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)