----

**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, 2006**

**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**

|  **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) |                            |

**(713)      989-7000**

|  ** 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**                   |

** **
** **
**P**
** **

** **
**P**
** **

**P**

**P**

**P**

** **
**P**

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**PANHANDLE      EASTERN PIPE LINE COMPANY, LP**

**FORM      10-K**

**DECEMBER      31, 2006**

**Table      of Contents**

|                                                                         |                                                                                                                                              | Page   |
|------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                         | **PART                I**                                                                                                                         |   |
| ITEM                1.                                                       | Business.                                                                                                                                         | 1      |
| ITEM                1A.                                                      | Risk                Factors.                                                                                                                      | 5      |
| ITEM                1B.                                                      | Unresolved                Staff Comments.                                                                                                         | 10     |
| ITEM                2.                                                       | Properties.                                                                                                                                       | 10     |
| ITEM                3.                                                       | Legal                Proceedings.                                                                                                                 | 10     |
| ITEM                4.                                                       | Submission                of Matters to a Vote of Security                Holders.                                                                | 11     |
|                                                                         | **PART                II**                                                                                                                        |   |
| ITEM                5.                                                       | Market                for Registrant’s Common Equity, Related Stockholder                Matters and Issuer Purchases of Equity Securities. | 11     |
| ITEM                6.                                                       | Selected                Financial Data.                                                                                                           | 11     |
| ITEM                7.                                                       | Management's                Discussion and Analysis of Financial Condition and Results of                Operation*.*                             | 11     |
| ITEM                7A.                                                      | Quantitative                and Qualitative Disclosures About Market                Risk.                                                         | 18     |
| ITEM                8.                                                       | Financial                Statements and Supplementary                Data.                                                                        | 19     |
| ITEM                9.                                                       | Changes                in and Disagreements with Accountants on Accounting                and Financial Disclosure.                               | 19     |
| ITEM                9A.                                                      | Controls                and Procedures.                                                                                                           | 19     |
| ITEM                9B.                                                      | Other                Information.                                                                                                                 | 19     |
|                                                                         | **PART                III**                                                                                                                       |   |
| ITEM                10.                                                      | Directors,                Executive Officers and Corporate                Governance.                                                             | 19     |
| ITEM                11.                                                      | Executive                Compensation.                                                                                                            | 20     |
| ITEM                12.                                                      | Security                Ownership of Certain Beneficial Owners and                Management and Related Stockholder Matters.                     | 20     |
| ITEM                13.                                                      | Certain                Relationships and Related Transactions, and                Director Independence.                                          | 20     |
| ITEM                14.                                                      | Principal                Accounting Fees and Services.                                                                                            | 20     |
|                                                                         | **PART                IV**                                                                                                                        |   |
| ITEM                15.                                                      | Exhibits,                Financial Statement                Schedules.                                                                            | 21     |
| Signatures                                                                   |                                                                                                                                              | 23     |
| Index                to the Consolidated Financial                Statements | F-1                                                                                                                                               |

----

*Table          of Contents*

**PART      I**

**ITEM      1. Business.**

***Our      Business***

***Introduction.***
*PEPL*
*Panhandle      *
*the      Company*
*Southern      Union Company*
*Southern      Union*
*FERC*

|   | · | PEPL,                an indirect wholly-owned subsidiary of Southern Union                Company; |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | · | Trunkline                Gas Company, LLC (*Trunkline*),                a direct wholly-owned subsidiary of                PEPL; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sea                Robin Pipeline Company, LLC (*Sea                Robin*),                an indirect wholly-owned subsidiary of                PEPL; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Trunkline                LNG Holdings, LLC (*LNG                Holdings*),                an indirect wholly-owned subsidiary of                PEPL; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Trunkline                LNG Company, LLC (*Trunkline                LNG*),                a direct wholly-owned subsidiary of LNG Holdings;                and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Pan                Gas Storage, LLC (d.b.a. *Southwest                Gas Storage*),                a direct wholly-owned subsidiary of                PEPL. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Services*.**
*LNG*
*Bcf/d*

|                                         | **Year                  Ended December 31,** |   |
|----------------------------------------------|----------------------------------------------|--------|
|                                         | **2006**                                     |   | **2005** |   | **2004** |   |
|                                         |                                         |   |   |   |   |   |   |   |   |
| PEPL                                         |                                         | 579    |   |   | 609 |   |   | 573 |   |
| Trunkline                                    |                                         | 486    |   |   | 459 |   |   | 527 |   |
| Sea                  Robin                   |                                         | 115    |   |   | 146 |   |   | 184 |   |
| Trunkline                  LNG Usage Volumes |                                         | 149    |   |   | 108 |   |   | 170 |   |

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*Table          of Contents*

|                                                                                                                              |  **As                  of**        |   |
|-----------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|--------|
|                                                                                                                              |  **December                  31,** |   |
|                                                                                                                              |  **2006**                          |   |
| Approximate                  Miles of Pipelines                                                                                   |                                    |   |   |
| PEPL                                                                                                                              |                                    | 6,000  |   |
| Trunkline                                                                                                                         |                                    | 3,500  |   |
| Sea                  Robin                                                                                                        |                                    | 450    |   |
| Peak                  Day Delivery Capacity (Bcf/d)                                                                               |                                    |   |   |
| PEPL                                                                                                                              |                                    | 2.8    |   |
| Trunkline                                                                                                                         |                                    | 1.5    |   |
| Sea                  Robin                                                                                                        |                                    | 1      |   |
| Trunkline                  LNG                                                                                                    |                                    | 2.1    |   |
| Underground                  Storage Capacity-Owned (Bcf)                                                                         |                                    | 72     |   |
| Underground                  Storage Capacity-Leased (Bcf)                                                                        |                                    | 16     |   |
| Trunkline                  LNG Terminal Storage Capacity (Bcf)                                                                    |                                    | 9      |   |
| Average                  Number of Transportation Customers                                                                       |                                    | 500    |   |
| Weighted                  Average Remaining Life in Years of Firm Transportation                  Contracts                       |                                    |   |   |
| PEPL                                                                                                                              |                                    | 4.6    |   |
| Trunkline                                                                                                                         |                                    | 9.9    |   |
| Sea                  Robin (1)                                                                                                    |                                    | N/A    |   |
| Weighted                  Average Remaining Life in Years of Firm Storage Contracts                                               |                                    |   |   |
| PEPL                                                                                                                              |                                    | 6.3    |   |
| Trunkline                                                                                                                         |                                    | 1.7    |   |
| ___________________                                                                                                               |                                    |   |   |
| (1)                  Sea Robin contracts are interruptible without any firm contracts                  in                  place. |                                    |   |   |

***Recent      System***
***Enhancements***

***LNG      Expansion Projects.***
*Construction      work-in-progress*

*Item      7. Management’s Discussion and Analysis of Financial Condition and Results of      Operations - Liquidity and Capital Resources*

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*Table          of Contents*

***Significant      Customers.***

|                                                                                                                                                                                                                                                                                                                                                                                               |   | **Percent                    of**         |   | **Weighted**                             |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                               |   | **Revenues**                              |   | **Average                    Life**      |   |
|                                                                                                                                                                                                                                                                                                                                                                                               |   | **For                    Year Ended**     |   | **of                    Contracts at**   |   |
| **Customer**                                                                                                                                                                                                                                                                                                                                                                                       |   | **December                    31, 2006**  |   | **December                    31, 2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                               |   |                                           |   |                                     |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                               |   |                                           |   |                                     |   |   |   |
| BG                    LNG Services (1)                                                                                                                                                                                                                                                                                                                                                             |   |                                           | 24     | %                                        |   | 17                    years |   |
| ProLiance                                                                                                                                                                                                                                                                                                                                                                                          |   |                                           | 12     |                                     |   | 7.8                    years |   |
| Ameren                    Corp. (2)                                                                                                                                                                                                                                                                                                                                                                |   |                                           | 10     |                                     |   | 7.1                    years |   |
| Other                    top 10 customers                                                                                                                                                                                                                                                                                                                                                          |   |                                           | 19     |                                     |   | 4.1                    years |   |
| Remaining                    customers                                                                                                                                                                                                                                                                                                                                                             |   |                                           | 35     |                                     |   | 4.5                    years |   |
| Total                    percentage                                                                                                                                                                                                                                                                                                                                                                |   |                                           | 100    | %                                        |   |   |   |
| ___________________                                                                                                                                                                                                                                                                                                                                                                                |   |                                           |   |                                     |   |   |   |
| (1)                    BG LNG Services’ contracts were extended with the completion of Phase I                    and Phase II in the second and third quarters of 2006, respectively.                    For                    additional information, see *Item                    8. Financial Statements and Supplementary Data, Note 3 – Regulatory                    Matters*. |   |
| (2)                    Includes Ameren Corp. subsidiaries such as Union Electric, Central                    Illinois Light Company, Illinois Power and Central Illinois Public                    Service.                                                                                                                                                                                        |   |

***Regulation***

*Item      1. Business - Environmental, Item 1A. Risk Factors *
*      Item      8. Financial Statements and Supplementary Data, Note 3 - Regulatory      Matters*

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*Table          of Contents*

|                                                                                                                                                                                                                                                                                                                                                               |   | **Date                        of Last** |   |                                                               |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------------------------------------|--------|
| **Company**                                                                                                                                                                                                                                                                                                                                                        |   | **Rate                        Filing**  |   | **Status**                                                         |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                    |   |                                                               |   |
| PEPL                                                                                                                                                                                                                                                                                                                                                               |   |  May                      1992     |   |  Settlement                      effective April 1997         |   |
| Trunkline                                                                                                                                                                                                                                                                                                                                                          |   |  January                      1996 |   |  Settlement                      effective May 2001           |   |
| Sea                        Robin                                                                                                                                                                                                                                                                                                                                   |   |  April                      2001   |   |  Settlement                      effective May 2002           |   |
| Trunkline                        LNG                                                                                                                                                                                                                                                                                                                               |   |  June                      2001    |   |  Settlement                      effective January 2002       |   |
| Southwest                        Gas Storage                                                                                                                                                                                                                                                                                                                       |   |  April                      1989   |   |  Settlement                        effective October 1989 (1) |   |
| ___________________                                                                                                                                                                                                                                                                                                                                                |   |                                    |   |                                                               |   |
| (1)                        For information related to a complaint filed with FERC against                        Southwest                        Gas Storage under Section 5 of the Natural Gas Act, see *Item                        8. Financial Statements and Supplementary Data, Note 3 -                        Regulatory                        Matters*. |   |

*Item      8. Financial Statements and Supplementary Data, Note 3 - Regulatory      Matters.*

***Competition***

***Environmental***

----

*Table          of Contents*

*Item      8. Financial Statements and Supplementary Data, Note 13 - Commitments and      Contingencies*

***Insurance***

***Employees***

***Available      Information***

*SEC*

**ITEM      1A. Risk Factors. **

***The      Company has substantial debt and depends on its ability to access the capital      markets.***

----

*Table          of Contents*

***Credit      ratings downgrades could increase the Company’s financing costs and could limit      its ability to access the capital markets.***

***The      Company is controlled by Southern Union.***

***The      Company is subject to operating risks.***

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*Table          of Contents*

***The      Company is subject to extensive federal, state and local laws and regulations      regulating the environmental aspects of its business that may increase its      costs      of operations, expose it to environmental liabilities and require it to make      material unbudgeted expenditures.***

***Terrorist      attacks, such as the attacks that occurred on September 11, 2001, have      resulted in increased costs, and the consequences of the War on Terror and      the      Iraq conflict may adversely impact the Company’s results of      operations.***

***The      Company’s business is highly regulated.***

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*Table          of Contents*

*Item      8. Financial Statements and Supplementary Data, Note 3 - Regulatory      Matters*

***The      pipeline business of the Company is subject to      competition.***

***The      success of the pipeline business of the Company depends, in part, on factors      beyond its control.***

***The      success of the Company depends on the continued development of additional      natural gas reserves in the vicinity of its facilities and its ability to access      additional reserves to offset the natural decline from existing wells connected      to its system.***

***Fluctuations      in energy commodity prices could adversely affect the business of the      Company.***

***The      pipeline business of the Company is dependent on a small number of customers      for      a significant percentage of its sales.***

***The      pipeline revenues of the Company are generated under contracts that must be      renegotiated periodically.***

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*Table          of Contents*

