======================================================================================================================================





**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, 2005**





**OR**





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





**Commission
      File No. 1-2921**





**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


(Exact
      name of registrant as specified in its charter)





**Delaware**    **44-0382470**


(State or other jurisdiction of  (I.R.S.
      Employer


incorporation or organization)  Identification
      No.)





****   **5444 Westheimer Road**   **77056-5306**


**Houston,
      Texas** (Zip
      Code)


(Address
      of principal executive offices)





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





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





**** **Title
      of each Class**  **Name
      of each exchange on which registered**


**** **4.80%
      Senior Notes due 2008, Series B**    **New
      York Stock Exchange**


**6.05%
      Senior Notes due 2013, Series B**    **New
      York Stock Exchange**





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





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes ____
      No **** **** **P** ****





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
      ___ No  **** **P** ****





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


Yes  **P**  No
      ___





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      accelerated filer  Accelerated
      filer  Non-accelerated filer  **P**




Indicate
      by check mark whether the registrant is a shell company (as defined in Exchange
      Act Rule 12b-2).


Yes  No  **** **P**





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





(62
      total
      number of pages)


===========================================================================================================================================











**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**FORM
      10-K**


**DECEMBER
      31, 2005**





**Table
      of Contents**







Page**PART
                I**ITEM
                1.
            Business.
            1ITEM
                1A.
            Risk
                Factors.
            5ITEM
                1B.
            Unresolved
                Staff Comments.
            10ITEM
                2.
            Properties.
            10ITEM
                3.
            Legal
                Proceedings.
            10ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders.
            10**PART
                II**ITEM
                5.
            Market
                for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities.
            11ITEM
                6.
            Selected
                Financial Data.
            11ITEM
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operation*.*
            11ITEM
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk.
            16ITEM
                8.
            Financial
                Statements and Supplementary Data.
            16ITEM
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure.
            16ITEM
                9A.
            Controls
                and Procedures.
            16ITEM
                9B.
            Other
                Information.
            17**PART
                III**ITEM
                10.
            Directors
                and Executive Officers of the Registrant.
            17ITEM
                11.
            Executive
                Compensation.
            17ITEM
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.
            17ITEM
                13.
            Certain
                Relationships and Related Transactions.
            17ITEM
                14.
            Principal
                Accountant Fees and Services.
            18**PART
                IV**ITEM
                15.
            Exhibits,
                Financial Statement Schedules, and Reports on Form 8-K.
            20SignaturesIndex
                to the Consolidated Financial
                Statements
            F-1














**PART
      I**





**ITEM
      1. Business.**





***Our
      Business***





***Introduction.*** Panhandle Eastern Pipe Line Company, LP ( *Panhandle
      Eastern Pipe Line* )
      (formerly Panhandle Eastern Pipe Line Company, LLC), a Delaware limited
      partnership (together with its subsidiaries, *Panhandle
      Energy* ),
      has
      been an indirect wholly-owned subsidiary of Southern Union Company ( *Southern
      Union Company* and,
      together with its subsidiaries, *Southern
      Union* )
      since
      Southern Union’s June 11, 2003 acquisition of Panhandle Energy from CMS Gas
      Transmission Company ( *CMS
      Gas Transmission* ),
      a
      subsidiary of CMS Energy Corporation ( *CMS
      Energy* and,
      together with CMS Gas Transmission, *CMS* ).
      See *Item
      8. Financial Statements and Supplementary Data,*  *Note
      1 - Corporate Structure* .
      Panhandle Energy is subject to the rules and regulations of the Federal Energy
      Regulatory Commission ( *FERC* ).
      The
      Panhandle Energy entities include the following:





·
            Panhandle
                Eastern Pipe Line;


·
            Trunkline
                Gas Company, LLC (*Trunkline)*;


·
            Sea
                Robin Pipeline Company, LLC (*Sea
                Robin*);


·
            Trunkline
                LNG Holdings, LLC (*LNG
                Holdings*);


·
            Trunkline
                LNG Company, LLC (*Trunkline
                LNG*);
                and


·
            Pan
                Gas Storage, LLC (d.b.a.*Southwest
                Gas Storage)*.





