southern Union on November 17, 2004 of $407,000,000 to fund a portion of
Southern Union's equity investment in CCE (the Bridge Loan). The Bridge Loan was
subject to standard terms and conditions and was due and payable on May 17,
2005. The Bridge Loan was repaid in February 2005 and Panhandle Eastern Pipe
Line has been released from all related obligations.

On September 10, 2003, Panhandle Eastern Pipe Line provided a guarantee to CB&I
Constructors, Inc. for the full performance by Trunkline LNG, its subsidiary, of
the engineering, procurement and construction contract between Trunkline LNG and
CB&I Constructors, Inc. Under the terms of the guarantee, Panhandle Eastern Pipe
Line would be required to perform should Trunkline LNG be in default of its
payment obligations regarding services already rendered. There are no amounts
being carried as liabilities for Panhandle Eastern Pipe Line's obligations under
these guarantees. See Note XIV -- Commitments and Contingencies.

13

CONTRACTUAL COMMITMENTS. Panhandle has contractual obligations with regard to
future payments of operating leases, debt and natural gas storage service. The
following table summarizes Panhandle's expected contractual obligations and
commitments at December 31, 2004.

IN TOTAL
2005 2006 2007 2008 2009 THEREAFTER
------------ ------------ ------------ ---------- ------------ -----------

Operating Leases (1) $ 12,768 $ 11,914 $ 9,576 $ 5,661 $ 1,929 $ 3,508

Total long term debt (2) 12,548 13,969 431,916 300,000 60,623 356,805

Interest payments on debt (3) 56,623 56,114 43,335 36,048 25,242 146,363

Firm capacity payments (4) 9,985 9,841 7,816 7,131 7,131 31,106
------------ ------------ ------------ ---------- ------------ -----------

Total $ 91,924 $ 91,838 $ 492,643 $ 348,840 $ 94,925 $ 537,782
============ ============ ============ ========== ============ ===========

(1) Lease of various assets utilized for operations

(2) Debt principal obligations

(3) Interest payments at stated rate

(4) Lease of third party storage capacity

CAPITAL EXPENDITURES. Panhandle estimates expenditures associated with Phase I
and Phase II LNG terminal expansion and the Trunkline 36-inch diameter, 23-mile
natural gas pipeline loop from the LNG terminal to be approximately $107 million
in 2005 and approximately $8 million in 2006, plus capitalized interest. These
estimates were developed for budget planning purposes and are subject to
revision.

ENERGY AFFILIATE RULEMAKING. In response to changes in the structure of the
energy industry, the FERC adopted Order No. 2004 on November 25, 2003 that
established standards of conduct for energy affiliates of FERC-regulated
entities. In April, August, and December 2004, the FERC issued orders clarifying
and modifying the standards. The rule, as modified, revises and conforms the
current gas and electric standards by broadening the definition of an energy
affiliate covered by the standards of conduct to include, in addition to current
marketers or merchant affiliates, gathering, processing, intrastate pipelines
and certain local distribution companies. In February 2004, Panhandle Eastern
Pipe Line, Trunkline, Trunkline LNG, Southwest Gas Storage and Sea Robin each
submitted an informational filing describing the measures needed to comply with
the rule. In addition, in compliance with the rule, in September 2004 each of
Panhandle Eastern Pipe Line, Trunkline, Trunkline LNG, Southwest Gas Storage and
Sea Robin posted on their respective websites procedures describing compliance
with the standards and other information required by the rule.

PIPELINE SAFETY NOTICE OF PROPOSED RULEMAKING. On December 12, 2003, the U.S.
Department of Transportation issued a final rule requiring pipeline operators to
develop integrity management programs to comprehensively evaluate their
pipelines, and take measures to protect pipeline segments located in "high
consequence areas." The final rule took effect on January 14, 2004 and
incorporates requirements of the Pipeline Safety Improvement Act enacted in
December 2002. Although Panhandle cannot predict the actual costs of compliance
with this rule, it does not expect the order to have a material incremental
effect on Panhandle's business, financial condition or results of operations
because such required activities were already being undertaken.

CONTROLLED GROUP PENSION LIABILITIES. Southern Union (including certain of its
divisions) sponsors a number of defined benefit pension plans arising from its
(including any of its present or former divisions) or its predecessor's
businesses when Southern Union acquired Panhandle. Under applicable pension and
tax laws, upon being acquired by Southern Union, Panhandle 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 Panhandle. As of December 31, 2004,
the aggregate

14

amount of the projected benefit obligations of these pension plans was
approximately $398,516,000 and the estimated fair value of all of the assets of
these plans was approximately $276,836,000.

CCE HOLDINGS ACQUISITION OF CROSSCOUNTRY ENERGY. On November 17, 2004, CCE
Holdings, LLC (CCE), a joint venture in which Southern Union owns a 50 percent
interest, acquired 100 percent of the equity interests of CrossCountry Energy,
LLC (CrossCountry) from Enron Corp. and certain of its subsidiaries for
approximately $2,450,000,000 in cash, including the assumption of certain
consolidated debt. On November 5, 2004, CCE entered into an Administrative
Services Agreement (the Management Agreement) with SU Pipeline Management LP
(Manager), a Delaware limited partnership and wholly-owned subsidiary of
Southern Union, and Panhandle. Under the terms of the Management Agreement,
Panhandle covenants, to the extent permitted by applicable law, to cause Manager
to perform the duties and obligations of Manager. Manager has assembled an
integrated pipeline management team, which includes employees of Panhandle and
CrossCountry. Pursuant to the Management Agreement, Manager is responsible for
the operations and administrative functions of CCE and its subsidiaries. CCE and
Manager will share certain operations of Manager and its affiliates, and CCE
will be obligated to bear its share of costs of the Manager and its affiliates,
as well as certain transition costs and, under certain conditions, pay annual
management fees to Manager. Transition costs are non-recurring costs of
establishing the shared services, including but not limited to severance costs,
professional fees, certain transaction costs, and the costs of relocating
offices and personnel, pursuant to the Management Agreement.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION. The Management's
Discussion and Analysis of Results of Operations and Financial Condition and
other sections of this Form 10-K 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.

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 of 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
Eastern Pipe Line'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-K, 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, abnormal
weather conditions in Panhandle's service territories; new legislation and
government regulations affecting or involving Panhandle; Panhandle's 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; Panhandle's 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
Panhandle's 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 its parent's 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-K 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.

15

Panhandle does 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 Panhandle's behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Panhandle has long-term debt which subjects Panhandle to the risk of loss
associated with movements in market interest rates.

At December 31, 2004, Panhandle had issued fixed-rate long-term debt of
$917,428,000 in principal amount (excluding net premiums on debt of $14,688,000)
and having a fair value of $956,673,000. These debt instruments are fixed-rate
and, therefore, do not expose Panhandle to the risk of earnings loss due to
changes in market interest rates. However, the fair value of these instruments
would increase by approximately $21,362,000 if interest rates were to decline by
ten percent from their levels at December 31, 2004. In general, such an increase
in fair value would impact earnings and cash flows only if Panhandle were to
reacquire all or a portion of these instruments in the open market prior to its
maturity. See Note XII -- Debt.

Panhandle's floating-rate obligations which relate to the Trunkline LNG facility
aggregated $258,433,000 at December 31, 2004. The floating rate notes, to the
extent not hedged, expose Panhandle to the risk of increased interest expense in
the event of increases in short-term interest rates. If the floating rates were
to increase by ten percent from December 31, 2004 levels, Panhandle's
consolidated interest expense would increase by approximately $81,000 each month
in which such increase were sustained. This amount has been determined by
considering the impact of the hypothetical interest rates on the variable rate
borrowings outstanding as of December 31, 2004.

Panhandle is party to interest rate swap agreements related to the Trunkline LNG
facility with an aggregate notional amount of $193,827,000 as of December 31,
2004 that fix the interest rate applicable to floating rate long-term debt and
which qualify for hedge accounting. For the twelve-month period ending December
31, 2004, the swap ineffectiveness was not significant. As of December 31, 2004,
floating rate London InterBank Offered Rate (LIBOR) based interest payments were
exchanged for weighted fixed rate interest payments of 5.88 percent, which does
not include the spread on the underlying variable debt rate of 1.63 percent. As
such, payments, in excess of the liability recorded, or receipts on interest
rate swap agreements are recognized as adjustments to interest expense. As of
December 31, 2004, December 31, 2003, and June 11, 2003 (the acquisition date),
the fair value liability position of the swaps was $11,053,000, $19,806,000 and
$26,850,000, respectively. Current market pricing models were used to estimate
fair values of interest rate swap agreements. See Note VI -- Accounting for
Derivatives and Hedging Activities.

In March 2004, Panhandle entered into interest rate swaps to hedge the risk
associated with the fair value of its $200 million 2.75 percent Senior Notes.
See Note XII -- Debt. These swaps are designated as fair value hedges and
qualify for the short cut method under SFAS No. 133. As of December 31, 2004 the
fair value position of the swaps was a liability of $3,936,000, recorded as a
reduction to long-term debt. Under the swap agreements, Panhandle will receive
fixed interest payments at a rate of 2.75 percent and will make floating
interest payments based on the six-month LIBOR. No ineffectiveness is assumed in
the hedging relationship between the debt instrument and the interest rate swap.
As of December 31, 2004, these swaps have an average interest rate of 2.52
percent.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required here is included in the report as set forth in the
Index to Consolidated Financial Statements on page F-1.

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

As first reported in Panhandle's Form 10-K for the year ended December 31, 2003,
in July 2003, Panhandle's board of managers dismissed Ernst & Young LLP as
Panhandle's certifying accountant and retained PricewaterhouseCoopers LLP for
2003, including for the 2003 and 2004 year end audits. Ernst & Young LLP's
report on the Panhandle financial statements for 2002 did not contain an adverse
opinion or a disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope, or accounting principles. For the year ended December
31, 2002 and the interim period from January 1, 2003 through June 11, 2003
(effective upon the closing of the Southern Union acquisition of Panhandle),
there were no disagreements or "reportable events" as described in Items
304(a)(1)(iv) and (v) of Regulation S-K between Panhandle and Ernst & Young.

16

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Panhandle performed an evaluation under the supervision and with the
participation of its management, including its Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), and with the participation of personnel from its
Legal, Internal Audit and Financial Reporting Departments, of the effectiveness
of the design and operation of Panhandle'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,
Panhandle's CEO and CFO concluded that its disclosure controls and procedures
were effective as of December 31, 2004 and have communicated that determination
to the Board of Managers and Southern Union's Audit Committee, which also serves
as our Audit Committee.

CHANGES IN INTERNAL CONTROLS

Management is not aware of any change in Panhandle's internal control over
financial reporting that occurred during the quarter ended December 31, 2004
that has materially affected or is reasonably likely to materially affect
Panhandle's internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Item 10, Directors and Executive Officers of the Registrant, has been omitted
from this report pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

Item 11, Executive Compensation, has been omitted from this report pursuant to
the reduced disclosure format permitted by General Instruction I to Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.

Item 12, Security Ownership of Certain Beneficial Owners & Management, has been
omitted from this report pursuant to the reduced disclosure format permitted by
General Instruction I to Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Item 13, Certain Relationships and Related Transactions, has been omitted from
this report pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.

17

PART III

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Below is a summary of fees billed to Panhandle by its principal audit firms for
the years ended December 31, 2004 and 2003. See ITEM 9. Changes in and
Disagreements With Accountants on Accounting and Financial Disclosure for
related information.

FEE CATEGORY 2004 2003
- ------------ ---------- -------
(IN THOUSANDS)

Audit Fees
PricewaterhouseCoopers LLP $ 703 $ 149
Ernst & Young LLP - 438

Audit-Related Fees
PricewaterhouseCoopers LLP 409 217
Ernst & Young LLP 166 317

All Other Fees - -

---------- -------
Total Fees $ 1,278 $ 1,121
========== =======

Audit Fees. Consists of fees billed for professional services rendered in
connection with the audit of the annual financial statements and review of the
quarterly financial statements.

Audit-Related Fees. Consists of fees billed for accounting research and
professional services rendered in connection with debt offerings and
registration statements, state and federal regulatory audits, and review of
internal controls.

All Other Fees. Consists of fees associated with consulting services.

The Audit Committee has considered whether the provision of the non-audit
services described above is compatible with maintaining the independence of
PricewaterhouseCoopers LLP. The Audit Committee has adopted a policy requiring
pre-approval of all auditing and non-audit services (including the fees and
terms thereof) to be provided to the Company by its independent auditor, other
than non-audit services not recognized to be non-audit services at the time of
the engagement that meet the de minimis exceptions described in Section
10A(i)(1)(B)(i) of the Securities Exchange Act of 1934, as amended; provided
that, they are approved by the Audit Committee prior to the completion of the
audit.

18

PART IV

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

(a)(1) and (2) Financial Statements and Financial Statement Schedules. See
Index to Consolidated Financial Statements set forth on page
F-1.

(a)(3) EXHIBITS.

EXHIBIT NO. DESCRIPTION
- ----------- -----------

3(a) Certificate of Formation of Panhandle Eastern Pipe
Line Company, LP.

3(b) Limited Partnership Agreement of Panhandle Eastern
Pipe Line Company, LP, dated as of June 29, 2004,
between Southern Union Company and Southern Union
Panhandle LLC.

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, and incorporated herein by reference).

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,
and incorporated herein by reference).

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, and incorporated herein by reference).

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 as Exhibit 4(d) to the Form 10-Q for the
quarter ended September 30, 2003, and incorporated
herein by reference).

4(e) 4th Supplemental Indenture dated as of March 12,
2004, between Panhandle, as Issuer and J.P. Morgan
Trust Company, National Association, as Trustee.