***The      Company is exposed to the credit risk of its customers in the ordinary course      of      business.***

***Substantial      risks are involved in operating a natural gas pipeline      system.***

***Cautionary      Factors That May Affect Future Results***

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*Table          of Contents*

|   | · | changes                in demand for natural gas by the Company’s customers, in the composition                of the Company’s customer base and in the sources of natural gas available                to the Company; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | additional                level of competition potentially increasing the number of discounted                revenue transactions; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                effects of inflation and the timing and extent of changes in the                prices                and overall demand for and availability of natural gas as well as                electricity, oil, coal and other bulk materials and                chemicals; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | adverse                weather conditions, such as warmer than normal weather in the Company’s                service territories, and the operational impact of disasters such                as                hurricanes; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | changes                in laws or regulations, third-party relations and approvals, decisions                of                courts, regulators and governmental bodies affecting or involving                the                Company, including deregulation initiatives and the impact of rate                and                tariff proceedings before FERC and various state regulatory                commissions; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                speed and degree to which additional competition is introduced to                the                Company’s business and the resulting effect on                revenues; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                outcome of pending and future                litigation; |
|--------|--------|-----------------------------------------------------------------------------|

|   | · | the                Company’s ability to comply with or to challenge successfully existing or                new environmental regulations; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | unanticipated                environmental liabilities; |
|--------|--------|---------------------------------------------------------|

|   | · | the                Company’s ability to acquire new businesses and assets and integrate those                operations into its existing operations, as well as its ability to                expand                its existing businesses and                facilities; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                Company’s ability to control costs successfully and achieve operating                efficiencies, including the purchase and implementation of new                technologies for achieving such                efficiencies; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                impact of factors affecting operations such as maintenance or repairs,                environmental incidents, gas pipeline system constraints and relations                with labor unions representing bargaining-unit                employees; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | changes                in the ratings of the Company’s debt securities or any of its                subsidiaries; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|

|   | · | changes                in interest rates and other general capital markets conditions, and                in the                Company’s ability to continue to access the capital                markets; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | acts                of nature, sabotage, terrorism or other acts causing damage greater                than                the Company’s insurance coverage                limits; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | market                risks beyond the Company’s control affecting its risk management                activities including market liquidity, commodity price volatility                and                counterparty creditworthiness; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | other                risks and unforeseen events. |
|--------|--------|---------------------------------------------------|

**ITEM      1B. Unresolved Staff Comments.**

**ITEM      2. Properties.**

*Item      1. Business *

**ITEM      3. Legal Proceedings.**

*Item      1, Business - Regulation*
*Item      8. Financial Statements and Supplementary Data, Note 3 - Regulatory Matters      and      Note 13 - Commitments and Contingencies,*
*Item      1A. Risk Factors - Cautionary Factors That May Affect Future      Results.*

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*Table          of Contents*

**ITEM      4. Submission of Matters to a Vote of Security Holders**.

**PART      II**

**ITEM      5. Market for Registrant’s Common Equity, Related Stockholder      Matters and Issuer Purchases of Equity Securities.**

*Item      8. Financial Statements and Supplementary Data, Note 1 - Corporate      Structure*

**ITEM      6. Selected Financial Data.**

**ITEM      7. Management's Discussion and Analysis of Financial Condition and Results      of      Operation*****.***

***Overview***

*Item      1. Business*

*      Item      1A. Risk Factors *
*Item      1. Business*
*.      *

*Item      1. Business - Regulation*

----

*Table          of Contents*

**Results      of Operations**

|                                                       |                            |    |                            |   |  **Year                  Ended**       |   |
|------------------------------------------------------------|---------------------------------|---------|---------------------------------|--------|---------------------------------------------|--------|
|                                                       |                            |    |                            |   |  **December                  31,**     |   |
|                                                       | **Year                  Ended** |    | **Year                  Ended** |   |  **2006                  Versus 2005** |   |
|                                                       | December                    31, |    | December                    31, |   | **Favorable/(Unfavorable)**                 |   |
|                                                       | **2006**                        |    | **2005**                        |   |  **Variances**                         |   |
|                                                       | (In                  thousands) |    |
| Operating                  revenue:                        |                            |    |                            |   |                                        |   |   |   |   |
| Transportation                  and storage of natural gas | $                               | 451,513 |                            | $      | 434,537                                     |   | $ | 16,976 |   |
| LNG                  terminalling revenue                  |                            | 111,821 |                            |   | 62,569                                      |   |   | 49,252 |   |
| Other                  revenue                             |                            | 13,848  |                            |   | 8,127                                       |   |   | 5,721 |   |
| Total                  operating revenue                   |                            | 577,182 |                            |   | 505,233                                     |   |   | 71,949 |   |
|                                                       |                            |    |                            |   |                                        |   |   |   |   |
| Operating                  expenses:                       |                            |    |                            |   |                                        |   |   |   |   |
| Operation,                  maintenance and general        |                            | 206,181 |                            |   | 204,461                                     |   |   | (1,720 | ) |
| Depreciation                  and amortization             |                            | 72,724  |                            |   | 62,171                                      |   |   | (10,553 | ) |
| Taxes,                  other than on income               |                            | 25,405  |                            |   | 28,196                                      |   |   | 2,791 |   |
| Total                  operating expenses                  |                            | 304,310 |                            |   | 294,828                                     |   |   | (9,482 | ) |
|                                                       |                            |    |                            |   |                                        |   |   |   |   |
| Operating                  income                          |                            | 272,872 |                            |   | 210,405                                     |   |   | 62,467 |   |
|                                                       |                            |    |                            |   |                                        |   |   |   |   |
| Other                  income (expense):                   |                            |    |                            |   |                                        |   |   |   |   |
| Interest                  expense, net                     |                            | (61,989 | )                               |   | (48,285                                     | )      |   | (13,704 | ) |
| Other,                  net                                |                            | 14,911  |                            |   | 4,069                                       |   |   | 10,842 |   |
| Total                  other expense, net                  |                            | (47,078 | )                               |   | (44,216                                     | )      |   | (2,862 | ) |
|                                                       |                            |    |                            |   |                                        |   |   |   |   |
| Earnings                  before income taxes              |                            | 225,794 |                            |   | 166,189                                     |   |   | 59,605 |   |
|                                                       |                            |    |                            |   |                                        |   |   |   |   |
| Income                  taxes                              |                            | 88,039  |                            |   | 64,627                                      |   |   | (23,412 | ) |
|                                                       |                            |    |                            |   |                                        |   |   |   |   |
| Net                  earnings                              | $                               | 137,755 |                            | $      | 101,562                                     |   | $ | 36,193 |   |
|                                                       |                            |    |                            |   |                                        |   |   |   |   |

***Operating      Revenue.***

| · | A                $49.3 million increase in LNG terminalling revenue due to expanded                vaporization capacity, a base capacity increase on the BG LNG Services                contract and higher volumes resulting from an increase in LNG cargoes; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Increased                transportation and storage revenue of $17 million due to higher                reservation revenues of $15.6                million, which were primarily driven by higher average rates on contracts,                higher parking revenues of $1.6                million and higher storage revenues of $4.7                million due to increased contracted capacity. These increases were                partially offset by lower usage revenues of $4.9                million, of which $3.1                million resulted from the impact on Sea Robin in 2006 of the hurricanes                that occurred in the third quarter of 2005 and $1.8                million resulted from lower overall capacity utilization at Trunkline;                and |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Increased                other revenue of $5.7 million primarily due to $3.7                million of non-recurring operational sales of gas in 2006 and                $1.1                million of higher liquids revenue. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Operating      Expenses.***

| · | Increased                depreciation and amortization expense of $10.6 million due to an                increase in property, plant and equipment placed in service, including                the                Trunkline LNG Phase I and Phase II expansions;                and |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An                increase in operation, maintenance and general expenses of $1.7 million                primarily due to approximately $3.2                million of higher pipeline integrity assessment costs, approximately                $1.6                million of higher maintenance project costs, $1.3                million for inspections of facilities due to Hurricane Rita, a                $3.8                million decrease in 2005 due to a change in vacation pay practice                and a                corresponding accrual reduction and $2.1                million of higher fuel and electric power tracker costs associated                with                higher LNG cargo activity. These increases were partially offset                by a                $9.7                million decrease in insurance related costs due to accrued losses                recorded                in 2005 associated with the hurricanes and lower 2006 premiums and                a                $4.4                million decrease in benefit costs primarily related to lower                postretirement benefit expenses including the impact of enactment                of                Medicare Part D reimbursements and benefit plan                changes. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table          of Contents*

***Other      Income (Expense).***
** **

***Income      Taxes.***

***Liquidity      and Capital Resources***

***Operating      Activities.***

***Investing      Activities.***

***Principal      Capital Expenditure Projects***

***LNG      Terminal Enhancement.***

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*Table          of Contents*

*Construction      work-in-progress*

***Compression      Modernization.***
*Construction      work-in-progress *

***Trunkline      Field Zone Expansion Project.***
*CIAC*
*Energy      Transfer*
*Construction      work-in-progress*

***Hurricane      - Related Expenditures*.**

*Construction      work in progress*

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*Table          of Contents*

|                                                                                                                                                                                                                                                        | **Year**                          |    | **Year**                          |   | **Year**                          |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|---------|-----------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                                                                                                                                        | **Ended**                         |    | **Ended**                         |   | **Ended**                         |   |
|                                                                                                                                                                                                                                                        | **December                  31,** |    | **December                  31,** |   | **December                  31,** |   |
| **Property,                  Plant and Equipment Additions**                                                                                                                                                                                                | **2006**                          |    | **2005**                          |   | **2004**                          |   |
|                                                                                                                                                                                                                                                             | (In                  thousands)   |    |
|                                                                                                                                                                                                                                                        |                              |    |                              |   |                              |   |   |   |   |
| LNG                  Terminal Expansions                                                                                                                                                                                                               | $                                 | 26,176  |                              | $      | 66,436                            |   | $ | 87,709 |   |
| LNG                  Terminal Enhancement                                                                                                                                                                                                              |                              | 30,869  |                              |   | 8,827                             |   |   | 614 |   |
| Trunkline                  LNG Loop                                                                                                                                                                                                                    |                              | 3,173   |                              |   | 25,329                            |   |   | 21,321 |   |
| Trunkline                  LNG Field Zone Expansion                                                                                                                                                                                                    |                              | 12,314  |                              |   | 169                               |   |   | - |   |
| Pipeline                  Integrity                                                                                                                                                                                                                    |                              | 20,223  |                              |   | 21,816                            |   |   | 18,378 |   |
| East                  End Enhancement                                                                                                                                                                                                                  |                              | 52,102  |                              |   | 1,012                             |   |   | - |   |
| Information                  Technology                                                                                                                                                                                                                |                              | 14,142  |                              |   | 6,162                             |   |   | 6,226 |   |
| Hurricanes                                                                                                                                                                                                                                             |                              | 20,296  |                              |   | 900                               |   |   | - |   |
| Compression                  Modernization                                                                                                                                                                                                             |                              | 11,642  |                              |   | -                                 |   |   | - |   |
| Air                  Emmission Compliance                                                                                                                                                                                                              |                              | 15,346  |                              |   | 11,481                            |   |   | 7,521 |   |
| Other                                                                                                                                                                                                                                                  |                              | 38,538  |                              |   | 47,283                            |   |   | 41,935 |   |
| Total                  (1)                                                                                                                                                                                                                                  | $                                 | 244,821 |                              | $      | 189,415                           |   | $ | 183,704 |   |
| ____________________                                                                                                                                                                                                                                        |                              |    |                              |   |                              |   |   |   |   |
| (1)                  Includes net capital accruals totaling $15,910, $(5,537) and $10,657                  for                  the years ended December 31, 2006, December 31, 2005 and December                  31,                  2004, respectively. |                              |

***Financing      Activities.***
*** ***

*2006      Term Loan*

**Retirement        of Debt Obligations**

*2007        Expected TLNG Term Loan*

----

*Table          of Contents*

*Item      8. Financial Statements and Supplementary Data, Note 11 - Debt*

***Other      Matters***

***Master      Limited Partnership.***
** **

***Regulation.***
** **

*      Item      8. Financial Statements and Supplementary Data, Note 3 - Regulatory      Matters.*

***Environmental      Matters.***
*      Item      8. Financial Statements and Supplementary Data, Note 13 - Commitments and      Contingencies.*

***Off-Balance      Sheet Arrangements and Aggregate Contractual      Obligations.***
*Bridge      Loan*

----

*Table          of Contents*

***Contractual      Commitments.***

|                                                                                                                                                                                                                                        | **Contractual                  Obligations (In thousands)** |      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|-----------|
|                                                                                                                                                                                                                                        |                                                        |      |   |   |   |   |   |   |   |   |   |   | **2012                  and** |   |
|                                                                                                                                                                                                                                        | **Total**                                                   |      | **2007** |   | **2008** |   | **2009** |   | **2010** |   | **2011** |   | **thereafter** |   |
|                                                                                                                                                                                                                                        |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                  Leases (1)                                                                                                                                                                                                       | $                                                           | 53,398    |   | $ | 11,250 |   | $ | 6,997 |   | $ | 6,353 |   | $ | 5,561 |   | $ | 4,979 |   | $ | 18,258 |   |
|                                                                                                                                                                                                                                        |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  long term debt (2)                                                                                                                                                                                                   |                                                        | 1,638,054 |   |   | 462,290 |   |   | 758,336 |   |   | 60,623 |   |   | 40,500 |   |   | - |   |   | 316,305 |   |
|                                                                                                                                                                                                                                        |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  payments on debt (3)                                                                                                                                                                                              |                                                        | 310,615   |   |   | 79,564 |   |   | 49,006 |   |   | 27,048 |   |   | 21,437 |   |   | 19,766 |   |   | 113,794 |   |
|                                                                                                                                                                                                                                        |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Firm                  capacity payments (4)                                                                                                                                                                                                 |                                                        | 55,436    |   |   | 8,901 |   |   | 7,455 |   |   | 7,186 |   |   | 5,810 |   |   | 5,351 |   |   | 20,733 |   |
|                                                                                                                                                                                                                                        |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| OPEB                  funding (5)                                                                                                                                                                                                           |                                                        | 39,060    |   |   | 7,812 |   |   | 7,812 |   |   | 7,812 |   |   | 7,812 |   |   | 7,812 |   |   | - |   |
|                                                                                                                                                                                                                                        |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                                                                                                                                                                       | $                                                           | 2,096,563 |   | $ | 569,817 |   | $ | 829,606 |   | $ | 109,022 |   | $ | 81,120 |   | $ | 37,908 |   | $ | 469,090 |   |
| ___________________                                                                                                                                                                                                                         |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                  Lease of various assets utilized for operations.                                                                                                                                                                       |                                                        |
| (2)                  The long-term debt cash obligations exclude $9.6 million of unamortized                  debt premium as of December 31, 2006.                                                                                         |                                                        |
| (3)                  Interest payments on debt are based upon the applicable stated                  or variable                  interest rates as of December 31, 2006.                                                                   |                                                        |
| (4)                  Charges for third party storage capacity.                                                                                                                                                                              |                                                        |
| (5)                  Panhandle is committed to the funding levels of $7.8 million per                  year                  until modified by future rate proceedings, the timing of which                  is                  uncertain. |                                                        |