Panhandle
      Energy accounted for its acquisition by Southern Union using the purchase method
      of accounting in accordance with accounting principles generally accepted within
      the United States of America with Panhandle Energy allocating ( *pushdown* )
      the
      purchase price paid by Southern Union to Panhandle’s net assets as of the
      acquisition date. The Panhandle assets acquired and liabilities assumed were
      recorded based on their estimated fair value as of the acquisition date based
      on
      the results of outside appraisals. Accordingly, the post-acquisition financial
      statements reflect a new basis of accounting and pre-acquisition period and
      post-acquisition period financial results (separated by a heavy black line)
      are
      presented but are not comparable. See *Item
      8. Financial Statements and Supplementary Data, Note 1 - Corporate
      Structure* .





Panhandle
      Energy owns and operates a large natural gas open-access interstate pipeline
      network. The pipeline network, consisting of the Panhandle Eastern Pipe Line
      transmission system, the Trunkline transmission system and the Sea Robin
      transmission system, serves customers in the Midwest and Southwest with a
      comprehensive array of transportation and storage services. Panhandle Eastern
      Pipe Line’s transmission system consists of four large diameter pipelines
      extending approximately 1,300 miles from producing areas in the Anadarko Basin
      of Texas, Oklahoma and Kansas through the states of Missouri, Illinois, Indiana
      and Ohio and terminating in Michigan. Trunkline’s transmission system consists
      of two large diameter pipelines extending approximately 1,400 miles from the
      Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
      Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
      Indiana-Michigan border. Sea Robin’s transmission system consists of two
      offshore Louisiana natural gas supply systems extending approximately 81 miles
      into the Gulf of Mexico. In connection with its gas transmission and storage
      systems, Panhandle Energy has five gas storage fields located in Illinois,
      Kansas, Louisiana, Michigan and Oklahoma. Southwest Gas Storage operates four
      of
      these fields and Trunkline operates one. Through Trunkline LNG, Panhandle Energy
      owns and operates a liquefied natural gas ( *LNG* )
      terminal in Lake Charles, Louisiana, which is one
      of
      the largest operating LNG facilities in North America based on its current
      sustainable send out capacity of approximately 1.2 billion cubic feet per day
      ( *Bcf/d* ).





Approximately
      half of Panhandle Energy’s revenue comes from reservation fees related to
      long-term service agreements with local distribution company customers and
      their
      affiliates. Panhandle Energy also provides firm transportation services under
      contracts to gas marketers, producers, other pipelines, electric power
      generators, and a variety of other end-users. In addition, the pipelines offer
      both firm and interruptible transportation to customers on a short-term or
      seasonal basis. Demand for gas transmission on Panhandle Energy’s pipeline
      systems is somewhat seasonal, with the highest throughput and a higher portion
      of annual operating revenues and net earnings occurring in the traditional
      winter heating season in the first and fourth calendar quarters.





1





The
      following table provides a summary of transportation volumes (in a trillion
      British thermal units ( *TBtu* ))
      associated with the reported results of operations for the periods
      presented:





**Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003****Panhandle
                  Energy**Panhandle
                  Eastern Pipe Line
              
              
              609
              
              
              573
              
              
              593Trunkline
              
              
              459
              
              
              527
              
              
              605Sea
                  Robin
              
              
              146
              
              
              184
              
              
              182Trunkline
                  LNG Usage Volumes
              
              
              108
              
              
              170
              
              
              248





The
      following table provides a summary of certain statistical information associated
      with Panhandle Energy at December 31, 2005:





**Year
                  Ended****December
                  31,****2005**Approximate
                  Miles of PipelinesPanhandle
                  Eastern Pipe Line
              
              
              6,500Trunkline
              
              
              3,500Sea
                  Robin
              
              
              450Peak
                  Day Delivery Capacity (Bcf/d)Panhandle
                  Eastern Pipe Line
              
              
              2.8Trunkline
              
              
              1.5Sea
                  Robin
              
              
              1.0Trunkline
                  LNG
              
              
              1.3Underground
                  Storage Capacity-Owned (Bcf)
              
              
              72Underground
                  Storage Capacity-Leased (Bcf)
              
              
              16Trunkline
                  LNG Terminal Storage Capacity (Bcf)
              
              
              6.3Average
                  Number of Transportation Customers
              
              
              500Weighted
                  Average Remaining Life of Firm Transportation ContractsPanhandle
                  Eastern Pipe Line
              
              
              3.0Trunkline
              
              
              10.5Sea
                  Robin    (1)
              
              
              1.0Weighted
                  Average Remaining Life of Firm Storage ContractsPanhandle
                  Eastern Pipe Line
              
              
              2.5Trunkline
              
              
              0.3___________________(1)
                  Sea Robin contracts are evergreen and are tied to the life of the
                  gas
                  reserves.