4(f) 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,
and incorporated herein by reference).

12 Computation of Consolidated Ratio of Earnings to
Fixed Charges (Filed as Exhibit 12 to the Form S-4/A
filed on May 18, 2004, and incorporated herein by
reference).

24 Power of Attorney

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

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

32.1 Section 1350 Certification

32.2 Section 1350 Certification

19

(B) REPORTS ON FORM 8-K.

Panhandle Eastern Pipe Line filed the following Current Report on
Form 8-K during the quarter ended December 31, 2004:

Date Filed Description of Filing
- ----------- ------------------------------------------

11/22/04 Filing under Item 2.03, Panhandle Eastern Pipe
Line provided a guarantee related to the bridge
financing entered into by Southern Union on
November 17,2004 of $407,000,000 to fund a
portion of Southern Union's equity investment
in CCE Holdings, LLC.

20

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Panhandle Eastern Pipe Line Company, LP has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 16th day of March 2005.

PANHANDLE EASTERN PIPE LINE COMPANY, LP

By: /s/ THOMAS F. KARAM
--------------------------------------
Thomas F. Karam
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of Panhandle
Eastern Pipe Line Company, LP and in the capacities and on the 16th day of
March, 2005.

Signature Title
--------- -----

(i) Principal executive officer:

/s/ THOMAS F. KARAM
--------------------------------
Thomas F. Karam Chief Executive Officer and Manager

(ii) Principal financial officer:

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

(iii) Principal accounting officer:

/s/ GARY W. LEFELAR
--------------------------------
Gary W. Lefelar Senior Vice President

(iv) A majority of the Board of Managers
including those named above:

/s/ GEORGE L. LINDEMANN
--------------------------------
George L. Lindemann Manager

/s/ JOHN E. BRENNAN
--------------------------------
John E. Brennan Manager

By: THOMAS F. KARAM
---------------
Thomas F. Karam
Attorney-in-fact

21

PANHANDLE EASTERN PIPE LINE COMPANY, LP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
---------

Financial Statements:

Consolidated statements of operations....................... F-2
Consolidated balance sheets................................. F-3-F4
Consolidated statements of cash flows....................... F-5
Consolidated statements of owners' equity and
comprehensive income (loss).............................. F-6
Notes to consolidated financial statements.................. F-7-F-33
Reports of independent registered public accounting firms... F-34-F-36

All schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements or related
notes.

F-1

PANHANDLE EASTERN PIPE LINE COMPANY, LP

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

POST-ACQUISITION PRE-ACQUISITION
------------------------- --------------------------
YEAR ENDED JUNE 12 - YEAR ENDED
DECEMBER 31, DECEMBER 31, JANUARY 1 - DECEMBER 31,
2004 2003 JUNE 11, 2003 2002
------------ ------------ ------------- ------------

OPERATING REVENUE
Transportation and storage of natural gas $ 423,011 $ 230,592 $ 196,408 $ 413,315
LNG terminalling revenue 56,537 33,389 26,750 57,879
Equity income (losses) from unconsolidated subsidiaries 216 136 411 (7,038)
Other revenue 9,616 4,974 10,701 19,517
--------- --------- ---------- ----------
Total operating revenue 489,380 269,091 234,270 483,673
--------- --------- ---------- ----------
OPERATING EXPENSES
Operation, maintenance and general 212,106 117,930 90,800 201,181
Depreciation and amortization 60,182 33,129 23,110 51,184
Taxes, other than on income 26,867 14,684 12,478 21,907
--------- --------- ---------- ----------
Total operating expenses 299,155 165,743 126,388 274,272
--------- --------- ---------- ----------

OPERATING INCOME 190,225 103,348 107,882 209,401

OTHER INCOME (EXPENSE)
Interest expense, net (48,429) (25,537) (35,416) (76,529)
Other, net 2,193 6,962 6,077 (13,436)
Minority interest - - - (3,527)
--------- --------- ---------- ----------
Total other income (expense) (46,236) (18,575) (29,339) (93,492)

EARNINGS BEFORE INCOME TAXES 143,989 84,773 78,543 115,909
Income taxes 56,056 33,321 30,532 46,401
--------- --------- ---------- ----------
Earnings before cumulative effect of change
in accounting principles 87,933 51,452 48,011 69,508
Cumulative effect of change in accounting principles,
net of tax:
Goodwill, SFAS 142 - - - (369,119)
Asset retirement obligations, SFAS 143 - - 2,003 -
--------- --------- ---------- ----------
Net earnings (loss) $ 87,933 $ 51,452 $ 50,014 $ (299,611)
========= ========= ========== ==========

See accompanying notes.

F-2

PANHANDLE EASTERN PIPE LINE COMPANY, LP

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------

ASSETS
PROPERTY, PLANT AND EQUIPMENT
Plant in service $ 1,947,524 $ 1,893,960
Construction work-in-progress 203,094 90,556
------------ ------------
2,150,618 1,984,516
Less accumulated depreciation and amortization 87,683 32,114
------------ ------------
Net property, plant and equipment 2,062,935 1,952,402
------------ ------------

INVESTMENT IN AFFILIATE 1,436 1,394
------------ ------------
CURRENT ASSETS
Cash and cash equivalents 26,054 16,810
Accounts receivable, less allowances of $1,289 and $1,464, respectively 48,085 56,315
Accounts receivable - related parties 7,287 816
Gas imbalances - receivable 36,122 26,974
System gas and operating supplies 98,250 60,937
Deferred income taxes, net 10,698 7,731
Note receivable - Southern Union 90,745 87,350
Other 11,646 8,271
------------ ------------
Total current assets 328,887 265,204
------------ ------------

Intangibles, net 8,496 30,698
Restricted cash 1,500 1,500
Debt issuance cost 4,471 4,699
Non-current system gas 30,471 23,938
Other 1,964 1,708
------------ ------------

TOTAL ASSETS $ 2,440,160 $ 2,281,543
============ ============

See accompanying notes.

F-3

PANHANDLE EASTERN PIPE LINE COMPANY, LP

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------

OWNERS' EQUITY
Partners' capital $ 802,406 $ -
Member's capital - 679,465
Accumulated other comprehensive income 1,231 1,372
Retained earnings - 51,452
Tax sharing note receivable - Southern Union (70,971) (85,471)
----------- -----------
Total owners' equity 732,666 646,818

Long-term debt 1,174,065 995,773
----------- -----------
Total capitalization 1,906,731 1,642,591
----------- -----------

CURRENT LIABILITIES
Current portion of long-term debt 12,548 209,671
Accounts payable 3,449 1,452
Accounts payable - overdrafts 20,103 6,607
Accounts payable - related parties 3,478 9,039
Gas imbalances - payable 102,567 66,049
Accrued taxes 10,750 9,979
Accrued interest 19,119 21,017
Other 85,239 65,230
----------- -----------
Total current liabilities 257,253 389,044
----------- -----------

Deferred income taxes, net 172,193 131,991
Post-retirement benefits 30,449 33,473
Other 73,534 84,444
Commitments and contingencies ----------- -----------

TOTAL OWNERS' EQUITY AND LIABILITIES $ 2,440,160 $ 2,281,543
=========== ===========

See accompanying notes.

F-4

PANHANDLE EASTERN PIPE LINE COMPANY, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

POST-ACQUISITION PRE-ACQUISITION
------------------------- -------------------------
YEAR ENDED JUNE 12 - JANUARY 1 - YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 11, DECEMBER 31,
2004 2003 2003 2002
------------ ------------ ----------- ------------

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings (loss) $ 87,933 $ 51,452 $ 50,014 $(299,611)
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 60,182 33,129 23,110 51,184
Gain on extinguishment of debt (231) (6,123) - (920)
Deferred income taxes, net 39,574 33,321 30,532 29,762
Debt premium and discount amortization, net (5,033) (8,272) (201) 1,047
Cumulative effect of change in accounting principle - - (2,003) 369,119
Centennial write-down - - - 26,281
Changes in operating assets and liabilities:
Accounts receivable 1,759 4,212 219 57,678
Inventory (31,693) (24,625) 2,520 22,171
Gas imbalances - receivable (9,148) 21,742 (30,952) 2,720
Other assets (8,293) 7,173 11,955 (31,773)
Payables (3,564) (3,620) 2,883 989
Accrued taxes 8,490 9,979 6,673 2,579
Interest accrued (1,898) 1,194 (4,768) (1,584)
Gas imbalances - payable 36,518 (2,455) 27,527 (18,200)
Other liabilities 8,714 (5,088) (6,915) (35,104)
--------- --------- --------- ---------
Net cash flows from operating activities 183,310 112,019 110,594 176,338
--------- --------- --------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Net increase in Note receivable - Southern Union (3,395) (87,350) - -
Net (increase) decrease in Note receivable - CMS Capital - - (62,570) 213,912
Capital and investment expenditures (173,047) (64,270) (29,339) (113,354)
Purchase of system gas,net - (3,939) (2,724) (4,739)
Sale of Centennial - - 40,000 -
Sale of Atchafalaya - 2,200 - -
Retirements and other (209) 237 (886) (10,395)
--------- --------- --------- ---------
Net cash flows used in investing activities (176,651) (153,122) (55,519) 85,424
--------- --------- --------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Increase (decrease) in bank overdrafts 13,496 (1,001) 219 (3,279)
Debt issuance 200,000 550,000 10,000 30,000
Debt retirements (209,671) (545,044) (45,852) (137,775)
Premium on debt issuance (190) - - -
Debt issuance costs (1,050) (4,434) - (2,853)
Debt retirement costs - (1,595) - -
Gain on interest rate swap - - - 2,562
Acquisition of LNG Holding's Minority Interest - - - (40,800)
Return of capital - - (40,000) (5,186)
Dividend - - - (27,204)
--------- --------- --------- ---------
Net cash flows from (used in) financing activities 2,585 (2,074) (75,633) (184,535)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 9,244 (43,177) (20,558) 77,227
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,810 59,987 80,545 3,318
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,054 $ 16,810 $ 59,987 $ 80,545
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest (net of interest rate swap and amounts capitalized) $ 68,250 $ 37,846 $ 38,187 $ 83,513
Income taxes (net of refunds) 66 - 83 (26,943)
OTHER NONCASH INVESTING AND FINANCING ACTIVITIES WERE:
Return of capital - Guardian equity investment $ - $ - $ (27,781) $ -
Property contributions received - - 15,149 -

See accompanying notes.

F-5

PANHANDLE EASTERN PIPE LINE COMPANY, LP

CONSOLIDATED STATEMENTS OF OWNERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)

Accumulated
Other Retained
Partners' Common Comprehensive Other Paid-in Members' Earnings
Capital Stock Income (Loss) Capital Capital (Deficit)
--------- ------- ------------- ------------- --------- ----------

Balance January 1, 2002 (Pre-acquisition) $ - $ 1,000 $ - $ 1,285,622 $ - $ (12,296)

Comprehensive income:
Net loss - - - - - (299,611)
Increase in pension liability, net of tax - - (25,770) - - -
Unrealized loss related to interest rate
swaps, net of tax - - (13,409) - - -
--------- ------- --------- ----------- --------- ----------
Comprehensive loss - - (39,179) - - (299,611)
--------- ------- --------- ----------- --------- ----------
Return of capital - CMS - - - (4,935) - -
Common stock dividends - - - - - (28,124)
Other 107 -
--------- ------- --------- ----------- --------- ----------
Balance December 31, 2002 (Pre-acquisition) $ - $ 1,000 $ (39,179) $ 1,280,794 $ - $ (340,031)

Comprehensive income:
Net earnings - - - - - 50,014
Unrealized loss related to interest rate
swaps, net of tax - - (3,180) - - -
--------- ------- --------- ----------- --------- ----------
Comprehensive income - - (3,180) - - 50,014
--------- ------- --------- ----------- --------- ----------
Return of capital - Centennial - - - (40,000) - -
Return of capital - Guardian equity
investment - - - (27,781) - -
Capital contribution from CMS Gas
Transmission - - - 15,149 - -
Other - - - 194 - -
--------- ------- --------- ----------- --------- ----------
Balance June 11, 2003 (Acquisition date) $ - $ 1,000 $ (42,359) $ 1,228,356 $ - $ (290,017)
--------- ------- --------- ----------- --------- ----------
Balance June 12, 2003 (Post-acquisition) $ - $ 1,000 $ (42,359) $ 1,228,356 $ - $ (290,017)
Acquisition adjustments to eliminate
original balances - (1,000) 42,359 (1,228,356) - 290,017
Pushdown of purchase price and related costs - - - - 679,465 -
Tax sharing receivable - Southern Union - - - - - -
--------- ------- --------- ----------- --------- ----------
Subtotal - - - - 679,465 -
Comprehensive income:
Net earnings - - - - - 51,452
Unrealized gain related to interest rate
swaps, net of tax - - 1,372 - -
--------- ------- --------- ----------- --------- ----------
Comprehensive income - - 1,372 - - 51,452
--------- ------- --------- ----------- --------- ----------
Balance December 31, 2003 (Post-acquisition) $ - $ - $ 1,372 $ - $ 679,465 $ 51,452

Adjustment to pushdown of purchase price
and related costs - - - - (16,444) -
Tax sharing receivable - Southern Union - - - - - -

Comprehensive income:
Net earnings - - - - - 47,201
Unrealized gain related to interest rate
swaps, net of tax - - 405 - -
--------- ------- --------- ----------- --------- ----------
Comprehensive income prior to change in
legal ownership structure - - 405 - - 47,201
--------- ------- --------- ----------- --------- ----------
Change in legal ownership structure (See
Note I) 761,674 - - - (663,021) (98,653)
Tax sharing receivable - Southern Union
(See Note V) - - - - - -