***Postretirement      Benefits***
**.**
*Item      8. Financial Statements and Supplementary Data, Note 14 -      Benefits*

***Vacation      Plan Change.***

***Inflation.***

***New      Accounting Pronouncements***

***FIN      48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB      Statement 109”***
**(**
***FIN      48***
**):**
*** ***
*(FASB)*
*Accounting      for Income Taxes*

***FASB      Statement No. 157, “Fair Value Measurements”***
**:**

----

*Table          of Contents*

***FASB      Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other      Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and      132(R)”***
**:**
*Item      8. Financial Statements and Supplementary Data, Note 14 -      Benefits*

***FASB      Statement No. 159, “The Fair Value Option for Financial Assets and Financial      Liabilities - Including an Amendment of FASB Statement No.      115”***
**:**

***SEC      Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year      Misstatements when Quantifying Misstatements in Current Year Financial      Statements” (SAB No. 108):***

*Item      8. Financial Statements and Supplementary Data, Note 2 - Summary of Significant      Accounting Policies - New Accounting Principles*

**ITEM      7A. Quantitative and Qualitative Disclosures About Market      Risks.**

*Accounting      for Derivative Instruments and Hedging Activities*

----

*Table          of Contents*

*Item      8. Financial Statements and Supplementary Data, Note 11 - Debt*

**ITEM      8. Financial Statements and Supplementary      Data.**

**ITEM      9. Changes in and Disagreements With Accountants on Accounting      and Financial Disclosure.**

**ITEM      9A. Controls and Procedures.**

***Evaluation      of Disclosure Controls and Procedures***

*Exchange      Act*
*COO*
*CFO*

***Changes      in Internal Controls Over Financial Reporting***

**ITEM      9B. Other Information.**

**PART      III**

**ITEM      10. Directors, Executive Officers and Corporate      Governance.**

----

*Table          of Contents*

**ITEM      11. Executive Compensation.**

**ITEM      12. Security Ownership of Certain Beneficial Owners and      Management and Related Stockholder Matters.**

**ITEM      13. Certain Relationships and Related Transactions, and      Director Independence.**

**ITEM      14. Principal Accountant Fees and      Services.**

| **Fee                        Category**                                                                                                                                                                                                                                                                                                                                                           |   | **2006**                              |   | **2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|----------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                              |   | (in                        thousands) |   |
| Audit                        Fees (1)                                                                                                                                                                                                                                                                                                                                                             |   |                                  |   |     |   |   |   |
| PricewaterhouseCoopers                        LLP                                                                                                                                                                                                                                                                                                                                                 |   | $                                     | 999    |     | $      | 1,184 |   |
|                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |     |   |   |   |
| Audit-Related                        Fees (2)                                                                                                                                                                                                                                                                                                                                                     |   |                                  |   |     |   |   |   |
| PricewaterhouseCoopers                        LLP                                                                                                                                                                                                                                                                                                                                                 |   |                                  | -      |     |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |     |   |   |   |
| All                        Other Fees (3)                                                                                                                                                                                                                                                                                                                                                         |   |                                  | -      |     |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |     |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |     |   |   |   |
| Total                        Fees                                                                                                                                                                                                                                                                                                                                                                 |   | $                                     | 999    |     | $      | 1,184 |   |
| ___________________                                                                                                                                                                                                                                                                                                                                                                               |   |                                  |   |     |   |   |   |
| (1)                        Audit Fees consists of fees billed for professional services                        rendered in                        connection with the audit of the annual financial statements,                        review of                        the quarterly financial statements and state and federal                        regulatory                        audits. |   |
| (2)                        Audit-Related Fees consists of fees billed for accounting                        research and                        professional services rendered in connection with debt offerings,                        registration statements, and review of internal controls.                                                                                                |   |
| (3)                        All Other Fees consists of fees associated with other services                        provided by                        the principal audit firm.                                                                                                                                                                                                                     |   |

*de      minimis*

----

*Table          of Contents*

**PART      IV**

**ITEM      15. Exhibits, Financial Statement      Schedules.**

**Exhibits.      **

**                    Exhibit No.**
**Description**

| 3(a)   | Certificate                of Formation of Panhandle Eastern Pipe Line  Company,                LP. (Filed as Exhibit 3.A to the Form 10-K for the year ended December                31,                2004 and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                          |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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. (Filed as Exhibit 3.B to the Form 10-K for the year                ended                December 31, 2004 and incorporated herein by                reference.)                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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                Issuerand                J.P. Morgan Trust Company, National Association, as Trustee. (Filed                as                Exhibit 4.E                to the Form 10-K for the year ended December 31, 2004 and incorporated                hereinby                reference.)                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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.)                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10(a)  | Credit                Agreement between Trunkline LNG Holdings, LLC, as borrower, Panhandle                Eastern Pipe Line Company, LP and CrossCountry Citrus, LLC, as guarantors,                the financial institutions listed therein and Bayerische Hypo- Und                Vereinsbank AG, New York Branch, as administrative agent, dated as                of                December 1, 2006. (Filed as Exhibit 10.1 to Panhandle’s Current Report on                Form 8-K filed on December 7, 2006 and incorporated herein by                reference.) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10(b)  | $465,000,000                Promissory Note made by CrossCountry Citrus, LLC, as borrower, in                favor of                Trunkline LNG Holdings LLC, as holder, dated as of December 1, 2006.                (Filed as Exhibit 10.2 to Panhandle’s Current Report on Form 8-K filed on                December 7, 2006 and incorporated herein by reference.)                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 24     | Power                of Attorney                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

----

*Table          of Contents*

| 31.1   | Certificate                by President and Chief Operating Officer pursuant to Rule 13a - 14(a)                or                15d - 14(a) promulgated under the Securities Exchange Act of 1934,                as                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of                2002.                                |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                   |
| 31.2   | Certificate                by Senior Vice President and Chief Financial Officer pursuant to                Rule 13a                - 14(a) or 15d - 14(a) promulgated under the Securities Exchange                Act of                1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act                of                2002.     |
|   |                                                                                                                                                                                                                                                                                                                                                   |
| 32.1   | Certificate                by President and Chief Operating Officer pursuant to Rule 13a - 14(b)                or                15d - 14(b) promulgated under the Securities Exchange Act of 1934                and                Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section                1350.                            |
|   |                                                                                                                                                                                                                                                                                                                                                   |
| 32.2   | Certificate                by Senior Vice President and Chief Financial Officer pursuant to                Rule 13a                - 14(b) or 15d - 14(b) promulgated under the Securities Exchange                Act of                1934 and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.                Section                1350. |

----

*Table          of Contents*

**SIGNATURES**

|      |  PANHANDLE EASTERN PIPE LINE COMPANY,              LP |
|-----------|------------------------------------------------------------|
|      |                                                       |
|  By: |  /s/ ROBERT O. BOND                         |
|      | Robert O. Bond                                             |
|      | President and Chief Operating              Officer         |

| **                                  SIGNATURE**       | **                                             TITLE**                                      |
|-------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  (i)                                                                                                                                       |  Principle                executive officer:/s/                ROBERT O. BOND                     Robert O. Bond                                                                                               |    President                and Chief Operating Officer |
|  (ii)                                                                                                                                      |  Principal                financial officer:/s/                RICHARD N. MARSHALL                     Richard N. Marshall                                                                                     |    Senior                Vice President and Chief Financial Officer |
|  (iii)                                                                                                                                     |  Principal                accounting officer:/s/                GARY W. LEFELAR                     Gary W. Lefelar                                                                                            |    Senior                Vice President and Chief Accounting Officer |
|  (iv)                                                                                                                                      |  A                majority of the Board of Directors of Southern Union Company, Sole                Member                of Southern Union Panhandle, LLC, General Partner of Panhandle Eastern                Pipe Line Company, L.P. |
|  **                                  SIGNATURE** |  **                                             TITLE**                                |
|  /s/                GEORGE L. LINDEMANN                     George L. Lindemann                                   |   Chairman,                Southern Union Company                                                                                                                                                                                  |
|  /s/                DAVID BRODSKY                     David Brodsky                                               |   Director,                Southern Union Company                                                                                                                                                                                  |
|  /s/                FRANK W. DENIUS                     Frank W. Denius                                           |   Director,                Southern Union Company                                                                                                                                                                                  |
|  /s/                KURT A. GITTER, M.D.                     Kurt A. Gitter, M.D.                                 |   Director,                Southern Union Company                                                                                                                                                                                  |
|  /s/                HERBERT H. JACOBI                     Herbert H. Jacobi                                       |   Director,                Southern Union Company                                                                                                                                                                                  |
|  /s/                ADAM M. LINDEMANN                      Adam M. Lindemann                                 |   Director,                Southern Union Company                                                                                                                                                                                  |
|  /s/                THOMAS N. McCARTER, III                      Thomas N. McCarter, III                     |   Director,                Southern Union Company                                                                                                                                                                                  |
|  /s/                GEORGE ROUNTREE, III                      George Rountree, III                           |   Director,                Southern Union Company                                                                                                                                                                                  |
|  /s/                ALAN D. SCHERER                      Alan D. Scherer                                     |   Director,                Southern Union Company                                                                                                                                                                                  |

|  *By: |  /s/ RICHARD N. MARSHALL                                     |  *By: |  /s/ ROBERT O. BOND                    |
|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------|
|       |  Senior Vice President and Chief                Financial Officer |       |  President and Chief Operating                Officer |
|       |  Attorney-in-fact                                                 |       |  Attorney-in-fact                                     |

----

*Table          of Contents*

**PANHANDLE      EASTERN PIPE LINE, LP**

**INDEX      TO CONSOLIDATED FINANCIAL STATEMENTS**

| Financial                Statements and Supplementary Data:                                        |                     |
|----------------------------------------------------------------------------------------------------|--------------------------|
| Consolidated                Statement of Operations                                                | F-2                      |
| Consolidated                Balance Sheet                                                          | F-3                - F-4 |
| Consolidated                Statement of Cash Flows                                                | F-5                      |
| Consolidated                Statement of Partners' Capital and Comprehensive                Income | F-6                      |
| Notes                to Consolidated Financial                Statements                           | F-7-F-35                 |
| Report                of Independent Registered Public Accounting                Firm              | F-36                     |

----

*Financial          Statement Index*

**PANHANDLE            EASTERN PIPE LINE COMPANY, LP**

**CONSOLIDATED            STATEMENT OF OPERATIONS**

|                                                             |                              |    |                              |   |                              |   |
|------------------------------------------------------------------|-----------------------------------|---------|-----------------------------------|--------|-----------------------------------|--------|
|                                                             | **Year                  Ended**   |    | **Year                  Ended**   |   | **Year                  Ended**   |   |
|                                                             | **December                  31,** |    | **December                  31,** |   | **December                  31,** |   |
|                                                             | **2006**                          |    | **2005**                          |   | **2004**                          |   |
|                                                                  | (In                  thousands)   |    |
| **Operating                  revenue**                           |                              |    |                              |   |                              |   |   |   |   |
| Transportation                  and storage of natural gas  | $                                 | 451,513 |                              | $      | 434,537                           |   | $ | 423,011 |   |
| LNG                  terminalling revenue                   |                              | 111,821 |                              |   | 62,569                            |   |   | 56,537 |   |
| Other                  revenue                              |                              | 13,848  |                              |   | 8,127                             |   |   | 9,616 |   |
| Total                  operating revenue                         |                              | 577,182 |                              |   | 505,233                           |   |   | 489,164 |   |
|                                                             |                              |    |                              |   |                              |   |   |   |   |
| **Operating                  expenses**                          |                              |    |                              |   |                              |   |   |   |   |
| Operation,                  maintenance and general         |                              | 206,181 |                              |   | 204,461                           |   |   | 212,106 |   |
| Depreciation                  and amortization              |                              | 72,724  |                              |   | 62,171                            |   |   | 60,182 |   |
| Taxes,                  other than on income                |                              | 25,405  |                              |   | 28,196                            |   |   | 26,867 |   |
| Total                  operating expenses                        |                              | 304,310 |                              |   | 294,828                           |   |   | 299,155 |   |
|                                                             |                              |    |                              |   |                              |   |   |   |   |
|                                                             |                              |    |                              |   |                              |   |   |   |   |
| **Operating                  income**                            |                              | 272,872 |                              |   | 210,405                           |   |   | 190,009 |   |
|                                                             |                              |    |                              |   |                              |   |   |   |   |
| **Other                  income (expense)**                      |                              |    |                              |   |                              |   |   |   |   |
| Interest                  expense, net                      |                              | (61,989 | )                                 |   | (48,285                           | )      |   | (48,429 | ) |
| Other,                  net                                 |                              | 14,911  |                              |   | 4,069                             |   |   | 2,409 |   |
| Total                  other income (expense)                    |                              | (47,078 | )                                 |   | (44,216                           | )      |   | (46,020 | ) |
|                                                             |                              |    |                              |   |                              |   |   |   |   |
| **Earnings                  before income taxes**                |                              | 225,794 |                              |   | 166,189                           |   |   | 143,989 |   |
|                                                             |                              |    |                              |   |                              |   |   |   |   |
| **Income                  taxes**(Note                  6)       |                              | 88,039  |                              |   | 64,627                            |   |   | 56,056 |   |
|                                                             |                              |    |                              |   |                              |   |   |   |   |
| **Net                  earnings**                                | $                                 | 137,755 |                              | $      | 101,562                           |   | $ | 87,933 |   |
|                                                             |                              |    |                              |   |                              |   |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE            EASTERN PIPE LINE COMPANY, LP**