***System
      Enhancements.*** Trunkline
      LNG is currently in the process of expanding its LNG terminal, which has
      increased sustainable send out capacity to approximately 1.2 Bcf/d from the
      former level of .63 Bcf/d and will increase terminal storage capacity to 9
      billion cubic feet ( *Bcf* )
      from
      the current 6.3 Bcf. On December 18, 2002, FERC approved Trunkline LNG’s
      incremental expansion of approximately .57 Bcf/d in send out capacity and
      approximately 2.7 Bcf of terminal storage capacity ( *Phase
      I* ).
      Construction on Phase I commenced in September 2003 and is expected to be
      completed late in the first quarter or early second quarter of 2006, with an
      estimated cost totaling $137
      million, plus capitalized interest. The expanded vaporization capacity portion
      of the expansion was placed into service on September 18, 2005.





On
      September 17, 2004, as modified on September 23, 2004, FERC approved Trunkline
      LNG’s further incremental expansion project ( *Phase
      II* ).
      Phase
      II is estimated to cost approximately $82
      million, plus capitalized interest, and will increase the LNG terminal
      sustainable send out capacity to 1.8 Bcf/d. Phase II has an expected in-service
      date of mid-2006.





2





On
      February 11, 2005, Trunkline received approval from FERC to construct, own
      and
      operate a 36-inch diameter, 23-mile natural gas pipeline loop from the LNG
      terminal. The new 36-inch pipeline was placed into service on July 22, 2005
      at a
      total construction cost of $46.7
      million, plus capitalized interest. The pipeline creates additional transport
      capacity in association with the Trunkline LNG expansion and also includes
      new
      and expanded delivery points with major interstate pipelines.





Beginning
      January 2002, Trunkline LNG entered into a 22-year contract with BG LNG Services
      for all the uncommitted capacity at its Lake Charles, Louisiana LNG terminal
      facility. BG LNG Services also has contract rights for the additional .57 Bcf/d
      in send out capacity that is the subject of Phase I. BG LNG Services has
      contracted for all the proposed additional sendout capacity to result from
      the
      Phase II construction, subject to Trunkline LNG achieving certain construction
      milestones at this facility.





***Significant
      Customers.*** The
      following table provides information related to Panhandle Energy’s significant
      customers:




**Percent
                  of****Transportation
                  and****Storage
                  Segment**
              
              
              
              **Remaining****Revenues**
              
              
              
              **average
                  life****For
                  Year Ended**
              
              
              
              **of
                  contracts at****Customer**
              
              **December
                  31, 2005**
              
              
              
              **December
                  31, 2005**BG
                  LNG Services (1)
              
              
              17
              %
              
              
              
              18.1ProLiance
              
              
              16
              
              
              
              
              2.7Ameren
                  Corp. (2)
              
              
              11
              
              
              
              
              0.4
              (4)CMS
                  Energy and affiliates (3)
              
              
              8
              
              
              
              
              3.3Other
                  top 10 customers
              
              
              14
              
              
              
              
              N/ARemaining
                  customers
              
              
              34
              
              
              
              
              N/ATotal
                  percentage
              
              
              100
              %


_______________________________


(1)
            BG
                LNG Services’ contracts will expand with the completion of Phase I and
                Phase II. Phase I is currently expected to be completed late in the
                first
                quarter or early second quarter of 2006. Phase II is expected to
                be
                completed by mid-2006. Phase I will provide an annual increase of
                gross
                reservation revenues of approximately$39
                million, $6 million of which was realized during 2005 due to the
                expanded
                vaporization capacity associated with the Phase I project. Phase
                II will
                provide additional annual gross revenues of approximately $22 million.
                (See*Item
                8. Financial Statements and Supplementary Data, Note 3 - Regulatory
                Matters*).
                BG LNG Services’ transportation contract with Trunkline will increase in
                volume proportionally with the Phase I and Phase II expansions and
                is
                expected to increase reservation revenues by $8 million and $5 million,
                respectively, from 2005 firm transport levels.