Comprehensive income:
Net earnings 40,732 - - - - -
Unrealized loss related to interest rate
swaps, net of tax - - (546) - -
--------- ------- --------- ----------- --------- ----------
Comprehensive income 40,732 - (546) - - -
--------- ------- --------- ----------- --------- ----------
Balance December 31, 2004 (Post-acquisition) $ 802,406 $ - $ 1,231 $ - $ - $ -
========= ======= ========= =========== ========= ==========

Tax Sharing
Note
Note Receivable Receivable-
CMS Capital Southern Union Total
--------------- -------------- -----------

Balance January 1, 2002 (Pre-acquisition) $ (150,000) $ - $ 1,124,326
Comprehensive income:
Net loss - - (299,611)
Increase in pension liability, net of tax - - (25,770)
Unrealized loss related to interest rate
swaps, net of tax - - (13,409)
---------- --------- -----------
Comprehensive loss - - (338,790)
---------- --------- -----------
Return of capital - CMS - - (4,935)
Common stock dividends - - (28,124)
Other 107
---------- --------- -----------
Balance December 31, 2002 (Pre-acquisition) $ (150,000) $ - $ 752,584
Comprehensive income:
Net earnings - - 50,014
Unrealized loss related to interest rate
swaps, net of tax - - (3,180)
---------- --------- -----------
Comprehensive income - - 46,834
---------- --------- -----------
Return of capital - Centennial - - (40,000)
Return of capital - Guardian equity
investment - - (27,781)
Capital contribution from CMS Gas
Transmission - - 15,149
Other - - 194
---------- --------- -----------
Balance June 11, 2003 (Acquisition date) $ (150,000) $ - $ 746,980
---------- --------- -----------
Balance June 12, 2003 (Post-acquisition) $ (150,000) $ - $ 746,980
Acquisition adjustments to eliminate
original balances 150,000 - (746,980)
Pushdown of purchase price and related costs - - 679,465
Tax sharing receivable - Southern Union - (85,471) (85,471)
---------- --------- -----------
Subtotal - (85,471) 593,994
Comprehensive income:
Net earnings - - 51,452
Unrealized gain related to interest rate
swaps, net of tax - - 1,372
---------- --------- -----------
Comprehensive income - - 52,824
---------- --------- -----------
Balance December 31, 2003 (Post-acquisition) $ - $ (85,471) $ 646,818
Adjustment to pushdown of purchase price
and related costs - - (16,444)
Tax sharing receivable - Southern Union - (5,467) (5,467)
Comprehensive income:
Net earnings - - 47,201
Unrealized gain related to interest rate
swaps, net of tax - - 405
---------- --------- -----------
Comprehensive income prior to change in
legal ownership structure - - 47,606
---------- --------- -----------
Change in legal ownership structure (See
Note I) - - -
Tax sharing receivable - Southern Union
(See Note V) - 19,967 19,967
Comprehensive income:
Net earnings - - 40,732
Unrealized loss related to interest rate
swaps, net of tax - - (546)
---------- --------- -----------
Comprehensive income - - 40,186
---------- --------- -----------
Balance December 31, 2004 (Post-acquisition) $ - $ (70,971) $ 732,666
========== ========= ===========

See accompanying notes.

F-6

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

I CORPORATE STRUCTURE

Panhandle Eastern Pipe Line Company, LP (Panhandle Eastern Pipe Line) became an
indirect wholly-owned subsidiary of Southern Union Company (Southern Union
Company and, together with its subsidiaries, Southern Union) upon Southern
Union's June 11, 2003 acquisition of Panhandle (Panhandle Acquisition) from CMS
Gas Transmission Company (CMS Gas Transmission), a subsidiary of CMS Energy
Corporation (CMS Energy and, together with CMS Gas Transmission, CMS). Panhandle
is primarily engaged in the interstate transportation and storage of natural gas
and also provides liquefied natural gas (LNG) terminalling and regasification
services. Panhandle is subject to the rules and regulations of the Federal
Energy Regulatory Commission (FERC). The Panhandle entities include Panhandle
Eastern Pipe Line, Trunkline Gas Company, LLC (Trunkline), a wholly-owned
subsidiary of Panhandle Eastern Pipe Line, Sea Robin Pipeline Company, LLC (Sea
Robin), an indirect wholly-owned subsidiary of Panhandle Eastern Pipe Line,
Trunkline LNG Company, LLC (Trunkline LNG), which is a wholly-owned subsidiary
of Trunkline LNG Holdings, LLC (LNG Holdings), an indirect wholly-owned
subsidiary of Panhandle Eastern Pipe Line and Pan Gas Storage, LLC (d.b.a.
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 (bcf) per day and 72 bcf of owned
underground storage capacity. Trunkline LNG, located on Louisiana's Gulf Coast,
operates one of the largest LNG import terminals in North America, based on
current send out capacity, and has 6.3 bcf of above ground LNG storage capacity.

On June 11, 2003, Southern Union acquired Panhandle from CMS Gas Transmission
for approximately $581,729,000 in cash and 3,000,000 shares of Southern Union
common stock (before adjustment for subsequent stock dividends), valued at
approximately $48,900,000 based on market prices at closing of the Panhandle
Acquisition, and in connection therewith incurred transaction costs of
approximately $31,922,000. At the time of the acquisition, Panhandle had
approximately $1,157,228,000 of debt outstanding that it retained. Southern
Union funded the cash portion of the acquisition with approximately $437,000,000
in cash proceeds it received for the January 1, 2003 sale of its Texas
operations, approximately $121,250,000 in cash 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 in a manner intended to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended.

Panhandle Eastern Pipe Line and five of its subsidiaries, as well as Southern
Union Panhandle, LLC, converted from Delaware corporations to Delaware limited
liability companies in June 2003. On June 29, 2004, Panhandle Eastern Pipe Line
was converted from a Delaware limited liability company to a limited
partnership. Pursuant to the conversion, all rights and liabilities of Panhandle
Eastern Pipe Line Company, LLC vested in Panhandle Eastern Pipe Line Company,
LP. As a result of the conversion, retained earnings and member's capital were
reclassified as partners' capital. There was no effect on Panhandle's results of
operations (including income taxes), cash flows or financial position as a
result of this conversion. Southern Union Panhandle, LLC serves as the general
partner of Panhandle Eastern Pipe Line and owns a one percent general partner
interest in Panhandle Eastern Pipe Line. Southern Union Company owns a
ninety-nine percent limited partner interest in Panhandle Eastern Pipe Line.

Under the terms of the Panhandle sale agreement, CMS retained ownership of and
all obligations associated with Centennial Pipeline, LLC (Centennial) and
Guardian Pipeline, LLC (Guardian) pipeline projects, as well as certain of
Panhandle's net deferred tax assets of $28,124,000, all tax liabilities of
$17,405,000, net pension liabilities recorded of $42,965,000, certain other net
post-retirement liabilities recorded of $16,351,000 and other net liabilities of
$2,214,000. CMS also retained financial responsibility for all existing stock
options. Panhandle disposed of its interest in Centennial and Guardian and
certain cash collateral related to Guardian was transferred to CMS. Such
disposition to CMS via sale to its partners was recorded at Panhandle's net book
value with no gain or loss recognized. See Note V -- Related Party Transactions.
The Note receivable from CMS Capital Corp. (CMS Capital), a subsidiary of CMS,
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
purchase accounting and subsequently extinguished. See Note V -- Related Party
Transactions. On March 1, 2003, certain assets previously held by CMS with a net
book value of $15,149,000 were contributed to Panhandle by CMS and were included
in the Southern Union purchase.

F-7

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Panhandle 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 (pushdown) the purchase
price paid by Southern Union to Panhandle's net assets as of the acquisition
date. The Panhandle assets acquired and liabilities assumed have been recorded
based on their estimated fair value as of the acquisition date based on the
results of outside appraisals. 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 final purchase accounting-based changes in
owners' equity associated with the acquisition as of June 11, 2003, including
details of the fair value adjustments to the pre-acquisition carrying amounts of
the net assets acquired. All dollar amounts in the tables herein are stated in
thousands.

Owners' equity, pre-acquisition $ 746,980
Fair value adjustments to pre-acquisition net assets:
Current assets, excluding system gas 1,177
System gas 14,055
Property, plant and equipment 230,065
Intangibles 9,503
Goodwill (112,582)
Deferred debt costs (14,469)
Other assets (352)
Current liabilities (863)
Long-term debt (63,764)
Deferred credits and other liabilities (12,614)
-------
Net fair value adjustments 50,156
Net liabilities retained by CMS 50,811
Elimination of CMS Capital Note receivable (184,926)
---------
Subtotal 663,021
Tax sharing receivable (90,938)
---------
Owners' equity, post-acquisition $ 572,083
=========

II SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of all majority-owned subsidiaries, after eliminating significant
intercompany transactions and balances. Investments in businesses not controlled
by Panhandle Eastern Pipe Line, but over which it has significant influence, are
accounted for using the equity method. Investments that are variable interest
entities are consolidated if Panhandle is allocated a majority of the entity's
gains and/or losses, including fees paid by the entity. All significant inter
company accounts and transactions are eliminated in consolidation.

REVISED CLASSIFICATION OF STATEMENT OF CASH FLOWS. During 2004, Panhandle
revised its classification in its Consolidated Statements of Cash Flows of the
change in current notes receivable from affiliates to a component of investing
activities from a component of financing activities. This revision in
classification had the effect of increasing the previously reported amount of
cash flows from financing activities by $62,570,000 and $87,350,000 for the
period from January 1 through June 11, 2003 and the period from June 12, 2003
through December 31, 2003, respectively, with corresponding decreases in the
amount of cash flows from investing activities in the respective periods. This
revision in classification also had the effect of decreasing the previously
reported amount of cash flows from financing activities by $213,912,000 for the
year ended December 31, 2002, with a corresponding increase in cash flows from
investing activities.

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 estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

F-8

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CASH AND CASH EQUIVALENTS. All liquid investments with maturities of three
months or less at the date of purchase are considered cash equivalents. The
carrying amount of cash and cash equivalents approximates fair value because of
the short maturity of these investments.

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.

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. Whenever fuel is due from customers from prior
underrecovery based on contractual and specific tariff provisions, Trunkline and
Trunkline LNG record an asset. Panhandle's other companies that are subject to
fuel tracker provisions record an expense when fuel is underrecovered. The
pipelines' fuel reimbursement is in-kind and non-discountable.

PROPERTY, PLANT AND EQUIPMENT. On June 11, 2003, Panhandle was acquired by
Southern Union. The acquisition was accounted for using the purchase method of
accounting in accordance with generally accepted accounting principles.
Panhandle's property, plant and equipment (PP&E) was adjusted to estimated fair
market value on June 11, 2003 and depreciated based on the revised estimated
remaining useful lives. Panhandle's accumulated depreciation and amortization
provision balance at June 11, 2003 was eliminated pursuant to the purchase
method of accounting. See Note I -- Corporate Structure.

Ongoing additions of PP&E are stated at cost. Panhandle capitalizes all
construction-related direct labor and material costs, as well as indirect
construction costs. The cost of renewals and betterments that extend the useful
life of PP&E is also capitalized. The cost of repairs and replacements of minor
items of PP&E is charged to expense as incurred. Depreciation is generally
computed using the straight-line method. The composite weighted-average
depreciation rates were 3.1, 3.0 and 3.1 percent for 2004, 2003 and 2002,
respectively.

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

Computer software, which is a component of PP&E, is stated at cost and is
generally amortized on a straight-line basis over its useful life on a
product-by-product basis. The amortization period for computer software is
between 5 and 10 years.

ASSET IMPAIRMENT. Panhandle applies the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," to account for impairments on long-lived assets.
Impairment losses are recognized for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows are not
sufficient to recover the assets' carrying value. The amount of impairment is
measured by comparing the fair value of the asset to its carrying amount.

RELATED PARTY TRANSACTIONS. Prior to its acquisition by Southern Union,
Panhandle had a number of significant transactions with its former parent and
its subsidiaries. These transactions included revenues for the transportation of
natural gas for Consumers Energy Company (Consumers), and other CMS affiliated
entities, which were based on regulated prices, market prices and/or competitive
bidding. Related party expenses included payments for services provided by
affiliates and payment of overhead costs and management and royalty fees to CMS,
as well as allocated employee benefit plan costs. Subsequent to June 11, 2003,
related party expenses primarily include payments for services provided by
Southern Union. Other income was primarily

F-9

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

related to interest income from the Note receivable - CMS Capital and Note
receivable - Southern Union. See Note V -- Related Party Transactions.

A portion of Panhandle's revenues for the transportation of natural gas includes
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 agreements between CMS and
Southern Union or closing of the Panhandle Acquisition and were based on
regulated prices, market prices and competitive bidding.

For periods commencing with the Panhandle Acquisition, Panhandle and certain of
its subsidiaries are not treated as separate taxpayers for federal and certain
state income tax purposes. Instead, Panhandle's income is taxable to Southern
Union. Panhandle has entered into a tax sharing agreement with Southern Union
pursuant to which Panhandle will be required to make payments to Southern Union
in order to reimburse Southern Union for federal and state taxes that it pays on
Panhandle's income, or to receive payments from Southern Union to the extent
that tax losses generated by Panhandle are utilized by Southern Union. In
addition, Panhandle's subsidiaries that are corporations will be included in
consolidated and combined federal and state income tax returns filed by Southern
Union. Panhandle's liability generally will be equal to the liability which
Panhandle and its subsidiaries would have incurred based upon Panhandle's
taxable income if Panhandle was a taxpayer filing separately from Southern
Union, except that Panhandle will receive credit under an intercompany note for
any increased liability resulting from its tax basis in its assets having been
reduced as a result of the like-kind exchange under Section 1031 of the IRS
Code. In addition, Southern Union has agreed to pay Panhandle any
indemnification payments that it receives from CMS with respect to its tax
liability for periods prior to the Panhandle Acquisition. The tax sharing
agreement can be amended from time to time. Depending upon the terms of the tax
sharing agreement, Panhandle's liability to Southern Union may be greater or
less than the tax liability that Panhandle would have incurred if it was a
corporation unaffiliated with Southern Union.