**CONSOLIDATED BALANCE            SHEET**

|                                                                        | **December                  31, 2006** |      | **December                  31, 2005** |   |
|-----------------------------------------------------------------------------|----------------------------------------|-----------|----------------------------------------|--------|
| **Assets**                                                                  |  (In                  thousands)  |      |
|                                                                        |                                   |      |                                   |   |   |   |
| **Current                  assets**                                         |                                   |      |                                   |   |   |   |
| Cash                  and cash equivalents                             | $                                      | 531       |                                   | $      | 585 |   |
| Accounts                  receivable, billed and unbilled,             |                                   |      |                                   |   |   |   |
| less                  allowances of $1,176 and $1,168, respectively    |                                   | 61,047    |                                   |   | 55,786 |   |
| Accounts                  receivable - related parties (Note 4)        |                                   | 17,994    |                                   |   | 9,556 |   |
| Gas                  imbalances - receivable                           |                                   | 68,013    |                                   |   | 105,233 |   |
| System                  gas and operating supplies                     |                                   | 127,303   |                                   |   | 89,620 |   |
| Deferred                  income taxes, net (Note 6)                   |                                   | 3,117     |                                   |   | 2,086 |   |
| Note                  receivable - Southern Union (Note 4)             |                                   | -         |                                   |   | 110,580 |   |
| Note                  receivable - CrossCountry Citrus (Note 4)        |                                   | 6,664     |                                   |   | - |   |
| Other                                                                  |                                   | 10,691    |                                   |   | 11,501 |   |
| Total                  current assets                                       |                                   | 295,360   |                                   |   | 384,947 |   |
|                                                                        |                                   |      |                                   |   |   |   |
| **Property,                  plant and equipment**(Note                  7) |                                   |      |                                   |   |   |   |
| Plant                  in service                                      |                                   | 2,418,917 |                                   |   | 2,163,474 |   |
| Construction                  work-in-progress                         |                                   | 166,085   |                                   |   | 176,370 |   |
|                                                                        |                                   | 2,585,002 |                                   |   | 2,339,844 |   |
| Less                  accumulated depreciation and amortization        |                                   | 207,606   |                                   |   | 145,550 |   |
| Net                  property, plant and equipment                          |                                   | 2,377,396 |                                   |   | 2,194,294 |   |
|                                                                        |                                   |      |                                   |   |   |   |
| **Investment                  in affiliate**(Note                  9)       |                                   | 1,457     |                                   |   | 1,468 |   |
|                                                                        |                                   |      |                                   |   |   |   |
| Note                  receivable - Southern Union (Note 4)             |                                   | 148,655   |                                   |   | - |   |
| Note                  receivable - CrossCountry Citrus (Note 4)        |                                   | 458,336   |                                   |   | - |   |
| Intangible                  customer contract, net (Note 8)            |                                   | 7,618     |                                   |   | 8,031 |   |
| Debt                  issuance cost                                    |                                   | 2,376     |                                   |   | 3,634 |   |
| Non-current                  system gas                                |                                   | 14,850    |                                   |   | 25,087 |   |
| Other                                                                  |                                   | 2,472     |                                   |   | 1,853 |   |
|                                                                        |                                   |      |                                   |   |   |   |
| **Total                  assets**                                      | $                                      | 3,308,520 |                                   | $      | 2,619,314 |   |
|                                                                        |                                   |      |                                   |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE            EASTERN PIPE LINE COMPANY, LP**

**CONSOLIDATED BALANCE SHEET            (CONTINUED)**

|                                                                | **December                  31, 2006** |      | **December                  31, 2005** |   |
|---------------------------------------------------------------------|----------------------------------------|-----------|----------------------------------------|--------|
|                                                                     | (In                  thousands)        |      |
| **Partners'                  capital**                              |                                   |      |                                   |   |   |   |
| Partners'                  capital                             | $                                      | 1,041,723 |                                   | $      | 903,968 |   |
| Accumulated                  other comprehensive income        |                                   | 15,477    |                                   |   | 1,339 |   |
| Tax                  sharing note receivable - Southern Union  |                                   | (16,431   | )                                      |   | (50,862 | ) |
| Total                  partners' capital                            |                                   | 1,040,769 |                                   |   | 854,445 |   |
|                                                                |                                   |      |                                   |   |   |   |
| Long-term                  debt (Note 11)                      |                                   | 1,185,391 |                                   |   | 1,179,534 |   |
| Total                  capitalization                               |                                   | 2,226,160 |                                   |   | 2,033,979 |   |
|                                                                |                                   |      |                                   |   |   |   |
| **Current                  liabilities**                            |                                   |      |                                   |   |   |   |
| Current                  portion of long-term debt (Note 11)   |                                   | 461,011   |                                   |   | - |   |
| Accounts                  payable                              |                                   | 6,679     |                                   |   | 3,054 |   |
| Accounts                  payable - overdrafts                 |                                   | 23,776    |                                   |   | 7,866 |   |
| Accounts                  payable - related parties (Note 4)   |                                   | 15,962    |                                   |   | 8,560 |   |
| Gas                  imbalances - payable                      |                                   | 144,137   |                                   |   | 124,297 |   |
| Accrued                  taxes                                 |                                   | 12,030    |                                   |   | 15,228 |   |
| Accrued                  interest                              |                                   | 19,669    |                                   |   | 19,569 |   |
| Fuel                  tracker obligation (Note 2)              |                                   | 12,418    |                                   |   | 32,863 |   |
| Labor                  and benefit accruals                    |                                   | 16,868    |                                   |   | 16,643 |   |
| Other                  operating expense accruals              |                                   | 9,832     |                                   |   | 11,938 |   |
| Capital                  accruals                              |                                   | 26,929    |                                   |   | 11,681 |   |
| Post-retirement                  benefits - current (Note 14)  |                                   | -         |                                   |   | 7,812 |   |
| Other                                                          |                                   | 20,623    |                                   |   | 22,365 |   |
| Total                  current liabilities                          |                                   | 769,934   |                                   |   | 281,876 |   |
|                                                                |                                   |      |                                   |   |   |   |
| Deferred                  income taxes, net (Note 6)           |                                   | 243,697   |                                   |   | 205,787 |   |
| Post-retirement                  benefits (Note 14)            |                                   | 4,436     |                                   |   | 26,103 |   |
| Other                                                          |                                   | 64,293    |                                   |   | 71,569 |   |
| Commitments                  and contingencies (Note 13)       |                                   |      |                                   |   |   |   |
|                                                                |                                   |      |                                   |   |   |   |
| **Total                  partners' capital and liabilities**   | $                                      | 3,308,520 |                                   | $      | 2,619,314 |   |
|                                                                |                                   |      |                                   |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE            EASTERN PIPE LINE COMPANY, LP**

|                                                                                                                        |                              |     |                              |   |                              |   |
|-----------------------------------------------------------------------------------------------------------------------------|-----------------------------------|----------|-----------------------------------|--------|-----------------------------------|--------|
|                                                                                                                        | **Year                  Ended**   |     | **Year                  Ended**   |   | **Year                  Ended**   |   |
|                                                                                                                        | **December                  31,** |     | **December                  31,** |   | **December                  31,** |   |
|                                                                                                                        | **2006**                          |     | **2005**                          |   | **2004**                          |   |
|                                                                                                                        | (In                  thousands)   |     |
| **Cash                  flows provided by (used in) operating activities**                                                  |                              |     |                              |   |                              |   |   |   |   |
| Net                  earnings                                                                                          | $                                 | 137,755  |                              | $      | 101,562                           |   | $ | 87,933 |   |
| Adjustments                  to reconcile net earnings to net cash provided by operating                  activities:  |                              |     |                              |   |                              |   |   |   |   |
| Depreciation                  and amortization                                                                         |                              | 72,724   |                              |   | 62,171                            |   |   | 60,182 |   |
| Gain                  on extinguishment of debt                                                                        |                              | -        |                              |   | -                                 |   |   | (231 | ) |
| Deferred                  income taxes, net                                                                            |                              | 59,898   |                              |   | 42,133                            |   |   | 39,574 |   |
| Gain                  on sale of assets                                                                                |                              | (2,267   | )                                 |   | -                                 |   |   | - |   |
| Debt                  premium and discount amortization, net                                                           |                              | (1,333   | )                                 |   | (1,293                            | )      |   | (5,033 | ) |
| Changes                  in operating assets and liabilities:                                                          |                              |     |                              |   |                              |   |   |   |   |
| Accounts                  receivable                                                                                   |                              | (13,699  | )                                 |   | (9,970                            | )      |   | 1,759 |   |
| Inventory                                                                                                              |                              | 6,821    |                              |   | (6,683                            | )      |   | (31,693 | ) |
| Gas                  imbalances - receivable                                                                           |                              | -        |                              |   | 735                               |   |   | (9,148 | ) |
| Other                  assets                                                                                          |                              | 614      |                              |   | 310                               |   |   | (8,293 | ) |
| Payables                                                                                                               |                              | 11,027   |                              |   | 4,687                             |   |   | (3,564 | ) |
| Accrued                  taxes                                                                                         |                              | 3,966    |                              |   | 24,587                            |   |   | 8,490 |   |
| Interest                  accrued                                                                                      |                              | 100      |                              |   | 450                               |   |   | (1,898 | ) |
| Gas                  imbalances - payable                                                                              |                              | -        |                              |   | (465                              | )      |   | 36,518 |   |
| Other                  liabilities                                                                                     |                              | (26,384  | )                                 |   | (12,851                           | )      |   | 8,714 |   |
| Net                  cash flows provided by operating activities                                                            |                              | 249,222  |                              |   | 205,373                           |   |   | 183,310 |   |
|                                                                                                                        |                              |     |                              |   |                              |   |   |   |   |
| **Cash                  flows provided by (used in) investing activities**                                                  |                              |     |                              |   |                              |   |   |   |   |
| Net                  increase in note receivable - Southern Union                                                      |                              | (38,075  | )                                 |   | (19,835                           | )      |   | (3,395 | ) |
| Increase                  in note receivable - related party                                                           |                              | (465,000 | )                                 |   | -                                 |   |   | - |   |
| Capital                  and investment expenditures                                                                   |                              | (228,911 | )                                 |   | (194,952                          | )      |   | (173,047 | ) |
| Sale                  of assets                                                                                        |                              | 2,450    |                              |   | -                                 |   |   | - |   |
| Other                                                                                                                  |                              | (650     | )                                 |   | (657                              | )      |   | (209 | ) |
| Net                  cash flows used in investing activities                                                                |                              | (730,186 | )                                 |   | (215,444                          | )      |   | (176,651 | ) |
|                                                                                                                        |                              |     |                              |   |                              |   |   |   |   |
| **Cash                  flows provided by (used in) financing activities**                                                  |                              |     |                              |   |                              |   |   |   |   |
| Increase                  (decrease) in bank overdrafts                                                                |                              | 15,910   |                              |   | (12,237                           | )      |   | 13,496 |   |
| Debt                  issuance                                                                                         |                              | 465,000  |                              |   | 255,626                           |   |   | 200,000 |   |
| Debt                  retirements                                                                                      |                              | -        |                              |   | (258,433                          | )      |   | (209,671 | ) |
| Premium                  on debt issuance                                                                              |                              | -        |                              |   | -                                 |   |   | (190 | ) |
| Debt                  issuance costs                                                                                   |                              | -        |                              |   | (354                              | )      |   | (1,050 | ) |
| Net                  cash flows provided by (used in) financing activities                                                  |                              | 480,910  |                              |   | (15,398                           | )      |   | 2,585 |   |
|                                                                                                                        |                              |     |                              |   |                              |   |   |   |   |
| Change                  in cash and cash equivalents                                                                   |                              | (54      | )                                 |   | (25,469                           | )      |   | 9,244 |   |
|                                                                                                                        |                              |     |                              |   |                              |   |   |   |   |
| Cash                  and cash equivalents at beginning of period                                                      |                              | 585      |                              |   | 26,054                            |   |   | 16,810 |   |
| **Cash                  and cash equivalents at end of period**                                                        | $                                 | 531      |                              | $      | 585                               |   | $ | 26,054 |   |
|                                                                                                                        |                              |     |                              |   |                              |   |   |   |   |
|                                                                                                                        |                              |     |                              |   |                              |   |   |   |   |
| **Supplemental                  disclosures of cash flow information**                                                      |                              |     |                              |   |                              |   |   |   |   |
| **Cash                  paid during the period for:**                                                                       |                              |     |                              |   |                              |   |   |   |   |
| Interest                  (net of interest rate swap and amounts capitalized)                                          | $                                 | 69,570   |                              | $      | 63,180                            |   | $ | 68,250 |   |
| Income                  taxes (net of refunds)                                                                         |                              | 26,674   |                              |   | 7                                 |   |   | 66 |   |

----

*Financial          Statement Index*

**PANHANDLE            EASTERN PIPE LINE COMPANY, LP**

|                                                                               | Partners'                  Capital |      | Accumulated                  Other Comprehensive Income (Loss) |   | Members'                  Capital |   | Retained                  Earnings (Deficit) |     | Tax                  Sharing Note Receivable-Southern Union |   | Total   |   |
|------------------------------------------------------------------------------------|------------------------------------|-----------|----------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------------------|----------|-------------------------------------------------------------|--------|---------|--------|
|                                                                                    | (In                  thousands)    |      |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Balance                  January 1, 2004                                           | $                                  | -         |                                                           | $      | 1,372                             |   | $                                            | 679,465  |                                                        | $      | 51,452  |   | $ | (85,471 | ) | $ | 646,818 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Adjustment                  to pushdown of purchase price and related costs        |                               | -         |                                                           |   | -                                 |   |                                         | (16,444  | )                                                           |   | -       |   |   | - |   |   | (16,444 | ) |
| Tax                  sharing receivable - Southern Union (see Note 4)              |                               | -         |                                                           |   | -                                 |   |                                         | -        |                                                        |   | -       |   |   | (5,467 | ) |   | (5,467 | ) |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Comprehensive                  income:                                             |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Net                  earnings                                                      |                               | -         |                                                           |   | -                                 |   |                                         | -        |                                                        |   | 47,201  |   |   | - |   |   | 47,201 |   |
| Unrealized                  gain related to interest rate swaps, net of tax        |                               | -         |                                                           |   | 405                               |   |                                         | -        |                                                        |   | -       |   |   | - |   |   | 405 |   |
| Comprehensive                  income prior to change in legal ownership structure |                               | -         |                                                           |   | 405                               |   |                                         | -        |                                                        |   | 47,201  |   |   | - |   |   | 47,606 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Change                  in legal ownership structure (See Note 1)                  |                               | 761,674   |                                                           |   | -                                 |   |                                         | (663,021 | )                                                           |   | (98,653 | )      |   | - |   |   | - |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Tax                  sharing receivable - Southern Union (See Note 4)              |                               | -         |                                                           |   | -                                 |   |                                         | -        |                                                        |   | -       |   |   | 19,967 |   |   | 19,967 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Comprehensive                  income:                                             |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Net                  earnings                                                      |                               | 40,732    |                                                           |   | -                                 |   |                                         | -        |                                                        |   | -       |   |   | - |   |   | 40,732 |   |
| Unrealized                  loss related to interest rate swaps, net of tax        |                               | -         |                                                           |   | (546                              | )      |                                         | -        |                                                        |   | -       |   |   | - |   |   | (546 | ) |
| Comprehensive                  income                                              |                               | 40,732    |                                                           |   | (546                              | )      |                                         | -        |                                                        |   | -       |   |   | - |   |   | 40,186 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Balance                  December 31, 2004                                         | $                                  | 802,406   |                                                           | $      | 1,231                             |   | $                                            | -        |                                                        | $      | -       |   | $ | (70,971 | ) | $ | 732,666 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Tax                  sharing receivable - Southern Union (See Note 4)              |                               | -         |                                                           |   | -                                 |   |                                         | -        |                                                        |   | -       |   |   | 20,109 |   |   | 20,109 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Comprehensive                  income:                                             |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Net                  earnings                                                      |                               | 101,562   |                                                           |   | -                                 |   |                                         | -        |                                                        |   | -       |   |   | - |   |   | 101,562 |   |
| Unrealized                  gain related to interest rate swaps, net of tax        |                               | -         |                                                           |   | 108                               |   |                                         | -        |                                                        |   | -       |   |   | - |   |   | 108 |   |
| Comprehensive                  income                                              |                               | 101,562   |                                                           |   | 108                               |   |                                         | -        |                                                        |   | -       |   |   | - |   |   | 101,670 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Balance                  December 31, 2005                                         | $                                  | 903,968   |                                                           | $      | 1,339                             |   | $                                            | -        |                                                        | $      | -       |   | $ | (50,862 | ) | $ | 854,445 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Tax                  sharing receivable - Southern Union (See Note 4)              |                               | -         |                                                           |   | -                                 |   |                                         | -        |                                                        |   | -       |   |   | 34,431 |   |   | 34,431 |   |
| Adjustment                  to initially apply FASB Statement No. 158, net of tax  |                               | -         |                                                           |   | 15,248                            |   |                                         | -        |                                                        |   | -       |   |   | - |   |   | 15,248 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Comprehensive                  income:                                             |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Net                  earnings                                                      |                               | 137,755   |                                                           |   | -                                 |   |                                         | -        |                                                        |   | -       |   |   | - |   |   | 137,755 |   |
| Realized                  gain related to interest rate swaps, net of tax          |                               | -         |                                                           |   | (1,110                            | )      |                                         | -        |                                                        |   | -       |   |   | - |   |   | (1,110 | ) |
| Comprehensive                  income                                              |                               | 137,755   |                                                           |   | (1,110                            | )      |                                         | -        |                                                        |   | -       |   |   | - |   |   | 136,645 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |
| Balance                  December 31, 2006                                         | $                                  | 1,041,723 |                                                           | $      | 15,477                            |   | $                                            | -        |                                                        | $      | -       |   | $ | (16,431 | ) | $ | 1,040,769 |   |
|                                                                               |                               |      |                                                           |   |                              |   |                                         |     |                                                        |   |    |   |   |   |   |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.      Corporate Structure**

*PEPL*
*,      the      Company*
*Southern      Union Company*
*Southern      Union*
*LNG*
*FERC*

|   | · | PEPL,                an indirect wholly-owned subsidiary of Southern Union                Company; |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | · | Trunkline                Gas Company, LLC (*Trunkline*),                a direct wholly-owned subsidiary of                PEPL; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sea                Robin Pipeline Company, LLC (*Sea                Robin*),                an indirect wholly-owned subsidiary of                PEPL; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Trunkline                LNG Holdings, LLC (*LNG                Holdings*),                an indirect wholly-owned subsidiary of                PEPL; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Trunkline                LNG Company, LLC (*Trunkline                LNG*),                a direct wholly-owned subsidiary of LNG Holdings;                and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Pan                Gas Storage, LLC (d.b.a. *Southwest                Gas Storage*),                a direct wholly-owned subsidiary of                PEPL. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Bcf/d*
*Bcf*

**2.      Summary of Significant Accounting Policies and Other      Matters**

***Basis      of Presentation.***

*FASB*
*Accounting      for the Effects of Certain Types of Regulation *
*Statement      No. 71*

***Principles      of Consolidation.***

***Use      of Estimates.***

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Cash      and Cash Equivalents.***

***System      Gas and Operating Supplies.***
*MMBtu*

***Gas      Imbalances.***
** **

***Fuel      Tracker.***
** **

***Property,      Plant and Equipment.***

***Asset      Impairment.***
*Accounting      for the Impairment or Disposal of Long-Lived Assets*

***Related      Party Transactions.***
*** ***

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*CrossCountry      Citrus*
*Note      4 - Related Party Transactions*

*Code*

***Unamortized      Debt Premium, Discount and Expense.***

***Environmental      Expenditures.***
** **

***Revenues.***

***Significant      Customers and Credit Risk.***

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                             |   |                              |   |                              |   |                              |   |
|------------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                                                             |   | **Year                  Ended**   |   | **Year                  Ended**   |   | **Year                  Ended**   |   |
|                                                             |   | **December                  31,** |   | **December                  31,** |   | **December                  31,** |   |
| **Allowance                  for Doubtful Accounts**             |   | **2006**                          |   | **2005**                          |   | **2004**                          |   |
|                                                             |   | (In                  thousands)   |   |
|                                                             |   |                              |   |                              |   |                              |   |   |   |   |
| Beginning                  Balance                               |   | $                                 | 1,168  |                              | $      | 1,289                             |   | $ | 1,464 |   |
| Additions:                  Charged to Cost and Expenses         |   |                              | 9      |                              |   | (76                               | )      |   | - |   |
| Deductions:                  Write-off of Uncollectible Accounts |   |                              | (1     | )                                 |   | (45                               | )      |   | (61 | ) |
| Other                                                            |   |                              | -      |                              |   | -                                 |   |   | (114 | ) |
| Ending                  Balance                                  |   | $                                 | 1,176  |                              | $      | 1,168                             |   | $ | 1,289 |   |
|                                                             |   |                              |   |                              |   |                              |   |   |   |   |

|                                              |   | **Percent                    of Operating Revenue for** |   |
|---------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                              |   | **Years                    Ended**                      |   |
|                                              |   | **December                    31,**                     |   |
| **Customer**                                      |   |  **2006**                                          |   | **2005** |   | **2004** |   |
|                                              |   |                                                    |   |   |   |   |   |   |   |   |
| BG                    LNG Services                |   |                                                    | 24     | % |   | 17 | % |   | 15 | % |
| ProLiance                                         |   |                                                    | 12     |   |   | 16 |   |   | 17 |   |
| Ameren                    Corp                    |   |                                                    | 10     |   |   | 11 |   |   | 12 |   |
| CMS                    Energy Corporation (1)     |   |                                                    | 2      |   |   | 8 |   |   | 10 |   |
| Other                    top 10 customers         |   |                                                    | 17     |   |   | 14 |   |   | 14 |   |
| Remaining                    customers            |   |                                                    | 35     |   |   | 34 |   |   | 32 |   |
| Total                    percentage               |   |                                                    | 100    | % |   | 100 | % |   | 100 | % |
| ___________________                               |   |                                                    |   |   |   |   |   |   |   |   |
| (1)                    Primarily Consumers Energy |   |                                                    |   |   |   |   |   |   |   |   |

***Interest      Cost Capitalized.***

***Retirement      Benefits.***
*Employers’      Accounting for Postretirement Benefits Other Than Pensions*
*Statement      No. 106*
*Accumulated      other comprehensive income*
*in      Partners’ capital*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Accumulated      other comprehensive income*

*Note      14 - Benefits*

***Derivatives      and Hedging Activities.***
*Accounting      for Derivative Instruments and Hedging Activities, *
*Statement      No. 133*
*fair      value hedge*
*cash      flow hedge*
*trading      or non-hedging instrument*
*Accumulated      other comprehensive income *
*Note      5 - Derivative Instruments and Hedging Activities*

***Asset      Retirement Obligations.***
*Accounting      for Asset Retirement Obligations*
*Statement      No. 143*
*Accounting      for Conditional Asset Retirement Obligations (FIN No. 47*
*AROs*

*Conditional      ARO*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

| **December                  31, 2006**         |                            |   |                                       | **(In                  thousands)** |
|------------------------------------------------|---------------------------------|--------|--------------------------------------------|-------------------------------------|
|                                           | **In                  Service** |   |                                       |                                |
| **ARO                  Description**           | **Date**                        |   | **Long-Lived                  Assets**     | **Amount**                          |
| Retire                  offshore lateral lines | Various                         |   | Offshore                  lateral lines    | $                  3,962            |
| Remove                  asbestos               | Various                         |   | Mainlines                  and compressors | $                  882              |

|                               |                                |   |                              |   |                              |   |
|------------------------------------|-------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                               | **Year                  Ended**     |   | **Year                  Ended**   |   | **Year                  Ended**   |   |
|                               | **December                  31,**   |   | **December                  31,** |   | **December                  31,** |   |
|                               | **2006**                            |   | **2005**                          |   | **2004**                          |   |
|                               | **(In                  thousands)** |   |
|                               |                                |   |                              |   |                              |   |   |   |   |
| Beginning                  Balance | $                                   | 8,200  |                              | $      | 5,657                             |   | $ | 7,479 |   |
| Incurred                           |                                | 1,189  |                              |   | 2,371                             |   |   | - |   |
| Settled                            |                                | (414   | )                                 |   | (285                              | )      |   | (2,365 | ) |
| Accretion                  Expense |                                | 633    |                              |   | 457                               |   |   | 543 |   |
| Ending                  Balance    | $                                   | 9,608  |                              | $      | 8,200                             |   | $ | 5,657 |   |
|                               |                                |   |                              |   |                              |   |   |   |   |

***Income      Taxes.***

***Stock      Based Compensation.***
*Accounting      for Stock-Based Compensation*
*Statement      No. 123R*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*APB      No. 25*
*Accounting      for Stock Issued to Employees*
*Note      15 - Stock-based Compensation.*

|                                                              |   | **Year                  Ended December 31,** |    |
|-------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                              |   | **2005**                                     |    | **2004** |   |
|                                                                   |   | (In                  thousands)              |    |
|                                                              |   |                                         |    |   |   |   |   |
| Net                  earnings, as reported                        |   | $                                            | 101,562 |   | $ | 87,933 |   |
| Add                  stock-based compensation expense included in |   |                                         |    |   |   |   |   |
| reported                  net earnings, net of related taxes      |   |                                         | 710     |   |   | - |   |
| Deduct                  stock-based employee                      |   |                                         |    |   |   |   |   |
| compensation                  expense determined                  |   |                                         |    |   |   |   |   |
| under                  fair value based method for                |   |                                         |    |   |   |   |   |
| all                  awards, net of related taxes                 |   |                                         | 1,001   |   |   | 207 |   |
| Pro                  forma net earnings                           |   | $                                            | 101,271 |   | $ | 87,726 |   |
|                                                              |   |                                         |    |   |   |   |   |