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. Remediation obligations are
not discounted.

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 III -- Regulatory Matters.

SIGNIFICANT CUSTOMERS AND CREDIT RISK. Panhandle manages trade credit risks to
minimize exposure to uncollectible trade receivables. Prospective and existing
customers are reviewed for creditworthiness based upon pre-established
standards. Customers that do not meet minimum standards are required to provide
additional credit support. Panhandle utilizes the allowance method for recording
its allowance for uncollectible accounts which is primarily based on the
application of historical bad debt percentages applied against Panhandle's aged
accounts receivable. Increases in the allowance are recorded as a component of
operation expenses. Reductions in the allowance are recorded when receivables
are written off. Panhandle has recorded an allowance for doubtful accounts
totaling $1,289,000 and $1,464,000 at December 31, 2004 and 2003, respectively,
relating to its trade receivables.

F-10

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows the relative contribution to Panhandle's total
operating revenue of each customer that comprised at least ten percent of our
operating revenues for the years ended December 31, 2004, 2003 and 2002.

PERCENT OF OPERATING REVENUE FOR
TWELVE MONTHS ENDED
DECEMBER 31,

CUSTOMER 2004 2003 2002
- ----------------------------- -------- --------- ---------

ProLiance 17% 16% 16%
BG LNG Services 15 15 13
Ameren Corp 12 8 7
CMS Energy and affiliates (1) 10 12 12
Other top 10 customers 14 18 19
Remaining customers 32 31 33
----- ------ ------
Total percentage 100% 100% 100%
===== ====== ======

(1) Primarily Consumers Energy

INTEREST COST CAPITALIZED. Panhandle capitalizes a carrying cost on funds
invested in its construction of long-lived assets that includes a return on the
investment financed by debt, which is recorded as capitalized interest. The
capitalized interest is calculated based on Panhandle's average cost of debt.
Gross interest expense for the twelve months ended December 31, 2004, 2003 and
2002 was $53,241,000, $63,564,000 and $79,537,000, respectively, of which
$4,812,000, $2,611,000 and $3,008,000 was capitalized for projects under
construction during 2004, 2003 and 2002, respectively. The capitalized interest
amounts are included as a reduction of interest expense. Capitalized carrying
cost for debt is reflected as an increase in the cost of the asset on the
balance sheet.

ACCOUNTING FOR RETIREMENT BENEFITS. Panhandle follows SFAS No. 87, "Employers'
Accounting for Pensions", to account for pension costs. To account for other
postretirement benefit costs, Panhandle follows SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", and SFAS No. 132R,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," as
amended. 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 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, its 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 4 percent of the
employee's eligible pay. In addition, Panhandle makes additional contributions
to the 401(k) plan ranging from 4 to 6 percent of the employee's eligible pay,
depending on the employee's age and years of service under a Retirement Power
Account benefit. Panhandle has generally retained the same active employee
health and life benefits that were offered prior to the Panhandle Acquisition.

In connection with the Panhandle Acquisition, CMS, or its affiliates, also
retained liabilities with respect to the postretirement 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

F-11

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of the assets relating to OPEB, which were $1,986,000 less than the liabilities
retained. Following the Panhandle Acquisition, Panhandle continues to provide
certain postretirement health and life benefits to eligible, active employees
(Panhandle Plan). The accumulated postretirement benefit obligation with respect
to such postretirement health and life benefits as of June 11, 2003 was
estimated to be approximately $42,752,000 and as of December 31, 2003 and
December 31, 2004 the balance was approximately $41,285,000 and $38,260,000,
respectively. Panhandle agreed to provide, or supplement, postretirement 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. See Note XV -- Retirement Benefits.

ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES. Panhandle follows SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended,
to accrue for derivative and hedging activities. See Note VI -- Accounting for
Derivatives and Hedging Activities.

ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. Panhandle follows SFAS No. 143,
"Accounting for Asset Retirement Obligations (ARO)", to account for its asset
retirement obligations. 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 associated with offshore lateral lines of
$5,026,000, recognition of an asset retirement obligation of $6,024,000, and a
cumulative effect of adoption that increased net income and owners' equity by
$2,003,000, net of tax.

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, properties such as onshore transmission
assets have an indeterminate life, retirement cash flows cannot be determined
and there is a low probability in determining 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.

Panhandle's ARO asset was $3,711,000 and $5,026,000 at December 31, 2004 and
December 31, 2003, respectively. Panhandle's ARO liability had an aggregate
carrying amount of approximately $5,657,000, $7,479,000 and $6,024,000 as of
December 31, 2004, December 31, 2003 and January 1, 2003, respectively. During
the year ended December 31, 2004, the change in the carrying amount of the ARO
liability was attributable to $543,000 of accretion expense offset by $2,365,000
of liabilities settled and cash flow revisions. During the periods January 1
through June 11, 2003 and June 12 through December 31, 2003, Panhandle incurred
accretion expense of $282,000 and $364,000, respectively, and a liability of
$809,000 during 2003.

During the second quarter of 2003, Panhandle reclassified $27,286,000 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.

ACCOUNTING FOR GAINS AND LOSSES ON DEBT EXTINGUISHMENT. Panhandle follows 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) to account for gains and losses on debt
extinguishment. SFAS No. 145 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 on or after May 15, 2002.
Panhandle has adopted SFAS No. 145 and the implementation resulted in a
reclassification of a $920,000 gain ($565,000, net of tax) related to debt
retirements previously reflected as Extraordinary Item to Other, net for the
twelve months ended December 31, 2002. During 2003, Panhandle recorded a pre-tax
gain on the extinguishment of debt of approximately $6,123,000 ($3,674,000, net
of tax) which is classified as Other, net. During 2004, Panhandle recorded an
additional pre-tax gain on the extinguishment of debt of approximately $231,000
($139,000, net of tax), which is classified as Other, net. See Note XII -- Debt.

F-12

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACCOUNTING FOR TAXES. For federal and certain state income tax purposes, after
converting to limited liability companies, Panhandle's subsidiaries are not
treated as separate taxpayers. Instead, their income is directly taxable to
Southern Union. Since its conversion to a limited partnership, Panhandle has
been treated as a disregarded entity for federal income tax purposes.
Panhandle's income is directly taxable to Southern Union. Pursuant to a tax
sharing agreement with Southern Union, Panhandle will pay its share of taxes
based on its taxable income, which will generally equal the liability which
Panhandle would have incurred as a separate taxpayer. Panhandle will receive
credit under an intercompany note from Southern Union for differences in tax
depreciation resulting from the like-kind exchange over the taxable life of the
related assets. See Note I -- Corporate Structure and Note II -- Summary of
Significant Accounting Policies and Other Matters - Related Party Transactions.

Deferred tax assets and liabilities are recorded based on the difference between
the financial statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets, such as net operating loss carryforwards, may be
reduced by a valuation allowance if, based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.

STOCK BASED COMPENSATION. Following its acquisition by Southern Union on June
11, 2003 and in accordance with Southern Union's policy, Panhandle reports
stock option grants using the intrinsic-value method in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
authoritative interpretations. Under the intrinsic-value method, because the
exercise price of the Southern Union employee stock options is greater than or
equal to the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

The following table illustrates the effect on net earnings and net earnings
available for equity holders if Panhandle had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure," to stock-based employee compensation:

YEAR ENDED
DECEMBER 31,
2004
------------

Net earnings, as reported $ 87,933
Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related taxes 207
------------
Pro forma net earnings $ 87,726
============

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in the year ended December 31, 2004: dividend yield of nil; volatility of
36.75 percent; risk-free interest rate of 2.95 percent; and expected life
outstanding of six years. The weighted average fair value of options granted
with fair market value strike prices at their grant date during the year ended
December 31, 2004 was $7.35. There were no options granted with strike prices
above fair market value at the grant date during the year ended December 31,
2004. No options were granted during the year ended December 31, 2003.

F-13

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NEW ACCOUNTING STANDARDS

FASB INTERPRETATION NO. 46R, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" (FIN
NO. 46R): Issued by the Financial Accounting Standards Board (FASB) in December
2003, the interpretation identifies a variable interest entity as an entity
whose equity owners do not have sufficient equity at risk and do not have
substantive voting rights. The interpretation is effective for special-purpose
entities for periods ending after December 15, 2003 and for all other types of
variable interest entities for periods ending after March 15, 2004. This
standard requires a company to consolidate a variable interest entity if it is
allocated a majority of the entity's losses and/or returns, including fees paid
by the entity. Panhandle has not identified any material variable interest
entities or interests in variable interest entities for which the provisions of
FIN No. 46R would require a change in Panhandle's current accounting for such
interests.

EITF 01-8, "DETERMINING WHETHER AN ARRANGEMENT CONTAINS A LEASE" (EITF 01-8): In
May 2003, the Emerging Issues Task Force (EITF) of the FASB reached a consensus
on EITF 01-8 that outlines certain criteria for determining when a contract or
portion thereof should be accounted for as a lease within the scope of SFAS No.
13, "Accounting for Leases". Because of certain contractual changes entered into
during January 2004 between Trunkline LNG and BG LNG Services, Inc., a
subsidiary of BG Group of the United Kingdom (BG LNG Services), regarding LNG
services at the Lake Charles facility, the BG LNG Services contract was required
to be reassessed under the provisions of EITF 01-8 and was determined to contain
an operating lease. The impact of this accounting treatment did not have an
impact on Panhandle's financial condition or results of operations.

FSP NO. FAS 106-2, "ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE
MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003" (THE
MEDICARE PRESCRIPTION DRUG ACT): In accordance with FASB Staff Position (FSP)
No. FAS 106-2, the benefit obligation and net periodic post-retirement cost in
Panhandle's consolidated financial statements and accompanying notes do not
reflect the effects of the Medicare Prescription Drug Act on Panhandle's
post-retirement healthcare plan because Panhandle is unable to conclude whether
benefits provided by the plan are actuarially equivalent to Medicare Part D
under the Medicare Prescription Drug Act. The method of determining whether a
sponsor's plan will qualify for actuarial equivalency was published January 21,
2005 by the Centers for Medicare & Medicaid Services. Once the determination of
actuarial equivalence for current and future years is complete, if eligible,
Panhandle will account for the subsidy as an actuarial gain, pursuant to the
guidelines of this standard.

FASB STATEMENT NO.123R, "SHARE-BASED PAYMENT (REVISED 2004)": Issued by the FASB
in December 2004, the statement revises FASB Statement No. 123, "Accounting for
Stock-Based Compensation," supersedes the Accounting Principal Board Opinion No.
25, "Accounting for Stock Issued to Employees" and amends the FASB Statement No.
95, "Statement of Cash Flows." The statement will be effective for Southern
Union, Panhandle's parent company, in the first interim reporting period
beginning after June 15, 2005 and will require Southern Union to measure all
employee stock-based compensation awards using a fair value method and record
such expense in its consolidated financial statements. Panhandle will be charged
for its proportionate share of the expense recorded by Southern Union. In
addition, the adoption of the statement will require additional accounting and
disclosure related to the income tax and cash flow effects resulting from
share-based payment arrangements. Panhandle is currently evaluating the impact
of this statement on its consolidated financial statements or results of
operations.

FSP NO. 109-1, "APPLICATION OF FASB STATEMENT NO. 109, `ACCOUNTING FOR INCOME
TAXES,' TO THE TAX DEDUCTION ON QUALIFIED PRODUCTION ACTIVITIES PROVIDED BY THE
AMERICAN JOBS CREATION ACT OF 2004": On October 22, 2004, the American Jobs
Creation Act of 2004 (the Act) was signed. The Act raises a number of issues
with respect to accounting for income taxes. On December 21, 2004, the FASB
issued a Staff Position regarding the accounting implications of the Act related
to the deduction for qualified domestic production activities (FSP FAS 109-1)
which is effective for periods subsequent to December 31, 2004. The guidance in
the FSP otherwise applies to financial statements for periods ending after the
date the Act was enacted. In FSP FAS 109-1, "Application of FASB Statement No.
109, `Accounting for Income Taxes,' to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004," the FASB decided
that the deduction for qualified domestic production activities should be
accounted for as a special deduction under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," and rejected an alternative
view to treat it as a rate reduction. Accordingly, any benefit from the
deduction should be reported in the period in which the deduction is claimed on
the tax return. In most cases, a company's existing deferred tax balances will
not be impacted at the date of enactment. For some companies, the deduction
could have an impact on their effective tax rate and, therefore, should be
considered when

F-14

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

determining the estimated annual rate used for interim financial reporting.
Panhandle is currently evaluating the impact, if any, of this FSP on its
consolidated financial statements or results of operations.

FERC PROPOSED ACCOUNTING RELEASE: In November 2004, the FERC issued an
industry-wide Proposed Accounting Release that, if enacted as written, would
require pipeline companies to expense rather than capitalize certain costs
related to mandated pipeline integrity programs. The accounting release is
proposed to be effective January 2005 following a period of public comment on
the release. Panhandle is currently reviewing the release and has not determined
what impact this release will have on its consolidated financial statements or
results of operations.