***New      Accounting Principles***

***Accounting      Principles Recently Adopted.***

***FASB      Statement No. 123R, “Share-Based Payment (revised      2004)”***
**:      **
*** ***
*FASB*
*Accounting      for Stock-Based Compensation*
*Accounting      for Stock Issued to Employees*
*Statement      of Cash Flows*
*Note      15 - Stock Based Compensation*

***FASB      Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other      Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and      132(R)”***
**:**
*Note      14 - Benefits *

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***SEC      Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year      Misstatements when Quantifying Misstatements in Current Year Financial      Statements” (SAB No. 108):***

***Accounting      Principles Not Yet Adopted.***

***FIN      48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB      Statement 109”***
**(**
***FIN      48***
**):**
*** ***
*Accounting      for Income Taxes*

***FASB      Statement No. 157, “Fair Value Measurements”***
**:**

***FASB      Statement No. 159, “The Fair Value Option for Financial Assets and Financial      Liabilities - Including an Amendment of FASB Statement No.      115”***
**:**

**3.      Regulatory Matters**

*Construction      work-in-progress*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Construction      work-in-progress*

*Construction      work-in-progress *

*CIAC*
*Energy      Transfer*
*Construction      work-in-progress *

*HCAs*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**4.      Related Party Transactions**

|                                              |   |                                |   |                                      |   |                                |   |
|---------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------------|--------|-------------------------------------|--------|
|                                              |   | **Year                    Ended**   |   | **Year                    Ended**    |   | **Year                    Ended**   |   |
|                                              |   | **December                    31,** |   | **December                    31,**  |   | **December                    31,** |   |
| **Related                    Party Transactions** |   | **2006**                            |   | **2005**                                  |   | **2004**                            |   |
|                                              |   | (In                    thousands)   |   |
|                                              |   |                                |   |                                      |   |                                |   |   |   |   |
| Transportation                    and storage     |   |                                |   |                                      |   |                                |   |   |   |   |
| of                    natural gas                 |   | $                                   | 4,282  |                                      | $      | 3,962                               |   | $ | 3,902 |   |
| Operation                    and maintenance:     |   |                                |   |                                      |   |                                |   |   |   |   |
| Management                    and royalty fees    |   |                                | 14,423 |                                      |   | 12,630                              |   |   | 12,215 |   |
| Other                    expenses                 |   |                                | 20,592 |                                      |   | 19,126                              |   |   | 24,607 |   |
| Other                    income, net              |   |                                | 11,506 |                                      |   | 3,749                               |   |   | 1,779 |   |
|                                              |   |                                |   |                                      |   |                                |   |   |   |   |

*Other,      net*
*Note      receivable - Southern Union*
*Note      receivable - Southern Union*
*Note      receivable - Southern Union *

*CrossCountry      Citrus*
*2006      Term Loan*
*Other,      net*
*Note      receivable - related party*

*Panhandle      Acquisition*
*Partners      Capital*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*CCE      Holdings*
*CrossCountry      Energy*
*Transwestern*
*Management      Agreement*
*Manager*

| **Related                    Party**                                                                                                                                                                                                                                                    |   | **December                    31, 2006** |   | **December                    31, 2005** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
| **Accounts                    receivable - related parties:**                                                                                                                                                                                                                           |   | (In                    thousands)        |   |
| Southern                    Union (1)                                                                                                                                                                                                                                                   |   | $                                        | 14,448 |                                     | $      | 6,837 |   |
| Other                    (2)                                                                                                                                                                                                                                                            |   |                                     | 3,546  |                                     |   | 2,719 |   |
|                                                                                                                                                                                                                                                                                    |   |                                     | 17,994 |                                     |   | 9,556 |   |
| **Accounts                    payable - related parties:**                                                                                                                                                                                                                              |   |                                     |   |                                     |   |   |   |
| Southern                    Union (3)                                                                                                                                                                                                                                                   |   | $                                        | 14,978 |                                     | $      | 8,410 |   |
| Other                    (4)                                                                                                                                                                                                                                                            |   |                                     | 984    |                                     |   | 150 |   |
|                                                                                                                                                                                                                                                                                    |   | $                                        | 15,962 |                                     | $      | 8,560 |   |
| ___________________                                                                                                                                                                                                                                                                     |   |                                     |   |                                     |   |   |   |
| (1)                    Primarily related to expenditures made on behalf of Southern                    Union and                    interest associated with the Note receivable – Southern                    Union.                                                             |   |
| (2)                    Primarily related to interest from CrossCountry Citrus in 2006                    and                    CrossCountry Energy transition service costs in 2005.                                                                                                   |   |
| (3)                    Primarily related to corporate services and payroll funding provided                    by                    Southern Union and reimbursable medical and insurance costs paid                    by                    Southern Union on behalf of the Company. |   |
| (4)                    Primarily related to various administrative and operating costs                    paid by                    other affiliate companies on behalf of the Company.                                                                                                |   |

**5.      Derivatives Instruments and Hedging Activities**

*Accumulated      other comprehensive income*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Accumulated      other comprehensive income*
*Accumulated      other comprehensive income*

*See      Note 11 - Debt*

**6.      Income Taxes**

|                                           |   | **Year                    Ended**   |   | **Year                    Ended**   |   | **Year                    Ended**   |   |
|------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                                           |   | **December                    31,** |   | **December                    31,** |   | **December                    31,** |   |
| **Income                    Tax Expense**      |   | **2006**                            |   | **2005**                            |   | **2004**                            |   |
|                                                |   | (In                    thousands)   |   |
|                                           |   |                                |   |                                |   |                                |   |   |   |   |
| Current                    income taxes        |   |                                |   |                                |   |                                |   |   |   |   |
| Federal                                        |   | $                                   | 21,170 |                                | $      | 20,153                              |   | $ | 14,756 |   |
| State                                          |   |                                | 6,971  |                                |   | 2,341                               |   |   | 1,726 |   |
| Total                    current income taxes  |   |                                | 28,141 |                                |   | 22,494                              |   |   | 16,482 |   |
|                                           |   |                                |   |                                |   |                                |   |   |   |   |
| Deferred                    income taxes       |   |                                |   |                                |   |                                |   |   |   |   |
| Federal                                        |   |                                | 52,574 |                                |   | 34,330                              |   |   | 32,861 |   |
| State                                          |   |                                | 7,324  |                                |   | 7,803                               |   |   | 6,713 |   |
| Total                    deferred income taxes |   |                                | 59,898 |                                |   | 42,133                              |   |   | 39,574 |   |
|                                           |   |                                |   |                                |   |                                |   |   |   |   |
| Total                    income tax expense    |   | $                                   | 88,039 |                                | $      | 64,627                              |   | $ | 56,056 |   |
|                                           |   |                                |   |                                |   |                                |   |   |   |   |

|                                                          |   | **Year                    Ended**       |   | **Year                    Ended**   |   | **Year                    Ended**   |   |
|---------------------------------------------------------------|--------|-----------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
| **Income                    Tax Expense --**                  |   | **December                    31,**     |   | **December                    31,** |   | **December                    31,** |   |
| **Reconciliation                    to Statutory Rate**       |   | **2006**                                |   | **2005**                            |   | **2004**                            |   |
|                                                          |   |  (In                    thousands) |   |
|                                                          |   |                                    |   |                                |   |                                |   |   |   |   |
| Income                    tax, computed at the statutory rate |   | $                                       | 79,028 |                                | $      | 58,166                              |   | $ | 50,396 |   |
| Adjustments:                                                  |   |                                    |   |                                |   |                                |   |   |   |   |
| State                    income tax, net of federal effect    |   |                                    | 9,292  |                                |   | 6,594                               |   |   | 5,485 |   |
| Permanent                    differences and other            |   |                                    | (281   | )                                   |   | (133                                | )      |   | 175 |   |
| Total                    income tax expense                   |   | $                                       | 88,039 |                                | $      | 64,627                              |   | $ | 56,056 |   |
|                                                          |   |                                    |   |                                |   |                                |   |   |   |   |
| Effective                    tax rate                         |   |                                    | 39.0   | %                                   |   | 38.9                                | %      |   | 38.9 | % |
|                                                          |   |                                    |   |                                |   |                                |   |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                        |   | **December                    31,** |     | **December                    31,** |   |
|-----------------------------------------------------------------------------|--------|-------------------------------------|----------|-------------------------------------|--------|
| **Net                    Deferred Income Tax Asset (Liability) Components** |   | **2006**                            |     | **2005**                            |   |
|                                                                        |   | (In                    thousands)   |     |
|                                                                        |   |                                |     |                                |   |   |   |
| Property,                    plant and equipment                            |   | $                              | (242,510 | )                                   | $      | (206,859 | ) |
| Current                    Assets                                           |   |                                | (338     | )                                   |   | - |   |
| Investments                                                                 |   |                                | (183     | )                                   |   | (196 | ) |
| Other                    deferred debits                                    |   |                                | 4,080    |                                |   | - |   |
| Other                    assets                                             |   |                                | -        |                                |   | 5,554 |   |
| Current                    liabilities                                      |   |                                | 2,197    |                                |   | - |   |
| Deferred                    credits and other liabilities                   |   |                                | 17,094   |                                |   | 19,174 |   |
| Long                    term debt                                           |   |                                | 3,018    |                                |   | - |   |
| Other                                                                       |   |                                | (102     | )                                   |   | - |   |
| State                    deferred income taxes, net of federal tax effect   |   |                                | (23,836  | )                                   |   | (21,374 | ) |
| Net                    deferred income tax asset (liability)                |   | $                                   | (240,580 | )                                   | $      | (203,701 | ) |
|                                                                        |   |                                |     |                                |   |   |   |
| Gross                    deferred tax liabilities                           |   | $                                   | (266,969 | )                                   | $      | (229,442 | ) |
| Gross                    deferred tax assets                                |   |                                | 26,389   |                                |   | 25,741 |   |
| Net                    deferred income tax asset (liability)                |   | $                                   | (240,580 | )                                   | $      | (203,701 | ) |
|                                                                        |   |                                |     |                                |   |   |   |
|                                                                        |   |                                |     |                                |   |   |   |
| Non                    current deferred income tax asset (liability)        |   | $                                   | (243,697 | )                                   | $      | (205,787 | ) |
| Current                    tax asset                                        |   |                                | 3,117    |                                |   | 2,086 |   |
| Net                    deferred income tax asset (liability)                |   | $                                   | (240,580 | )                                   | $      | (203,701 | ) |
|                                                                        |   |                                |     |                                |   |   |   |

**7.      Property, Plant and Equipment**

|                                                                        |   | **Lives**                     |   | **December                  31,** |      | **December                  31,** |   |
|-----------------------------------------------------------------------------|--------|-------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|
| **Property,                  Plant and Equipment**                          |   | **In                  Years** |   | **2006**                          |      | **2005**                          |   |
|                                                                        |   |                          |   | (In                  thousands)   |      |
|                                                                        |   |                          |   |                              |      |                              |   |   |   |
| Transmission                                                                |   | 36-46                         |   | $                                 | 1,400,547 |                              | $      | 1,285,848 |   |
| Gathering                                                                   |   | 26                            |   |                              | 44,402    |                              |   | 45,822 |   |
| Underground                  storage                                        |   | 36-46                         |   |                              | 279,845   |                              |   | 275,603 |   |
| General                  plant - LNG                                        |   | 20-40                         |   |                              | 619,018   |                              |   | 494,827 |   |
| General                  plant - other (1)                                  |   | 1-6                           |   |                              | 75,105    |                              |   | 61,374 |   |
| Construction                  work-in-progress                              |   |                          |   |                              | 166,085   |                              |   | 176,370 |   |
| Total                  property, plant and equipment                        |   |                          |   |                              | 2,585,002 |                              |   | 2,339,844 |   |
| Less                  accumulated depreciation and amortization             |   |                          |   |                              | 207,606   |                              |   | 145,550 |   |
| Net                  property, plant and equipment                          |   |                          |   | $                                 | 2,377,396 |                              | $      | 2,194,294 |   |
|                                                                        |   |                          |   |                              |      |                              |   |   |   |
| (1)                  Includes capitalized computer software costs totaling: |   |                          |   |                              |      |                              |   |   |   |
|                                                                        |   |                          |   |                              |      |                              |   |   |   |
| Computer                  software cost                                     |   |                          |   | $                                 | 56,804    |                              | $      | 53,716 |   |
| Less                  accumulated amortization                              |   |                          |   |                              | 16,734    |                              |   | 12,386 |   |
| Net                  computer software costs                                |   |                          |   | $                                 | 40,070    |                              | $      | 41,330 |   |
|                                                                        |   |                          |   |                              |      |                              |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**8.      Intangible Customer Contract**

|                                                 |   | **Useful**                      |   |                                |                              |                                |   |
|------------------------------------------------------|--------|---------------------------------|--------|-------------------------------------|-----------------------------------|-------------------------------------|--------|
|                                                 |   | **Lives**                       |   | **December                    31,** |                              | **December                    31,** |   |
| **Intangible                    customer contract**  |   | **In                    Years** |   | **2006**                            |                              | **2005**                            |   |
|                                                 |   |                            |   |                                | (In                    thousands) |                                |
|                                                 |   |                            |   |                                |                              |                                |   |   |   |   |
| Customer                    contract                 |   |                            | 25     |                                | $                                 | 9,503                               |   | $ | 9,503 |   |
| Accumulated                    amortization          |   |                            |   |                                |                              | 1,885                               |   |   | 1,472 |   |
| Intangible                    customer contract, net |   |                            |   |                                | $                                 | 7,618                               |   | $ | 8,031 |   |
|                                                 |   |                            |   |                                |                              |                                |   |   |   |   |

*Note      7 - Property, Plant and Equipment*

**9.      Investment in Affiliates**

**10.      Financial Instruments**

*Note      4 - Related Party Transactions*

*Note      4 - Related Party Transactions*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**11.      Debt**

|                                                        |   |                            |   | **December                    31, 2006** |      |  **December                    31, 2005** |   |
|-------------------------------------------------------------|--------|---------------------------------|--------|------------------------------------------|-----------|------------------------------------------------|--------|
| **Long-term                    Debt**                       |   | **Year                    Due** |   | **Book                    Value**        |      | **Fair                    Value**              |   |  **Book                    Value** |   | **Fair                    Value** |   |
|                                                        |   |                            |   | (In                    thousands)        |      |
|                                                        |   |                            |   |                                     |      |                                           |   |   |   |   |   |   |   |   |   |
| 2.75%                    Senior Notes                       |   |  2007                      |   | $                                        | 200,000   |                                           | $      | 200,000 |   | $ | 200,000 |   | $ | 200,000 |   |
| 4.80%                    Senior Notes                       |   | 2008                            |   |                                     | 300,000   |                                           |   | 300,000 |   |   | 300,000 |   |   | 300,000 |   |
| 6.05%                    Senior Notes                       |   | 2013                            |   |                                     | 250,000   |                                           |   | 251,053 |   |   | 250,000 |   |   | 254,450 |   |
| 6.50%                    Senior Notes                       |   | 2009                            |   |                                     | 60,623    |                                           |   | 61,721 |   |   | 60,623 |   |   | 63,228 |   |
| 8.25%                    Senior Notes                       |   |  2010                      |   |                                     | 40,500    |                                           |   | 43,180 |   |   | 40,500 |   |   | 45,135 |   |
| 7.00%                    Senior Notes                       |   |  2029                      |   |                                     | 66,305    |                                           |   | 71,947 |   |   | 66,305 |   |   | 73,521 |   |
| Term                    Loan                                |   |  2007                      |   |                                     | 255,626   |                                           |   | 255,626 |   |   | 255,626 |   |   | 255,626 |   |
| Term                    Loan                                |   |  2008                      |   |                                     | 465,000   |                                           |   | 465,000 |   |   | - |   |   | - |   |
| Unamortized                    debt premium, net            |   |                            |   |                                     | 9,613     |                                           |   | 9,613 |   |   | 12,205 |   |   | 12,205 |   |
| Total                    debt outstanding                   |   |                            |   |                                     | 1,647,667 |                                           | $      | 1,658,140 |   |   | 1,185,259 |   | $ | 1,204,165 |   |
| Current                    portion of long-term debt        |   |                            |   |                                     | (461,011  | )                                              |   |   |   |   | - |   |   |   |   |
| Interest                    rate swaps (2.75% Senior Notes) |   |                            |   |                                     | (1,265    | )                                              |   |   |   |   | (5,725 | ) |   |   |   |
| Total                    long-term debt                     |   |                            |   | $                                        | 1,185,391 |                                           |   |   |   | $ | 1,179,534 |   |   |   |   |
|                                                        |   |                            |   |                                     |      |                                           |   |   |   |   |   |   |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**Retirement        of Debt Obligations**

*2007        Expected TLNG Term Loan*

** **

**12.      Comprehensive Income**

|                                                                                  |                              |    |                              |   |                              |   |
|---------------------------------------------------------------------------------------|-----------------------------------|---------|-----------------------------------|--------|-----------------------------------|--------|
|                                                                                  | **Year                  ended**   |    | **Year                  ended**   |   | **Year                  ended**   |   |
|                                                                                  | **December                  31,** |    | **December                  31,** |   | **December                  31,** |   |
|                                                                                  | **2006**                          |    | **2005**                          |   | **2004**                          |   |
|                                                                                  | (In                  thousands)   |    |
|                                                                                  |                              |    |                              |   |                              |   |   |   |   |
| Net                  earnings                                                         | $                                 | 137,755 |                              | $      | 101,562                           |   | $ | 87,933 |   |
|                                                                                  |                              |    |                              |   |                              |   |   |   |   |
| Realized                  (gain) loss on cash flow hedging                            |                              |    |                              |   |                              |   |   |   |   |
| activities,                  net of taxes of $(742), $1,587 and $3,407, respectively  |                              | (1,105  | )                                 |   | 2,495                             |   |   | 5,345 |   |
| Unrealized                  gain (loss) on cash flow hedging                          |                              |    |                              |   |                              |   |   |   |   |
| activities                  net of taxes of $(3), $(1,515) and $(3,502), respectively |                              | (5      | )                                 |   | (2,387                            | )      |   | (5,486 | ) |
| Total                  other comprehensive income (loss)                              |                              | (1,110  | )                                 |   | 108                               |   |   | (141 | ) |
|                                                                                  |                              |    |                              |   |                              |   |   |   |   |
|                                                                                  |                              |    |                              |   |                              |   |   |   |   |
| Total                  comprehensive income (loss)                                    | $                                 | 136,645 |                              | $      | 101,670                           |   | $ | 87,792 |   |
|                                                                                  |                              |    |                              |   |                              |   |   |   |   |

*Accumulated      other comprehensive income*

|                                                                                                                                   | **2006**                        |   | **2005** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|--------|----------|--------|
|                                                                                                                                   | (In                  thousands) |   |
| Other                  postretirement plan - net actuarial loss and prior service credit,                  net of                  tax | $                               | 15,248 |     | $      | - |   |
| Interest                  rate hedges, net of tax                                                                                      |                            | 229    |     |   | 1,339 |   |
| Accumulated                  other comprehensive income, net of tax                                                                    | $                               | 15,477 |     | $      | 1,339 |   |
|                                                                                                                                   |                            |   |     |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

**13.      Commitments and Contingencies**

***Leases.***

***Capital      Expenditures.***

***Litigation.***
** **
*Accounting      for Contingencies*

*Hope      Land*

*MMS*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Environmental      Matters.***
*Environmental      Remediation Liabilities*

***Environmental      Remediation.***
*PCB*

*the      Pierce Waste Oil sites*
*U.S.      EPA*
*(PRP*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Illinois      EPA*

*MDEQ*

|                                             | **December                  31,** |   | **December                  31,** |   |
|--------------------------------------------------|-----------------------------------|--------|-----------------------------------|--------|
|                                             | **2006**                          |   | **2005**                          |   |
|                                                  | (In                  thousands)   |   |
|                                             |                              |   |                              |   |   |   |
| Current                                          | $                                 | 1,962  |                              | $      | 2,337 |   |
| Noncurrent                                       |                              | 6,760  |                              |   | 8,385 |   |
| Total                  Environmental Liabilities | $                                 | 8,722  |                              | $      | 10,722 |   |
|                                             |                              |   |                              |   |   |   |

***Air      Quality Control.***
*NOx      SIP Call*
*NOx*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*HAPs*

***Spill      Control.***
*** ***

***Other      Commitments and Contingencies.***

** **
***Kaplan      Compressor Station Damage.***
*Construction      work in progress*

***Hurricane      Damage.***

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

***Energy      Transfer Commitment.***

***Controlled      Group Pension Liabilities.***

**14.      Benefits **

***Postretirement      Benefit Plans***
**.**
*other      postretirement plans*

|                                                                                                                 |   | Other                  Postretirement Plans      |   |
|----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                                                                                                 |   |                                                                 |   | SFAS                  158 |   |    |   |
|                                                                                                                 |   |                                                                 |   | adoption |   | Post-SFAS |   |
|                                                                                                                 |   | Pre-SFAS                  158                                        |   | adjustment |   | 158 |   |
|                                                                                                                 |   | (in                  thousands)                                           |   |
| Postretirement                  liabilities, noncurrent (included in Post-retirement                  benefits) |   | $                                                                         | 24,677 |   | $ | (20,241 | ) | $ | 4,436 |   |
| Accumulated                  deferred income taxes                                                                   |   |                                                                      | -      |   |   | 4,993 |   |   | 4,993 |   |
| Accumulated                  other comprehensive income, net of tax                                                  |   |                                                                      | -      |   |   | 15,248 |   |   | 15,248 |   |
| Accumulated                  other comprehensive income, pre-tax                                                     |   |                                                                      | -      |   |   | 20,241 |   |   | 20,241 |   |
|                                                                                                                 |   |                                                                      |   |   |   |   |   |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                       | **Other                  Postretirement Benefits** |         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------|--------------|
|                                                                                                                                                       | **At                  December 31,**               |         |
|                                                                                                                                                       | **2006**                                           |         | **2005** |   |
|                                                                                                                                                       |                                               |         |   |   |   |   |
| Change                  in Benefit Obligation:                                                                                                             |                                               |         |   |   |   |   |
| Benefit                  obligation at beginning of period                                                                                                 | $                                                  | 39,594       |   | $ | 62,845 |   |
| Service                  cost                                                                                                                              |                                               | 1,323        |   |   | 2,264 |   |
| Interest                  Cost                                                                                                                             |                                               | 1,781        |   |   | 2,926 |   |
| Actuarial                  gain                                                                                                                            |                                               | (8,340       | ) |   | (4,156 | ) |
| Benefits                  paid                                                                                                                             |                                               | 32           |   |   | - |   |
| Plan                  amendments                                                                                                                           |                                               | -            |   |   | (24,285 | ) |
| Benefit                  obligation at end of period                                                                                                       | $                                                  | 34,390       |   | $ | 39,594 |   |
|                                                                                                                                                       |                                               |         |   |   |   |   |
| Change                  in Plan Assets:                                                                                                                    |                                               |         |   |   |   |   |
| Fair                  value of plan assets at beginning of period                                                                                          | $                                                  | 20,400       |   | $ | 12,196 |   |
| Return                  on plan assets                                                                                                                     |                                               | 1,707        |   |   | 392 |   |
| Employer                  contributions                                                                                                                    |                                               | 7,815        |   |   | 7,812 |   |
| Benefits                  paid                                                                                                                             |                                               | 32           |   |   | - |   |
| Fair                  value of plan assets at end of period                                                                                                | $                                                  | 29,954       |   | $ | 20,400 |   |
|                                                                                                                                                       |                                               |         |   |   |   |   |
| Funded                  Status:                                                                                                                            |                                               |         |   |   |   |   |
| Funded                  status                                                                                                                        | $                                                  | (4,436       | ) | $ | (19,194 | ) |
| Unrecognized                  net actuarial loss                                                                                                           |                                               |         |   |   | 10,101 |   |
| Unrecognized                  prior service credit                                                                                                         |                                               |         |   |   | (24,822 | ) |
| Net                  amounts recognized                                                                                                                    |                                               |         |   | $ | (33,915 | ) |
|                                                                                                                                                       |                                               |         |   |   |   |   |
| Amounts                  recognized in the Consolidated Balance Sheet (1):                                                                                 |                                               |         |   |   |   |   |
| Accrued                  benefit liability                                                                                                                 | $                                                  | (4,436  |                  ) | $ | 33,915  |   |
| Net                  asset (liability) recognized                                                                                                          | $                                                  | (4,436       | ) | $ | (33,915 | ) |
| ___________________                                                                                                                                        |                                               |         |   |   |   |   |
| (1)                  As of December 31, 2006, the Company's other postretirement benefit                  plan had non-current liabilities of $4,436. |                                               |

*Accumulated      other comprehensive income*

|                                     | **Other                  Postretirement Benefits** |    |
|------------------------------------------|----------------------------------------------------|---------|
|                                     | **December                  31,**                  |    |
|                                     | **2006**                                           |    | **2005** |   |
|                                     | **(In                  thousands)**                |    |
|                                     |                                               |    |   |   |   |   |
| Net                  actuarial loss      | $                                                  | 924     |   |   | N/A |   |
| Prior                  service credit    |                                               | (21,165 | ) |   | N/A |   |
| Total                  amount recognized | $                                                  | (20,241 | ) |   | N/A |   |
|                                     |                                               |    |   |   |   |   |