III REGULATORY MATTERS

In conjunction with a FERC Order issued in September 1997, certain natural gas
producers were required to refund to interstate natural gas pipelines, including
Panhandle Eastern Pipe Line, monies previously paid to producers as
reimbursement of the producers Kansas Ad Valorem tax obligations. The FERC order
required the affected pipelines to refund these amounts to their customers. In
June 2001, Panhandle Eastern Pipe Line filed a proposed settlement of these
proceedings which all the customers and most of the producers supported. The
settlement provided for the producers to refund and the customers to accept a
reduction from the amounts originally billed to the producers. In September
2001, the FERC approved the settlement without modification and the settlement
became effective on October 15, 2001. Settlements were reached with all of the
non-settling producers in November 2003, except for Pioneer Natural Resources,
Inc. (Pioneer) and Burlington Resources Oil & Gas Company, LP (Burlington). On
January 29, 2004 and February 13, 2004, the Commission approved settlements with
these remaining non-settling producers. A FERC hearing to resolve the
outstanding issues with Pioneer was conducted on October 16, 2003. FERC orders
which established Pioneer's refund amount were issued on June 2, 2004 and
October 12, 2004. As of December 31, 2004, all tax collections due from
producers had been received. One producer, Burlington, is contesting the
applicability of the FERC refund requirement due to a prior gas purchase
contract settlement with Panhandle Eastern Pipe Line. On January 21, 2005, the
United States Court of Appeals for the District of Columbia Circuit remanded
this case back to the FERC for further explanation as to why Burlington should
be required to make a refund to Panhandle Eastern Pipe Line. Management believes
that this matter will not have a material adverse effect on Panhandle's
consolidated results of operations or financial position. At December 31, 2003,
accounts receivable included $3,017,000 for tax collections due from natural gas
producers. At December 31, 2004 and December 31, 2003, other current liabilities
included $206,000 and $8,556,000, respectively, for tax collections due to
customers.

In December 2002, FERC approved a Trunkline LNG certificate application to
expand the Lake Charles facility to approximately 1.2 bcf per day of sustainable
send out capacity versus the current sustainable send out capacity of .63 bcf
per day and increase terminal storage capacity to 9 bcf from the current 6.3
bcf. BG LNG Services has contract rights for the .57 bcf per day of additional
capacity. Construction on the Trunkline LNG expansion project (Phase I)
commenced in September 2003 and is expected to be completed at an estimated cost
of $137 million, plus capitalized interest, by the end of 2005. On September 17,
2004, as modified on September 23, 2004, FERC approved Trunkline LNG's further
incremental expansion project (Phase II). Phase II is estimated to cost
approximately $77 million, plus capitalized interest, and would increase the LNG
terminal sustainable send out capacity to 1.8 bcf per day. Phase II has an
expected in-service date of mid-2006. BG LNG Services has contracted for all the
proposed additional capacity, subject to Trunkline LNG achieving certain
construction milestones at this facility. Approximately $127 million and $43
million of costs are included in the line item Construction work-in-progress for
the expansion projects through December 31, 2004 and December 31, 2003,
respectively.

In February 2004, Trunkline filed an application with the FERC to request
approval of a 30-inch diameter, 23-mile natural gas pipeline loop from the LNG
terminal. Trunkline's filing was approved on September 17, 2004, as modified on
September 23, 2004. The pipeline creates additional transport capacity in
association with the Trunkline LNG expansion and also includes new and expanded
delivery points with major interstate pipelines. On November 5, 2004, Trunkline
filed a modified application with the FERC to change the size of the pipeline
from 30-inch diameter to 36-inch diameter to better position Trunkline to
provide transportation service for expected future LNG volumes and increase
operational flexibility. The modification was approved by FERC on February 11,
2005. The Trunkline natural gas pipeline loop project associated with the LNG
terminal is estimated to cost $50 million, plus capitalized interest.
Approximately $21 million of costs are included in the line item Construction
work-in-progress for this project through December 31, 2004.

F-15

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Panhandle Eastern Pipe Line previously sought refunds from the State of Kansas
concerning certain corporate income tax issues for the years 1981 through 1984.
On January 25, 2002, the Kansas Supreme Court entered an order affirming a
previous Board of Tax Court finding that Panhandle Eastern Pipe Line was
entitled to refunds, which, with interest, total approximately $26,000,000.
Pursuant to the provisions of the purchase agreement between CMS and a
subsidiary of Duke Energy (Duke) associated with the March 1999 CMS acquisition
of Panhandle, Duke retained the benefits of any tax refunds or liabilities for
periods prior to the date of the sale of Panhandle to CMS, including these
Kansas refunds.

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

IV 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 is 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 $601,108,000 pre-tax write-down ($369,119,000 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.
Such adjustment resulted in a net loss of $299,611,000 for the year ended
December 31, 2002. If there had been no cumulative effect of change in
accounting principle related to the goodwill impairment, Panhandle's net income
would have been $69,508,000. No goodwill amortization was reported for the
periods subsequent to January 1, 2002.

On June 11, 2003, Southern Union completed its acquisition of Panhandle from
CMS. Based on the results of an outside appraisal and the purchase price
allocations, the acquisition resulted in no recognition of goodwill.

V RELATED PARTY TRANSACTIONS

Panhandle had a number of significant transactions with former related parties
during the pre-acquisition period. Revenue transactions, primarily for the
transportation of natural gas for Consumers Energy Company and other CMS
affiliates which were related parties until June 12, 2003, were 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 Eastern Pipe Line
has transportation revenues with Missouri Gas Energy, a Southern Union division,
which account for less than one percent of annual consolidated revenues. These
deliveries are at contracted rates that pre-date the Panhandle Acquisition.

F-16

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

POST-ACQUISITION PRE-ACQUISITION
-------------------------- --------------------------
YEAR ENDED JUNE 12 - JANUARY 1- YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 11, DECEMBER 31,
RELATED PARTY TRANSACTIONS 2004 2003 2003 2002
- -------------------------- ----------- ------------ ---------- -------------

Transportation and storage
of natural gas $ 3,902 $ 2,251 $ 28,094 $ 56,516
LNG terminalling revenue - - - 2,238
Other operating revenues 216 136 411 (4,796)
Operation and maintenance:
Management & royalty fees 12,215 6,111 - 16,630
Other expenses (1) 24,607 9,900 9,727 23,010
Interest income, net 1,563 271 6,161 8,743

(1) Includes allocated benefit plan costs

Prior to June 12, 2003, related party expenses included 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. 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 management and royalty fees implemented by
Southern Union.

Other operating revenue for the twelve month period ended December 31, 2002
includes equity losses related to Centennial of $7,924,000. On February 10,
2003, Panhandle sold its one-third interest in Centennial for $40,000,000 to
Centennial's two other unaffiliated partners. There was no income or loss
related to Centennial in the first quarter of 2003. In March 2003, $40,000,000
of cash from the sale of Centennial was distributed to CMS as a return of
capital.

Net cash generated by Panhandle in excess of operating, investing or financing
needs was previously loaned to CMS Capital. 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.

Included in Interest income, net, is interest income of $6,204,000 and
$8,843,000 for the periods ended June 11, 2003 and December 31, 2002,
respectively, for interest on the Note receivable - CMS Capital. The Note
receivable - CMS Capital of $184,926,000 as of the acquisition date has since
been eliminated following the acquisition of Panhandle by Southern Union. See
Note I -- Corporate Structure. The $150,000,000 portion of the note classified
as a reduction to equity as of the acquisition date was also eliminated.

Pursuant to a demand note with Southern Union under a cash management program,
Panhandle has loaned excess cash, net of repayments, totaling $90,745,000 to
Southern Union since the Panhandle Acquisition; net loans of $3,395,000 were
recorded during the twelve month period ended December 31, 2004. Panhandle is
credited with interest on the note at a one month LIBOR rate. Included in Other,
net in the accompanying Consolidated Statements of Operations is interest income
of $1,563,000 for the twelve month period ended December 31, 2004 and $271,000
for the period June 12-December 31, 2003 related to interest on the Note
receivable - Southern Union. Panhandle expects to draw down on the note over the
next twelve months to fund capital expenditures in excess of operating cash
flows and has thus reflected the note receivable from Southern Union as a
current asset.

F-17

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

DECEMBER 31, DECEMBER 31,
RELATED PARTY TRANSACTIONS 2004 2003
- -------------------------------------------------------- ------------ ------------

Note receivable - Southern Union $ 90,745 $ 87,350
Accounts receivable 7,287 816
Accounts payable (3,478) (9,039)
Owners' equity - Tax sharing note receivable - Southern
Union 70,971 85,471
Deferred tax - receivable - 8,684

The Panhandle Acquisition by Southern Union was treated as an asset acquisition
for tax purposes pursuant to a Section 338(h)(10) election of the Internal
Revenue Code of 1986, as amended, 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 Panhandle assets acquired and liabilities
assumed have been recorded based on their estimated fair value as of the
acquisition date based on the results of outside appraisals. Southern Union
structured the Panhandle Acquisition in a manner intended to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended. For tax purposes, the Panhandle assets that were part of
the exchange were recorded at the tax basis of the Southern Union assets for
which they were exchanged. The resulting transaction generated an estimated
deferred tax liability originally estimated at $85 million, with a final
calculated amount of approximately $91 million at the acquisition date and a
corresponding receivable from Southern Union reflected as a reduction to owners'
equity on Panhandle's Consolidated Balance Sheet. Repayment of the receivable
from Southern Union is limited to actual tax liabilities otherwise payable by
Panhandle pursuant to the tax sharing agreement with Southern Union. In December
2004, Panhandle recorded a $7,720,000 income tax liability settlement against
the Tax sharing note receivable. In the fourth quarter of 2004, Panhandle
recorded a $12,247,000 reduction in its deferred tax liability and the
corresponding Tax sharing note receivable from Southern Union due to revised
calculations in the amount of Panhandle's tax basis utilized by Southern Union
in the like-kind exchange associated with the Panhandle Acquisition.

On November 17, 2004, CCE Holdings, LLC (CCE), a joint venture in which Southern
Union owns a 50 percent interest, acquired 100 percent of the equity interests
of CrossCountry Energy, LLC (CrossCountry) from Enron Corp. and certain of its
subsidiaries for approximately $2,450,000,000 in cash, including the assumption
of certain consolidated debt. On November 5, 2004, CCE entered into an
Administrative Services Agreement (the Management Agreement) with SU Pipeline
Management LP (Manager), a Delaware limited partnership and a wholly owned
subsidiary of Southern Union, and Panhandle. Under the terms of the Management
Agreement, Panhandle covenants, to the extent permitted by applicable law, to
cause Manager to perform the duties and obligations of Manager. Manager has
assembled an integrated pipeline management team, which includes employees of
Panhandle and CrossCountry. Pursuant to the Management Agreement, Manager is
responsible for the operations and administrative functions of the enterprise.
CCE and Manager will share certain operations of Manager and its affiliates, and
CCE will be obligated to bear its share of costs of the Manager and its
affiliates, as well as certain transition costs and, under certain conditions,
pay annual management fees to Manager. Transition costs are non-recurring costs
of establishing the shared services, including but not limited to severance
costs, professional fees, certain transaction costs, and the costs of relocating
offices and personnel, pursuant to the Management Agreement. At December 31,
2004, Panhandle recognized a liability of approximately $6 million for severance
related costs which is reimbursable from CCE for which an offsetting amount is
reflected in Accounts receivable - related parties at December 31, 2004.

On March 10, 2003, Panhandle's ownership interest in Guardian was transferred to
CMS as a return of capital at the book value of $27,781,000 and Panhandle was
released from its guarantee obligations associated with the Guardian
non-recourse guaranty by the note holders. See Note XIV -- Commitments and
Contingencies. As a result, the $62,500,000 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 - 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
$15,149,000 were contributed to Panhandle by CMS and were included in Southern
Union's acquisition of Panhandle.

F-18

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

VI ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES

Panhandle follows SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, to account for derivative and hedging
activities. Panhandle utilizes interest-rate related derivative instruments to
manage its exposure on its debt instruments and does not enter into derivative
instruments for any purpose other than hedging purposes. 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: (i) a
hedge of the fair value of a recognized asset or liability or of an unrecognized
firm commitment (fair value hedge) or (ii) a hedge of a forecasted transaction
or the variability of cash flows to be received or paid in conjunction with a
recognized asset or liability (cash flow hedge).

Interest rate swaps are used to reduce interest rate risks and to manage
interest expense. By entering into these agreements, Panhandle converts
floating-rate debt into fixed-rate debt or converts fixed-rate debt to floating.
Interest differentials paid or received under the swap agreements are reflected
as an adjustment to interest expense. These interest rate swaps are financial
derivative instruments that qualify for hedge treatment. For derivatives treated
as hedges of future cash flows, the effective portion of changes in fair value
is recorded in other comprehensive income until the related hedge items impact
earnings. Any ineffective portion of a hedge is reported in earnings
immediately. For derivatives treated as a hedge of the fair value of a debt
instrument, the effective portion of changes in fair value are recorded as an
adjustment to the hedged debt. The ineffective portion of a fair value hedge is
recognized in earnings if the short cut method of assessing effectiveness is not
used. 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.

Panhandle's subsidiary LNG Holdings is party to interest rate swap agreements
with an aggregate notional amount of $193,827,000 as of December 31, 2004 that
fix the interest rate applicable to floating rate long-term debt and which
qualify for hedge accounting. For the twelve month periods ended December 31,
2004 and 2003, the amount of swap ineffectiveness was not significant. As of
December 31, 2004, floating rate LIBOR based interest payments were exchanged
for weighted average fixed rate interest payments of 5.88 percent, which does
not include the spread on the underlying variable debt rate of 1.63 percent. As
such, payments, in excess of the liability recorded, or receipts on interest
rate swap agreements are recognized as adjustments to interest expense. As of
December 31, 2004 and December 31, 2003, the fair value liability position of
the swaps was $11,053,000 and $19,806,000, respectively. For the twelve months
ended December 31, 2002 and the period January 1 through June 11, 2003, an
unrealized loss of $22,424,000 ($13,409,000, net of tax) and $5,317,000
($3,180,000, net of tax), respectively, was included in accumulated other
comprehensive income related to these swaps. As of December 31, 2003 and since
the Panhandle Acquisition date, an unrealized gain of $2,293,000 ($1,372,000,
net of tax) was included in accumulated other comprehensive income related to
these swaps. For the twelve months ended December 31, 2004, an unrealized loss
of $236,000 ($141,000, net of tax) was included in accumulated other
comprehensive income related to these swaps. Current market pricing models were
used to estimate fair values of interest rate swap agreements.

In March 2004, Panhandle entered into interest rate swaps to hedge the risk
associated with the fair value of its $200 million 2.75 percent Senior Notes.
See Note XII -- Debt. These swaps are designated as fair value hedges and
qualify for the short cut method under SFAS No. 133. As of December 31, 2004 the
fair value position of the swaps was a liability of $3,936,000, recorded as a
reduction to long-term debt. Under the swap agreements, Panhandle will receive
fixed interest payments at a rate of 2.75 percent and will make floating
interest payments based on the six-month LIBOR. No ineffectiveness is assumed in
the hedging relationship between the debt instrument and the interest rate swap.
As of December 31, 2004, these swaps have an average interest rate of 2.52
percent.

F-19

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

VII INCOME TAXES

The separate components of income tax expense for the periods presented consist
of:

POST-ACQUISITION PRE-ACQUISITION
----------------------------------------------
YEAR ENDED JUNE 12 - JANUARY 1 - YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 11, DECEMBER 31,
INCOME TAX EXPENSE 2004 2003 2003 2002
- ------------------ ---- ---- ---- ----

Current income taxes
Federal $ 14,756 $ - $ - $ 13,637
State 1,726 - - 3,002
--------- --------- --------- -----------
Total current income taxes 16,482 - - 16,639

Deferred income taxes
Federal 32,861 27,823 25,823 24,491
State 6,713 5,498 4,709 5,271
--------- --------- --------- -----------
Total deferred income taxes 39,574 33,321 30,532 29,762
--------- --------- --------- -----------
Total income tax expense $ 56,056 $ 33,321 $ 30,532 $ 46,401
========= ========= ========= ===========

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

POST-ACQUISITION PRE-ACQUISITION
----------------------------------------------
YEAR ENDED JUNE 12 - JANUARY 1 - YEAR ENDED
INCOME TAX EXPENSE DECEMBER 31, DECEMBER 31, JUNE 11, DECEMBER 31,
RECONCILIATION TO STATUTORY RATE 2004 2003 2003 2002
- -------------------------------- ---- ---- ---- ----

Income tax, computed at the $ 50,396 $ 29,671 $ 27,490 $ 40,570
statutory rate Adjustments:
State income tax, net of
federal effect 5,485 3,574 3,061 5,377
Permanent differences and
other 175 76 (19) 454
--------- --------- --------- -----------
Total income tax expense $ 56,056 $ 33,321 $ 30,532 $ 46,401
========= ========= ========= ===========
Effective tax rate 38.9% 39.3% 38.9% 40.0%
========= ========= ========= ===========

F-20

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The principal components of Panhandle's deferred tax assets (liabilities)
recognized in the Consolidated Balance Sheets for the twelve month periods ended
December 31, 2004 and 2003 are as follows:

DECEMBER 31, DECEMBER 31,
NET DEFERRED INCOME TAX ASSET (LIABILITY) COMPONENTS 2004 2003
- ---------------------------------------------------- ---- ----

Property, plant and equipment $ (189,041) $ (178,663)
Investments (116) (1,028)
Deferred credits and other liabilities 26,534 38,740
Tax loss carryforward - 8,090
Other assets 9,933 3,149
Purchase related costs - 9,738
Interest rate swap 7,536 7,942
State deferred income taxes, net of federal tax effect (16,341) (12,228)
----------- -----------
Net deferred income tax asset (liability) $ (161,495) $ (124,260)
=========== ===========

Gross deferred tax liabilities $ (205,498) $ (192,048)
Gross deferred tax assets 44,003 67,788
----------- -----------
Net deferred income tax asset (liability) $ (161,495) $ (124,260)
=========== ===========

Non current deferred income tax asset (liability) $ (172,193) $ (131,991)
Current tax asset 10,698 7,731
----------- -----------
Net deferred income tax asset (liability) $ (161,495) $ (124,260)
=========== ===========

Under the terms of the Panhandle sale agreement, CMS retained all net deferred
tax assets of $28,124,000 and all tax liabilities of $17,405,000 as of June 11,
2003, the acquisition date. Panhandle recognized a deferred tax liability of
$90,938,000, which resulted from the like-kind exchange of property under
Section 1031 of the Internal Revenue Code of 1986, as amended. See Note V --
Related Party Transactions. In December 2004, Panhandle realized $7,720,000 of
the Tax sharing note receivable as an offset against its current income taxes
payable, pursuant to the tax sharing agreement. In the fourth quarter of 2004,
Panhandle recorded a $12,247,000 reduction in its deferred tax liability and the
corresponding Tax sharing note receivable from Southern Union due to revised
calculations in the amount of Panhandle's tax basis utilized by Southern Union
in the like-kind exchange associated with the Panhandle Acquisition.

Panhandle had a deferred income tax asset attributable to temporary differences
reflecting tax loss carryforwards of $8,090,000 as of December 31, 2003, which
was fully utilized in 2004.

F-21

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

VIII PROPERTY, PLANT AND EQUIPMENT

LIVES DECEMBER 31, DECEMBER 31,
PROPERTY, PLANT AND EQUIPMENT IN YEARS 2004 2003
- ----------------------------- -------- ---- ----

Transmission 36-46 $ 1,181,182 $ 1,123,262
Gathering 26 46,074 49,016
Underground storage 36-46 274,337 316,802
General plant - LNG 40 388,703 387,866
General plant - other (1) 1-10 57,228 17,014
Construction work-in-progress 203,094 90,556
----------- -----------
Total property, plant and equipment 2,150,618 1,984,516
Less accumulated depreciation and amortization 87,683 32,114
----------- -----------
Net property, plant and equipment $ 2,062,935 $ 1,952,402
=========== ===========
(1) Includes capitalized computer software costs totalling:

Computer software cost $ 49,828 $ 15,374
Less accumulated amortization 6,439 2,539
----------- -----------
Net computer software costs $ 43,389 $ 12,835
=========== ===========

All of the assets of Trunkline LNG Holdings, an indirect subsidiary of Panhandle
Eastern Pipe Line, are pledged as collateral for bank loans which it has
outstanding. Post-acquisition figures reflect the impact of purchase accounting
for the Southern Union acquisition. See Note I -- Corporate Structure.

Amortization expense of capitalized computer software costs for years 2004,
2003, 2002 was $5,070,000, $4,969,000 and $7,523,000, respectively. During the
quarter ended September 30, 2004, Panhandle commenced utilization of an upgraded
internally developed computer application to manage its pipeline administration.
Panhandle recorded in General plant - other costs of $34,224,000 pursuant to SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," with related amortization expense during 2004 totaling
$1,141,000. The intangible asset will be amortized over a ten year life.

At December 31, 2004 and December 31, 2003, capitalized accruals to Property,
plant and equipment of $16,108,000 and $5,451,000 are included in Other current
liabilities on the Consolidated Balance Sheet.

IX INTANGIBLE ASSETS

Based on the purchase price allocations and outside appraisals, the Panhandle
Acquisition resulted in the recognition of an intangible asset related to the BG
LNG contract with Trunkline LNG with an initial estimated value of $31,569,000.
During 2004, Panhandle recorded a reduction in Intangibles, net of $22,066,000,
resulting in a final adjusted balance of $9,503,000. Such adjustment was related
to a reduction in Southern Union's estimated deferred state income tax liability
incurred as a result of the Panhandle Acquisition, pursuant to the provisions of
SFAS No. 109.

The intangible is amortized over a period of twenty years, the remaining life of
the contract for which the value is associated. At December 31, 2004 and 2003,
the carrying amount of these intangibles was approximately $8,496,000 and
$30,698,000, respectively. Amortization expense on the customer contract for
2004 and 2003 was $136,000 and $871,000, respectively. Panhandle estimates the
annual amortization expense for 2005, 2006, 2007, 2008 and 2009 will be $475,000
per year.

Certain intangibles are included in Property, plant and equipment. See Note VIII
- -- Property, Plant and Equipment.

F-22

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

X INVESTMENT IN AFFILIATES

Panhandle owns a 29 percent interest in the Lee 8 partnership, which operates a
2 bcf natural gas storage facility in Michigan. Panhandle initially held a 40
percent interest in Lee 8. In July 2002, Panhandle entered into transactions
with MG Ventures Storage Corporation and Proliance Energy which resulted in a
reduction in equity ownership from 40 percent to the current 29 percent. The
remaining interest in the Lee 8 partnership is currently owned by Proliance
Energy (51 percent) and Howard Energy Company (20 percent).

XI FINANCIAL INSTRUMENTS

Panhandle's financial instruments include $1,175,861,000 and $1,185,533,000 of
total debt outstanding, including the current portion of long-term debt, at
December 31, 2004 and 2003, respectively, with an approximate fair value of
$1,215,107,000 and $1,238,304,000 as of December 31, 2004 and 2003,
respectively. Estimated fair value amounts of long-term debt were obtained from
independent parties. Judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates determined as of
December 31, 2004 and 2003 are not necessarily indicative of the amounts
Panhandle could have realized in current market exchanges.

The $90,745,000 and $87,350,000 Note Receivable from Southern Union at December
31, 2004 and December 31, 2003, respectively, is at fair value and the interest
portion is calculated using an interest rate equal to the one month LIBOR rate.
See Note V -- Related Party Transactions.

LNG Holdings is required by its credit agreement to have fixed interest rates on
a portion of its bank notes for a period of five years. Accordingly, from time
to time, LNG Holdings enters into interest rate swaps to effectively fix the
rate of certain of its otherwise floating rate notes in order to conform to this
requirement. On December 31, 2001 and March 22, 2002, interest rate swaps were
entered into with respect to $150,000,000 and $67,000,000, respectively, of
floating rate notes.

As of December 31, 2004 and December 31, 2003, the fair value liability position
of the swaps was $11,053,000 and $19,806,000, respectively. As of December 31,
2003 and since the acquisition date, an unrealized gain of $2,293,000
($1,372,000, net of tax) was included in accumulated other comprehensive income
related to these swaps. For the twelve months ended December 31, 2004, an
unrealized loss of $236,000 ($141,000, net of tax) was included in accumulated
other comprehensive income related to these swaps. Current market pricing models
were used to estimate fair values of interest rate swap agreements.

F-23

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

XII DEBT

DECEMBER 31, DECEMBER 31,
Long-term Debt Year Due 2004 2003
- -------------- -------- ---- ----

6.125% Senior Notes 2004 $ - $ 146,080
7.875% Senior Notes 2004 - 52,455
6.50% Senior Notes 2009 60,623 60,623
8.25% Senior Notes 2010 40,500 40,500
7.00% Senior Notes 2029 66,305 66,305
4.80% Senior Notes 2008 300,000 300,000
6.05% Senior Notes 2013 250,000 250,000
2.75% Senior Notes 2007 200,000 -
LNG bank loans (floating rate) 2005-2007 258,433 269,570
----------- -----------
Total debt outstanding 1,175,861 1,185,533
Current portion of long-term debt (12,548) (209,671)
Interest rate swaps (2.75% Senior Notes) (3,936) -
Unamortized debt premium, net 14,688 19,911
----------- -----------
Total long-term debt $ 1,174,065 $ 995,773
=========== ===========

Panhandle has $1,186,613,000 of debt recorded at December 31, 2004, of which
$12,548,000 is current. Debt of $928,180,000, including net premiums of
$14,688,000 and unamortized interest rate swaps of $3,936,000, is at fixed rates
ranging from 2.75 percent to 8.25 percent, with an average interest rate for
2004 of 4.96 percent including debt premium, discount and issuance cost
amortization and 5.48 percent excluding debt premium, discount and issuance cost
amortization. The $258,433,000 of variable rate bank loans have an average rate
of 3.08 percent for the twelve month period ended December 31, 2004. The
Trunkline LNG facilities are pledged as collateral for the variable rate loans.
See Note VI -- Accounting for Derivatives and Hedging Activities for discussion
of interest rate swap agreements associated with outstanding debt.

Panhandle's notes are subject to certain requirements such as the maintenance of
a fixed charge coverage ratio and a leverage ratio which restrict certain
payments if not maintained, and limitations on liens. At December 31, 2004,
Panhandle, based on the currently most restrictive debt covenant requirements,
was subject to a $344,226,000 limitation on additional restricted payments
including dividends and loans to affiliates, and a limitation of $327,373,000 of
additional secured indebtedness or other defined liens based on a limitation on
liens covenant. At December 31, 2004, Panhandle was in compliance with all
covenants.

At December 31, 2004, Panhandle had scheduled debt payments of $12,548,000,
$13,969,000, $431,916,000, $300,000,000, $60,623,000 and $356,805,000 for the
years 2005 through 2009 and in total thereafter, respectively.