*Accumulated      other comprehensive income*

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                           | **Other                  Postretirement Benefits** |   |
|------------------------------------------------|----------------------------------------------------|--------|
|                                           | **Years                  Ended**                   |   |
|                                           | **December                  31,**                  |   |
|                                           |  **2006**                                     |   | **2005** |   | **2004** |   |
|                                           |                                               |   |   |   |   |   |   |   |   |
| Discount                  rate                 |                                               | 5.91   | % |   | 5.50 | % |   | 5.75 | % |
| Rate                  of compensation increase |                                               |   |   |   |   |   |   |   |   |
| (average)                                      |                                               | N/A    |   |   | N/A |   |   | N/A |   |
| Health                  care cost trend rate   |                                               | 11.00  | % |   | 12.00 | % |   | 13.00 | % |

|                                                                | **December                  31,** |   |
|---------------------------------------------------------------------|-----------------------------------|--------|
|                                                                | **2006**                          |   | **2005** |   | **2004** |   |
|                                                                |                              |   |   |   |   |   |   |   |   |
| Health                  care cost trend rate assumed for next year  |                              | 11.00  | % |   | 12.00 | % |   | 13.00 | % |
| Ultimate                  trend rate                                |                              | 4.85   | % |   | 4.65 | % |   | 4.75 | % |
| Year                  that the rate reaches the ultimate trend rate |                              | 2013   |   |   | 2012 |   |   | 2012 |   |

|                                             |  **Postretirement                  Benefits** |   |
|--------------------------------------------------|----------------------------------------------------|--------|
|                                             |  **Years                  Ended**             |   |
|                                             |  **December                  31,**            |   |
|                                             |  **2006**                                     |   | **2005** |   | **2004** |   |
|                                             | (in                  thousands)                    |   |
|                                             |                                               |   |   |   |   |   |   |   |   |
| Service                  cost                    | $                                                  | 1,323  |   | $ | 2,264 |   | $ | 2,327 |   |
| Interest                  cost                   |                                               | 1,781  |   |   | 2,926 |   |   | 3,004 |   |
| Expected                  return on plan assets  |                                               | (1,378 | ) |   | (891 | ) |   | (425 | ) |
| Prior                  service cost amortization |                                               | (3,643 | ) |   | (1,077 | ) |   | - |   |
| Recognized                  actuarial loss  |                                               | 508    |   |   | 231 |   |   | - |   |
| Net                  periodic benefit cost       | $                                                  | (1,409 | ) | $ | 3,453 |   | $ | 4,906 |   |
|                                             |                                               |   |   |   |   |   |   |   |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                           | **Years                  Ended**  |   |
|------------------------------------------------|-----------------------------------|--------|
|                                           | **December                  31,** |   |
|                                           |  **2006**                    |   | **2005** |   | **2004** |   |
|                                           |                              |   |   |   |   |   |   |   |   |
| Discount                  rate                 |                              | 5.50   | % |   | 5.75 | % |   | 6.25 | % |
| Expected                  return on assets -   |                              |   |   |   |   |   |   |   |   |
| tax                  exempt accounts           |                              | 7.00   | % |   | 7.00 | % |   | 7.00 | % |
| Expected                  return on assets -   |                              |   |   |   |   |   |   |   |   |
| taxable                  accounts              |                              | 5.00   | % |   | 5.00 | % |   | 5.00 | % |
| Rate                  of compensation increase |                              | N/A    |   |   | N/A |   |   | N/A |   |
| Health                  cost trend rates:      |                              |   |   |   |   |   |   |   |   |
| Medical                                        |                              | 11.00  | % |   | 12.00 | % |   | 13.00 | % |
| Dental                                         |                              | N/A    |   |   | N/A |   |   | 8.00 | % |

|                                                                | **December                  31,** |   |
|---------------------------------------------------------------------|-----------------------------------|--------|
|                                                                | **2006**                          |   | **2005** |   | **2004** |   |
|                                                                |                              |   |   |   |   |   |
| Health                  care cost trend rate assumed for next year  |                              | 11.00  | % |   | 12.00 | % |   | 13.00 | % |
| Ultimate                  trend rate                                |                              | 4.65   | % |   | 4.75 | % |   | 4.75 | % |
| Year                  that the rate reaches the ultimate trend rate |                              | 2012   |   |   | 2012 |   |   | 2012 |   |

|                                                                      | **One                  Percentage Point**    |   | **One                  Percentage Point**    |   |
|---------------------------------------------------------------------------|----------------------------------------------|--------|----------------------------------------------|--------|
|                                                                      | **Increase                  in Health Care** |   | **Decrease                  in Health Care** |   |
|                                                                      | **Trend                  Rate**              |   | **Trend                  Rate**              |   |
|                                                                      | (In                  thousands)              |   |
|                                                                      |                                         |   |                                         |   |   |   |
| Effect                  on total service and interest cost components     | $                                            | 641    |                                         | $      | (508 | ) |
| Effect                  on accumulated post-retirement benefit obligation | $                                            | 6,106  |                                         | $      | (4,905 | ) |

***Discount      Rate Selection.***

***Postretirement      Health Care and Life Insurance Plans’ Asset      Information.***

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                        |   | **Year                    Ended**    |   |
|---------------------------------------------|--------|-------------------------------------------|--------|
|                                        |   | **December                    31,**  |   |
| **Asset                    Category**       |   |  **2006**                            |   | **2005** |   |
|                                        |   |                                      |   |   |   |   |   |
| Equity                    securities        |   |                                      | 25     | % |   | 0 | % |
| Debt                    securities          |   |                                      | 70     | % |   | 0 | % |
| Other                    - cash equivalents |   |                                      | 5      | % |   | 100 | % |
| Total                                       |   |                                      | 100    | % |   | 100 | % |
|                                        |   |                                      |   |   |   |   |   |

|      |   | **Expected                    Benefits** |       |                                   |   |     |   |
|-----------|--------|------------------------------------------|------------|----------------------------------------|--------|---------------|--------|
|      |   | **Before                    Effect of**  |       | **Payments**                           |   |     |   |
| **Years** |   | **Medicare                    Part D**   |       | **Medicare                    Part D** |   |  **Net** |   |
|           |   | (In                    thousands)        |       |
|      |   |                                     |       |                                   |   |          |   |   |   |   |
| 2007      |   | $                                        | 138,001    |                                   | $      | -             |   | $ | 138,001 |   |
| 2008      |   |                                     | 231,578    |                                   |   | -             |   |   | 231,578 |   |
| 2009      |   |                                     | 387,284    |                                   |   | -             |   |   | 387,284 |   |
| 2010      |   |                                     | 653,621    |                                   |   | 4,543         |   |   | 649,078 |   |
| 2011      |   |                                     | 1,052,927  |                                   |   | 6,959         |   |   | 1,045,968 |   |
| 2012-2016 |   |                                     | 12,533,744 |                                   |   | 387,951       |   |   | 12,145,793 |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Medicare      Part D*

***Defined      Contribution Plan***
***.***
*Savings      Plan*

**15.      Stock-Based Compensation**

***Stock      Award Plans*.**
*Amended      2003 Plan*

*Second      Amended 2003 Plan*

|   | · | An                increase from 7,000,000                to 9,000,000 in the aggregate number of shares of stock that may                be issued                under the plan; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An                increase from 725,000                to 1,500,000 in the total number of shares of stock that may be issued                pursuant to stock awards, performance units and other equity-based                rights;                and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An                increase from 4,000                to 5,000 in the maximum number of shares of restricted common stock                that                each non-employee director is eligible to receive                annually. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Stock      Options*.**

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

*Accounting      for Stock-Based Compensation*

*Operating      income*
*Earnings      before income taxes*
*Net      earnings*

|                                     |   | **Year                  ended December 31,** |                        |
|------------------------------------------|--------|----------------------------------------------|-----------------------------|
|                                     |   | **2006**                                     |                        | **2005** |   | **2004** |   |
| Expected                  volatility     |   |                                         | 32.90%                      |   |   | 37.04%                  to 37.36% |   |   | 36.75% |   |
| Expected                  dividend yield |   |                                         | 1.43%                       |   |   | 0.00% |   |   | 0.00% |   |
| Risk-free                  interest rate |   |                                         | 4.69%                       |   |   | 4.06%                  to 4.52% |   |   | 4.95% |   |
| Expected                  life           |   |                                         | 6.00                  years |   |   | 6.25                  years |   |   | 6.00                  years |   |

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |    |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------|--------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |    | **Weighted** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **Shares** |    | **Average**  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **Under**  |    | **Exercise** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **Option** |    | **Price**    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |    |         |   |   |   |
| Outstanding                  January 1, 2004                                                                                                                                                                                                                                                                                                                                                                                                                              |       | -       |         | $      | - |   |
| Granted                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 249,193 |         |   | 16.83 |   |
| Exercised                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | -       |         |   | - |   |
| Forfeited                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (31,423 | )            |   | 16.83 |   |
| Outstanding                  December 31, 2004                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 217,770 |         | $      | 16.83 |   |
| Granted                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 176,337 |         |   | 22.90 |   |
| Exercised                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (31,425 | )            |   | 16.83 |   |
| Forfeited                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (8,821  | )            |   | 16.83 |   |
| Outstanding                  December 31, 2005                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 353,861 |         | $      | 19.88 |   |
| Granted                  (1)                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | -       |         |   | - |   |
| Exercised                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (18,280 | )            |   | 17.37 |   |
| Forfeited                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (9,759  | )            |   | 20.13 |   |
| Outstanding                  December 31, 2006                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 325,822 |         | $      | 20.01 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |    |         |   |   |   |
| Exercisable                  December 31, 2004                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 22,050  |         | $      | 16.83 |   |
| Exercisable                  December 31, 2005                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 29,739  |         | $      | 16.83 |   |
| Exercisable                  December 31, 2006                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 92,120  |         | $      | 19.67 |   |
| ___________________                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |    |         |   |   |   |
| (1)                  Excludes 37,114 stock appreciation rights (*SARs*)                  which vest in equal increments on December 27, 2007 through 2009.                  Each SAR                  entitles the holder to shares of Southern Union's common stock                  equal to                  the fair market value of Southern Union's common stock in excess                  of $28.07                  for each SAR on the applicable vesting date. |       |

**Restricted      Stock.**

----

*Financial          Statement Index*

**PANHANDLE          EASTERN PIPE LINE COMPANY, LP**

**NOTES          TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **Number                  of**         |    | **Weighted-Average** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|----------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **Restricted                  Shares** |    | **Grant-Date**       |   |
| **Nonvested                  Restricted Stock**                                                                                                                                                                                                                                                                                                                                                                                      |   | **Outstanding                  (1)**   |    | **Fair-Value**       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                   |    |                 |   |   |   |
| Nonvested                  restricted shares at January 1, 2005                                                                                                                                                                                                                                                                                                                                                                      |   |                                   | -       |                 | $      | - |   |
| Granted                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                   | 43,050  |                 |   | 24.08 |   |
| Vested                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                   | -       |                 |   | - |   |
| Forfeited                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                   | -       |                 |   | - |   |
| Nonvested                  restricted shares at December 31, 2005                                                                                                                                                                                                                                                                                                                                                                    |   |                                   | 43,050  |                 | $      | 24.08 |   |
| Granted                  (2)                                                                                                                                                                                                                                                                                                                                                                                                         |        |                                        | -       |                 |   | - |   |
| Vested                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                   | (11,036 | )                    |   | 24.08 |   |
| Forfeited                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                   | (6,872  | )                    |   | 24.06 |   |
| Nonvested                  restricted shares at December 31, 2006                                                                                                                                                                                                                                                                                                                                                                    |   |                                   | 25,142  |                 | $      | 24.08 |   |
| ___________________                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                   |    |                 |   |   |   |
| (1)                  There was no restricted stock activity during the year ended December                  31,                  2004.                                                                                                                                                                                                                                                                                               |   |
| (2)                  Excludes 52,846 equity-based units (*Cash                  Restricted Units*),                  which vest in equal increments on December 27, 2007 through 2009.                  Each                  Cash Restricted Unit entitles the holder to a cash payment equal                  to the                  closing price of the Company's common stock on the applicable vesting                  date. |   |

**16.      Quarterly Financial Information (Unaudited)**

|                               | **First**                       |    | **Second**  |   |  **Third**   |   | **Fourth**  |    |      |   |
|------------------------------------|---------------------------------|---------|-------------|--------|-------------------|--------|-------------|---------|-----------|--------|
|                               | **Quarter**                     |    | **Quarter** |   |  **Quarter** |   | **Quarter** |    | **Total** |   |
| **2006**                           | (In                  thousands) |    |
| Operating                  revenue | $                               | 144,643 |        | $      | 134,109           |   | $           | 143,397 |      | $      | 155,033 |   | $ | 577,182 |   |
| Operating                  income  |                            | 73,721  |        |   | 58,479            |   |        | 66,717  |      |   | 73,955 |   |   | 272,872 |   |
| Net                  earnings      |                            | 39,065  |        |   | 28,057            |   |        | 32,836  |      |   | 37,797 |   |   | 137,755 |   |
|                               |                            |    |        |   |              |   |        |    |      |   |   |   |   |   |   |
|                                    | **First**                       |    | **Second**  |   | **Third**         |   | **Fourth**  |    |      |   |   |
|                               | **Quarter**                     |    | **Quarter** |   | **Quarter**       |   | **Quarter** |    | **Total** |   |
| **2005**                           | (In                  thousands) |    |
| Operating                  revenue | $                               | 135,400 |        | $      | 110,421           |   | $           | 115,945 |      | $      | 143,467 |   | $ | 505,233 |   |
| Operating                  income  |                            | 62,514  |        |   | 40,395            |   |        | 46,109  |      |   | 61,387 |   |   | 210,405 |   |
| Net                  earnings      |                            | 31,470  |        |   | 18,670            |   |        | 21,470  |      |   | 29,952 |   |   | 101,562 |   |

----

*Financial          Statement Index*

**Report        of Independent Registered Public Accounting        Firm**

** **

----