On March 12, 2004, Panhandle issued $200,000,000 of 2.75 percent Senior Notes
due 2007, Series A, in reliance on an exemption from the registration
requirements of the Securities Act of 1933 for offers and sales of securities
not involving a public offering or sale, in order to refinance Panhandle's
maturing debt. Panhandle used a portion of the net proceeds to retire
$146,080,000 of 6.125 percent Senior Notes which matured on March 15, 2004, as
well as for other general corporate purposes. A portion of the remaining net
proceeds was also used to pay off the $52,455,000 of 7.875 percent Senior Notes
which matured on August 15, 2004. Panhandle filed a registration statement on
May 12, 2004 to initiate an exchange of the unregistered 2.75 percent Senior
Notes due 2007, Series A, for substantially identical securities registered
under the Securities Act of 1933. Such exchange was completed June 25, 2004.

In July 2003, Panhandle announced a tender offer for any and all of the
$747,370,000 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 $134,500,000 principal amount of
its two series of debentures that were outstanding. Panhandle repurchased
approximately $378,257,000 of the principal amount of its

F-24

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

outstanding debt through the Panhandle Tender Offer for total consideration of
approximately $396,445,000 plus accrued interest through the purchase date.
Panhandle also redeemed its approximately $134,500,000 of debentures for total
consideration of $139,411,000 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 $6,123,000 ($3,674,000, 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, net, pursuant to the requirements of SFAS No. 145.
During 2004, Panhandle recorded an additional pre-tax gain on the extinguishment
of debt of approximately $231,000 ($139,000, net of tax), which is classified as
Other, net. In August 2003, Panhandle issued $550,000,000 of senior notes, of
which $300,000,000 is a new five year senior note at 4.8 percent and
$250,000,000 is a new ten year senior note at 6.05 percent, principally to
refinance the repurchased notes and redeemed debentures. The issuance of the
$550,000,000 of senior notes resulted in a debt discount recorded of $2,573,000.
Also in August and September 2003, Panhandle repurchased $3,150,000 principal
amount of its senior notes on the open market through two transactions for total
consideration of $3,398,000, plus accrued interest through the repurchase date
and which also resulted in $270,000 of retired premium.

Panhandle Eastern Pipe Line provided a guarantee related to the bridge financing
entered into by Southern Union on November 17, 2004 of $407,000,000 to fund a
portion of Southern Union's equity investment in CCE Holdings, LLC (the Bridge
Loan). The Bridge Loan was subject to standard terms and conditions and was due
and payable on May 17, 2005. The Bridge Loan was repaid in February 2005 and
Panhandle Eastern Pipe Line has been released from all related obligations.

XIII COMPREHENSIVE INCOME

The table below provides an overview of comprehensive income for the periods
indicated.

YEAR ENDED JUNE 12 - JANUARY 1 - YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 11, DECEMBER 31,
2004 2003 2003 2002
---- ---- ---- ----

Net earnings (loss) $ 87,933 $ 51,452 $ 50,014 $ (299,611)

Unrealized gain (loss) related to interest rate swaps 8,752 7,045 (5,317) (22,424)
Realized (gains) losses in net income (8,988) (4,751) - -
Increase in minimum pension liability - - - (42,025)
----------- ----------- ---------- -----------
Other comprehensive income (loss) before taxes $ 87,697 $ 53,746 $ 44,697 $ (364,060)

Income tax benefit (loss) 95 (922) 2,137 25,270
----------- ----------- ---------- -----------
Total comprehensive income (loss) $ 87,792 $ 52,824 $ 46,834 $ (338,790)
=========== =========== ========== ===========

Accumulated other comprehensive income reflected in the Consolidated Balance
Sheet at December 31, 2004 and December 31, 2003, includes unrealized gains
related to interest rate swaps.

F-25

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

XIV COMMITMENTS AND CONTINGENCIES

LEASES. Panhandle utilizes assets under operating leases in several areas of
operation. Consolidated rental expense amounted to $13,358,000 in 2004,
$12,527,000 in 2003 and $14,356,000 in 2002. Future minimum rental payments
under Panhandle's various operating leases for the years 2005 through 2009 are
$12,768,000, $11,914,000, $9,576,000, $5,661,000 and $1,929,000, respectively,
and $3,508,000 in total thereafter.

CAPITAL EXPENDITURES. Panhandle estimates expenditures associated with Phase I
and Phase II LNG terminal expansion and the Trunkline 36-inch diameter, 23-mile
natural gas pipeline loop from the LNG terminal to be approximately $107 million
in 2005 and approximately $8 million in 2006, plus capitalized interest. These
estimates were developed for budget planning purposes and are subject to
revision.

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

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 which was denied in December of 2003. The case is in the
process of being transferred back to the trial court for a trial on the merits.
The case is presently expected to begin in 2005. Panhandle does not believe the
outcome of this case will have a material adverse effect on Panhandle's
consolidated results of operations or financial position.

Jack Grynberg, an individual, has filed actions against a number of companies,
including Panhandle, now transferred to the U.S. District Court for the District
of Wyoming, for damages for mis-measurement of gas volumes and Btu content,
resulting in lower royalties to mineral interest owners. Panhandle believes that
its measurement practices conformed to the terms of its FERC Gas Tariff, which
was filed with and approved by FERC. As a result, Panhandle believes that it has
meritorious defenses to the complaint (including FERC-related affirmative
defenses, such as the filed rate/tariff doctrine, the primary/exclusive
jurisdiction of FERC, and the defense that Panhandle complied with the terms of
its tariff) and is defending the suit vigorously.

ENVIRONMENTAL MATTERS. Panhandle's gas transmission operations are subject to
federal, state and local regulations regarding water quality, hazardous and
solid waste management, air quality control and other environmental matters.
Panhandle has previously 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.

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-three
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.
Sixteen sites have 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 has implemented a
program to remediate sites where such issues are identified during painting
activities. If PCBs are identified above acceptable levels, the paint is removed
and disposed of in an EPA approved manner.

The Illinois Environmental Protection Agency (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.

F-26

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 seventeen percent. Panhandle and twenty-one
other non-affiliated parties conducted an initial voluntary investigation of the
Pierce Oil Springfield site, one of the three sites. In addition, Illinois EPA
has informally indicated that it has referred the Pierce Oil Springfield site,
to the EPA so that environmental contamination present at the site can be
addressed through the federal Superfund program. No formal notice has yet been
received from either agency concerning the referral. However, the EPA is
expected to issue special notice letters and has begun the process of listing
the site on the National Priority List. Panhandle and three of the other
non-affiliated parties associated with the Pierce Oil Springfield site met with
the EPA and Illinois EPA regarding this issue. Panhandle was given no indication
as to when the listing process was to be completed. Panhandle has also received
a Comprehensive Environmental Response, Compensation, and Liability Act 104e
data request from the EPA Region V regarding the second Pierce Waste Oil site
known as the Dunavan site, located in Oakwood, Illinois. Panhandle is working on
the response that will show that waste oil generated at Panhandle facilities was
shipped to the Dunavan Oil site in Oakwood, Illinois, resulting in Panhandle
becoming a potentially responsible party at such site.

Panhandle expects the cleanup programs for all of the above matters to continue
for several years and has estimated its share of remaining cleanup costs to
range from approximately $7 million to $16 million. At December 31, 2004,
Panhandle has related accruals totaling approximately $12,912,000, of which
$3,046,000 is included in Other current liabilities for the estimated current
amounts and $9,866,000 is included in Other non-current liabilities on the
Consolidated Balance Sheet. At December 31, 2003, Panhandle had accruals
totaling approximately $14,577,000 of such costs, of which $2,933,000 was
included in Other current liabilities for the estimated current amounts and
$11,644,000 was included in Other non-current liabilities on the Consolidated
Balance Sheet. During 2004, Panhandle spent $1,942,000 related to these cleanup
programs.

Panhandle paid approximately $6,783,000 during the second quarter of 2003 in
connection with the May 13, 2003, execution of a cleanup liability assumption
agreement with Duke Energy and a third party relating to a site in Liberal,
Kansas. The agreement provides for a third party to assume all liability and
responsibility for remediation of the site, excluding any potential third-party
liabilities. In connection with the agreement, a $30,000,000 insurance policy
with a ten-year term was purchased to cover any such potential third-party
liabilities. Panhandle had provided accruals related to the liability related to
this site in prior periods.

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 was promulgated by the EPA in April 2004. The five
midwestern states have one year to promulgate state laws and regulations to
address the requirements of this rule. Based on an EPA guidance document
negotiated with gas industry representatives in 2002, it is believed that
Panhandle will be required under state rules to reduce nitrogen oxide (NOx)
emissions by eighty-two percent on the identified large internal combustion
engines and will be able to trade off engines within the company and within each
of the five Midwestern states affected by the rule in an effort to create a cost
effective NOx reduction solution. The final implementation date is May 2007. The
rule impacts twenty large internal combustion engines on the Panhandle system in
Illinois and Indiana at an approximate cost of $17 million for capital
improvements through 2007, based on current projections.

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 requires the installation of emission controls. New regulations
also require certain grandfathered facilities in Texas to enter into the new
source permit program which may require the installation of emission controls at
five additional facilities. These two rules affect six company facilities in
Texas at an estimated cost of approximately $12 million for capital improvements
through March 2007, based on current projections.

The EPA promulgated various Maximum Achievable Control Technology (MACT) rules
in February 2004. The rules require that Panhandle Eastern Pipe Line and
Trunkline control Hazardous Air Pollutants (HAPs) emitted from certain internal
combustion engines at major HAPs sources. Most of Panhandle Eastern

F-27

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pipe Line and Trunkline compressor stations are major HAPs sources. The HAPs
pollutant of concern for Panhandle Eastern Pipe Line and Trunkline is
formaldehyde. As promulgated, the rule seeks to reduce formaldehyde emissions by
76 percent from these engines. Catalytic controls will be required to reduce
emissions under these rules with a final implementation date of June 2007.
Panhandle Eastern Pipe Line and Trunkline have twenty-two internal combustion
engines subject to the rules. It is expected that compliance with these
regulations will cost an estimated $5 million for capital improvements, based on
current projections.

OTHER COMMITMENTS AND CONTINGENCIES. In 1993, the U.S. Department of the
Interior announced its intention to seek, through its Mineral 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. This liability is being assessed for its impact on the final purchase
price allocation. If required to reimburse or indemnify the producers, Panhandle
Eastern Pipe Line and Trunkline may file with FERC to recover these costs from
pipeline customers. Management believes these commitments and contingencies will
not have a material adverse effect on Panhandle's business, financial condition
or results of operations.

In conjunction with its acquisition by Southern Union, Panhandle initiated a
plan designed to reduce its workforce by approximately five 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 workforce reduction initiative costs of approximately $10,000,000 are
included in the $31,922,000 of transaction costs incurred. See Note I --
Corporate Structure.

In conjunction with Southern Union's investment in CCE Holdings, LLC (CCE) and
CCE's acquisition of Cross Country Energy, LLC (CrossCountry) from Enron Corp.
and certain subsidiaries of Enron, Panhandle initiated an additional workforce
reduction plan designed to reduce the workforce by approximately an additional
six percent. Certain of the approximately $7.7 million of the resulting
severance and related costs are reimbursable by CCE pursuant to agreements
between the parties involved, with the reimbursable portion totaling
approximately $6 million.

Panhandle Eastern Pipe Line provided a guarantee related to the bridge financing
entered into by Southern Union on November 17, 2004 of $407,000,000 to fund a
portion of Southern Union's equity investment in CCE Holdings, LLC (the Bridge
Loan). The Bridge Loan was subject to standard terms and conditions and was due
and payable on May 17, 2005. The Bridge Loan was repaid in February 2005 and
Panhandle Eastern Pipe Line has been released from all related obligations.

On September 10, 2003, Panhandle Eastern Pipe Line provided a guarantee to CB&I
Constructors, Inc. for the full performance by Trunkline LNG, its subsidiary, of
the engineering, procurement and construction 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 $18 million of
the remaining cost of the Phase I expansion through December 2005 and
approximately $30 million of the remaining cost of the Phase II expansion
through June 2006. Under the terms of the guarantee, Panhandle Eastern Pipe Line
would be required to perform should Trunkline LNG be in default of its
obligation, as it relates to services already rendered. There are no amounts
being carried as liabilities for Panhandle's obligations under these guarantees.

In May 2001, Panhandle provided a guaranty related to project financing
associated with its investment in Centennial in an amount up to $50,000,000
during the initial operating period of the project. Due to rating agency
downgrades of Panhandle's debt, the Centennial lender required additional credit
support from Panhandle. On September 27, 2002 Panhandle's partners provided
credit support of $25,000,000 each in the form of guarantees to the Centennial
lender to cover Panhandle's $50,000,000 obligation. The partners were paid
credit fees by Panhandle on the outstanding balance of the guarantees for the
periods for which they were in effect. On February 10, 2003, Panhandle sold its
one-third equity interest in Centennial for $40,000,000 to Centennial's two
other partners, MAPL and TEPPCO. Panhandle has been released by MAPL, TEPPCO and
the lenders for any liabilities related to Panhandle's $50,000,000 parent
guaranty of the project debt.

In November 2001, in conjunction with the Guardian project, Panhandle provided a
$60,000,000 guaranty related to project financing during the construction and
initial operating period of the project. Due to rating agency

F-28

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

downgrades of Panhandle's debt, the Guardian lender assessed credit fees and
required additional credit support from Panhandle. In October 2002, Panhandle
provided a letter of credit to the lenders which constituted acceptable credit
support under the Guardian financing agreement. On March 10, 2003, Panhandle's
ownership interest in Guardian was transferred back to CMS Gas Transmission,
along with the $62,500,000 cash collateral. Panhandle was also released from the
guarantee obligations associated with the Guardian non-recourse debt as of March
10, 2003, by the partners, the Prudential Insurance Company of America and the
other noteholders.

CONTROLLED GROUP PENSION LIABILITIES. Southern Union (including certain of its
divisions) sponsors a number of defined benefit pension plans for employees.
Under applicable pension and tax laws, upon being acquired by Southern Union,
Panhandle 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 Panhandle and each of its
subsidiaries. As of December 31, 2004, the aggregate amount of the projected
benefit obligations of these pension plans was approximately $398,516,000 and
the estimated fair value of all of the assets of these plans was approximately
$276,836,000.

XV RETIREMENT BENEFITS

EMPLOYEE RETIREMENT BENEFITS. Until June 11, 2003, Panhandle, through its former
parent company, participated in a 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, 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. None of the assets
or liabilities related to the CMS defined benefit retirement plan and OPEB plan
were transferred with the sale of Panhandle. Panhandle employees, following the
sale, are no longer eligible to accrue benefits or make contributions to the CMS
plans.

The significant downturn in the equities markets and a decrease in the price of
CMS Common Stock affected the value of the CMS Pension Plan (Pension Plan)
assets. The Pension Plan's Accumulated Benefit Obligation exceeded the value of
these assets at December 31, 2002 by $425,900,000, and as a result, CMS was
required to recognize an additional minimum liability for this excess in
accordance with SFAS No. 87. Panhandle's allocation was $47,998,000, of which
$25,770,000, net of tax, was recorded to Accumulated other comprehensive income
in 2002.

In connection with the Panhandle Acquisition, CMS or its affiliates retained all
assets and liabilities related to its underfunded Pension Plan. The Pension Plan
will retain pension payment obligations under the plan for Panhandle employees
who were already vested in the plan as of June 11, 2003.

For the CMS Pension Plan, the total pension plan expense, which was allocated to
Panhandle by CMS, was approximately $2,952,000 and $3,672,000 for the period
January 1 through June 11, 2003 and during 2002, respectively. Contributions
made by Panhandle to CMS on behalf of the Pension Plan were $6,423,000 for the
period ended December 31, 2002. There were no contributions made by Panhandle to
CMS on behalf of the Pension Plan for the period January 1 through June 11,
2003.

The net periodic postretirement benefit cost allocated to Panhandle was
approximately $2,648,000 for the period January 1 through June 11, 2003 and
$6,193,000 in 2002. Contributions made by Panhandle for the OPEB plan during the
CMS ownership period was $3,498,000 for the period January 1 through June 11,
2003 and $7,756,000 for the period ended December 31, 2002. In connection with
the Panhandle Acquisition, CMS, or its affiliates, retained liabilities with
respect to 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
estimated to be $1,986,000 less than the liabilities retained.

Following the June 11, 2003 acquisition by Southern Union, Panhandle continues
to provide certain retiree benefits through employer contributions to a
qualified defined contribution plan, which contributions range from four to six
percent of the participating employee's salary based on the participating
employee's age and years of

F-29

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $42,752,000 liability as of
June 12, 2003 and Panhandle continues to fund the plan at approximately $7.8
million per year, with $12,196,000 and $4,314,000 of plan assets accumulated at
December 31, 2004 and December 31, 2003, respectively. Since retirement eligible
active employees as of June 12, 2003 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.

It is Panhandle's general policy to fund accrued postretirement health care
costs. Panhandle accrues on an actuarial basis, health and life benefit costs
over the active service period of employees to the date of full eligibility for
the benefits. The following table represents the OPEB plan at December 31, 2004.

POST-ACQUISITION
YEAR ENDED JUNE 11 TO
DECEMBER 31, DECEMBER 31,
OPEB 2004 2003
- ---- ---- ----

Change in Benefit Obligation
Benefit obligation at beginning of period $ 47,085 $ 42,752
Service cost 2,327 1,302
Interest cost 3,004 1,425
Amendments (1,600) --
Actuarial loss 12,029 1,606
----------- -----------
Benefit obligation at end of year $ 62,845 $ 47,085
=========== ===========
Change in Plan Assets
Fair value of plan assets at beginning of period $ 4,314 $ --
Return on plan assets 70 1
Employer contributions 7,812 4,313
Benefits paid -- --
----------- -----------
Fair value of plan assets at end of year $ 12,196 $ 4,314
=========== ===========
Funded Status
Funded status at end of year $ (50,649) $ (42,771)
Unrecognized net actuarial gain 13,989 1,605
Unrecognized prior service cost (1,600) --
----------- -----------
Net liability recognized at December 31 $ (38,260) $ (41,166)
=========== ===========

WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATIONS:

POST-ACQUISITION
AS OF DECEMBER 31 2004 2003
- ----------------- ---- ----

Discount rate 5.75% 6.25%
Rate of compensation increase N/A N/A

Health care cost trend rates:

Medical (graded to 4.75% by year 2012) 13.00% 14.00%
Dental N/A 8.00%

F-30

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Panhandle's OPEB benefit consists of the following:

POST-ACQUISITION
----------------
Year Ended June 12 -
December 31, December 31,
OPEB 2004 2003
- ---- ---- ----

Service cost $ 2,327 $ 1,302
Interest cost 3,004 1,425
Expected return on plan assets (425) -
Amortization of prior service cost - -
Amortization of transition obligation - -
Recognized actuarial gain (loss) - -
Settlement recognition - -
----------- -----------
Net periodic benefit cost $ 4,906 $ 2,727
=========== ===========

WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COSTS:

POST-ACQUISITION
YEAR ENDED DECEMBER 31 2004 2003
- ---------------------- ---- ----

Discount rate 6.25% 6.00%
Rate of compensation increase N/A N/A
Expected long-term return on plan assets:
a. Union VEBA rate 7.00% N/A
b. Non union VEBA rate 5.00% N/A

Health care cost trend rates:
Medical (graded to 4.75% by year 2012) 13.00% 13.00%
Dental (graded to 4.75% by year 2012) 8.00% 8.00%

Panhandle employs a building block approach in determining the expected
long-term rate on return on plan assets. Historical markets are studied and
long-term historical relationships between equities and fixed-income are
preserved consistent with the widely accepted capital market principle that
assets with higher volatility generate a greater return over the long run.
Current market factors such as inflation and interest rates are evaluated before
long-term market assumptions are determined. The long-term portfolio return is
established via a building block approach with proper consideration of
diversification and rebalancing. Peer data and historical returns are reviewed
to check for reasonability and appropriateness.

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

ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------

Effect on total service and interest cost components $ 1,481 $ (1,151)
Effect on postretirement benefit obligation $ 13,785 $ (10,825)

F-31

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PLAN ASSET INFORMATION:

The plan assets shall be invested in accordance with sound investment practices
that emphasize long-term investment fundamentals. An investment objective of
income and growth for the plan has been adopted. This investment objective: (i)
is a risk-averse balanced approach that emphasizes a stable and substantial
source of current income and some capital appreciation over the long-term; (ii)
implies a willingness to risk some declines in value over the short-term, so
long as the plan is positioned to generate current income and exhibits some
capital appreciation; (iii) is expected to earn long-term returns sufficient to
keep pace with the rate of inflation over most market cycles (net of spending
and investment and administrative expenses), but may lag inflation in some
environments; (iv) diversifies the plan in order to provide opportunities for
long-term growth and to reduce the potential for large losses that could occur
from holding concentrated positions; and (iv) recognizes that investment results
over the long-term may lag those of a typical balanced portfolio since a typical
balanced portfolio tends to be more aggressively invested. Nevertheless, this
plan is expected to earn a long-term return that compares favorably to
appropriate market indices.

It is expected that these objectives can be obtained through a well-diversified
portfolio structure in a manner consistent with the investment policy.

Panhandle's other postretirement benefit plan weighted-average asset allocations
by asset category are as follows:

YEAR ENDED
DECEMBER 31,
2004 2003
---- ----

Equity securities 0% 0%
Debt securities 0% 0%
Cash and cash equivalents 100% 100%
--- ---
Total 100% 100%
=== ===

CASH FLOW INFORMATION:

Panhandle expects to contribute an amount of approximately $7.8 million to its
OPEB plan in 2005 and approximately $7.8 million annually thereafter until
modified by rate case proceedings.

The OPEB plan information for periods prior to June 12, 2003, which has been
previously disclosed, is not presented because the plan is for CMS and its
affiliates (including Panhandle) of which Panhandle gets an allocation, and the
assets and costs for Panhandle are not distinguishable from the OPEB plan
information, therefore, the presentation would not be meaningful.

STOCK OPTIONS. On November 4, 2003, the stockholders of Southern Union adopted
the 2003 Stock and Incentive Plan (2003 Plan) under which options to purchase
7,350,000 shares were provided to be granted to officers and key employees,
including employees of Panhandle, at prices not less than fair market value on
the date of the grant, until September 28, 2013. The 2003 Plan allows for the
granting of stock appreciation rights, stock awards, performance units, dividend
equivalents, incentive options, non-statutory options, and other equity-based
rights. Options granted under the 2003 Plan are exercisable for periods of ten
years from the date of the grant or such lesser period as may be designated for
particular options, and become exercisable after a specified period of time from
the date of grant in cumulative annual installments. See Note II -- Summary of
Significant Accounting Policies and Other Matters - Stock Based Compensation.

F-32

PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides information on stock options granted, exercised,
canceled and outstanding under the 2003 Plan for employees of Panhandle for the
year ended December 31, 2004:

2003 PLAN
-------------------------------
WEIGHTED
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------ --------------

Outstanding December 31, 2003 -
Granted 254,625 $ 17.67
Exercised -
Canceled (19,425) 17.67
-------
Outstanding December 31, 2004 235,200 $ 17.67
=======

The weighted average remaining contractual life of options outstanding under the
2003 Plan at December 31, 2004 was 8.3 years. There were no shares exercisable
under the 2003 Plan at December 31, 2004.

Panhandle's former parent company retained financial responsibility for all
stock options issued prior to the sale of Panhandle as of June 11, 2003. For the
stock options through Panhandle's former parent company, the total compensation
cost, which was allocated by CMS, was approximately $418,000 in 2002. There were
no compensation costs, which were allocated by its former parent company for the
period January 1 through June 11, 2003.

XVI QUARTERLY FINANCIAL DATA (UNAUDITED)

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----

2004
Operating revenue $ 138,179 $ 108,341 $ 109,318 $ 133,542 $ 489,380
Operating income 65,781 34,207 37,971 52,266 190,225
Earnings before extraordinary
item and cumulative effect of
change in accounting principle 33,057 14,144 16,056 24,676 87,933
Net earnings 33,057 14,144 16,056 24,676 87,933

PRE-ACQUISITION POST-ACQUISITION
--------------- ----------------
FIRST APRIL 1 - JUNE 12 - THIRD FOURTH
QUARTER JUNE 11 JUNE 30 QUARTER QUARTER TOTAL
------- ------- ------- ------- ------- -----

2003
Operating revenue $ 137,464 $ 96,806 $ 24,529 $ 114,218 $ 130,344 $ 503,361
Operating income 63,266 44,616 9,634 37,919 55,795 211,230
Earnings before extraordinary
item and cumulative effect of
change in accounting principle 28,835 19,176 4,612 20,121 26,719 99,463
Net earnings 30,838 19,176 4,612 20,121 26,719 101,466

F-33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Southern Union Company and Board of Managers of
Panhandle Eastern Pipe Line Company, LP:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, owners' equity and comprehensive income
(loss) and cash flows present fairly, in all material respects, the financial
position of Panhandle Eastern Pipe Line Company, LP (formerly Panhandle Eastern
Pipe Line Company, LLC) and its subsidiaries (collectively, "the Company") at
December 31, 2004 and 2003, and the results of their operations and their cash
flows for the year ended December 31, 2004 and the period from June 12 through
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

PricewaterhouseCoopers LLP

Houston, Texas
March 16, 2005

F-34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Southern Union Company and Board of Managers of
Panhandle Eastern Pipe Line Company, LP:

In our opinion, the accompanying consolidated statements of operations, owners'
equity and comprehensive income (loss) and cash flows present fairly, in all
material respects, the results of the operations and cash flows of Panhandle
Eastern Pipe Line Company, LP (formerly Panhandle Eastern Pipe Line Company,
LLC) and its subsidiaries (collectively, "the Company") for the period from
January 1 through June 11, 2003, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

As discussed in Note 1 to the accompanying consolidated financial statements,
the Company was acquired by Southern Union Company effective June 11, 2003. The
post-acquisition period financial statements reflect a new basis of accounting
and pre-acquisition and post-acquisition period financial results are presented
but are not comparable.

PricewaterhouseCoopers LLP

Houston, Texas
March 16, 2005

F-35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated statements of operations, common
stockholder's equity and comprehensive income (loss) and cash flows of Panhandle
Eastern Pipe Line Company for the year ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Panhandle Eastern Pipe Line Company for the year ended December 31, 2002 in
conformity with U.S. generally accepted accounting principles.

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

Ernst & Young, LLP
Houston, Texas
March 14, 2003

F-36

INDEX TO EXHIBITS

EXHIBIT NO. DESCRIPTION
- ---------- -----------

3(a) Certificate of Formation of Panhandle Eastern Pipe Line Company,
LP (Filed herein).

3(b) Limited Partnership Agreement of Panhandle Eastern Pipe Line LP,
dated as of June 29, 2004, by Southern Union Panhandle LLC (Filed
herein).

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 as Exhibit 4(d) to the Form 10-Q
for the quarter ended September 30, 2003).

4(e) 4th Supplemental Indenture dated as of March 12, 2004, between
Panhandle, as Issuer and J.P. Morgan Trust Company, National
Association, as Trustee (Filed herein).

4(f) 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).

12 Computation of Consolidated Ratio of Earnings to Fixed Charges
(Filed as Exhibit 12 to the Form S-4/A filed on May 18, 2004).

24 Power of Attorney

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

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

32.1 Section 1350 Certification

32.2 Section 1350 Certification