(2)
            Primarily
                these Ameren Corp. subsidiaries are Union Electric, Central Illinois
                Light
                Company, Illinois Power and Central Illinois Public Service.


(3)
            Primarily
                Consumers Energy contracts that originally were set to expire in
                late 2005
                but were amended and extended to 2008. These amended contracts will
                result
                in a reduction in CMS Energy’s revenue contribution to Panhandle Energy in
                calendar year 2006, the first full year of effectiveness. If the
                new
                contract had been in effect for the full year ended December 31,
                2005,
                Panhandle Energy’s operating revenues would have been approximately$9
                million lower.


(4)
            In
                February 2006, certain expiring contracts with Ameren Corp. were
                renewed.
                These renewed contracts have a weighted average remaining life of9.3
                years.





Panhandle
      Energy’s customers are subject to change during the year as a result of capacity
      release provisions that allow them to release all or part of their capacity,
      which generally occurs for a limited time period. Under the terms of Panhandle
      Energy’s tariff, a temporary capacity release does not relieve the original
      customer from its payment obligations if the replacement customer fails to
      pay.





***Regulation***





Panhandle
      Energy is subject to regulation by various federal, state and local governmental
      agencies, including those specifically described below. See also *Item
      1. Business - Environmental, Item 1A. Risk Factors* and *Item
      8. Financial Statements and Supplementary Data, Note 3 - Regulatory
      Matters* .








3





FERC
      has
      comprehensive jurisdiction over Panhandle Eastern Pipe Line, Southwest Gas
      Storage, Trunkline, Trunkline LNG and Sea Robin as natural gas companies within
      the meaning of the Natural Gas Act of 1938. For natural gas companies, FERC’s
      jurisdiction relates, among other things, to the acquisition, operation and
      disposal of assets and facilities and to the service provided and rates charged.





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





The
      following table summarizes the status of the rate proceedings applicable to
      Panhandle Energy:




**Date
                  of Last****Company**
              
              **Rate
                  Filing**
              
              **Status**Panhandle
                  Eastern Pipe Line
              
              May
                  1992
              
              Settlement
                  effective April 1997Trunkline
              
              January
                  1996
              
              Settlement
                  effective May 2001Sea
                  Robin
              
              April
                  2001
              
              Settlement
                  effective May 2002Trunkline
                  LNG
              
              June
                  2001
              
              Settlement
                  effective January 2002Southwest
                  Gas Storage
              
              April
                  1989
              
              Settlement
                  effective October 1989





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





For
      a
      discussion of the effect of certain FERC orders on Panhandle Energy, see *Item
      8. Financial Statements and Supplementary Data, Note 3 - Regulatory
      Matters.*





***Competition***





The
      interstate pipeline systems of Panhandle Ener gy
      compete with those of other interstate and intrastate pipeline companies in
      the
      transportation and storage of natural gas. The principal elements of competition
      among pipelines are rates, terms of service, flexibility, and reliability of
      service.





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





Federal
      and state regulation of natural gas interstate pipelines has changed
      dramatically in the last two decades and could continue to change over the
      next
      several years. These regulatory changes have resulted and will continue to
      result in increased competition in the pipeline business. In order to meet
      competitive challenges, Panhandle Energy will need to adapt its marketing
      strategies, the type of transportation and storage services and its pricing
      and
      rate responses to competitive forces. Panhandle Energy also will need to respond
      to changes in state regulation in its market areas that allow direct sales
      to
      all retail end-user customers or, at a minimum, broader customer classes than
      now allowed.





FERC
      policy allows the issuance of certificates authorizing the construction of
      new
      interstate pipelines that are competitive with existing pipelines. A number
      of
      new pipeline and pipeline expansion projects are under development to transport
      large additional volumes of natural gas to the Midwest from the Rockies. These
      pipelines, which include Kinder Morgan’s Rockies Express Pipeline project and El
      Paso Corporation’s Continental Connector project, could potentially compete with
      Panhandle Energy. Increased competition could reduce the volumes of gas
      transported by Panhandle Energy to existing markets or force Panhandle Energy
      to
      lower rates in order to remain competitive.





4





Panhandle
      Energy’s direct competitors include Alliance Pipeline LP, ANR Pipeline Company,
      Natural Gas Pipeline Company of America, Northern Border Pipeline Company,
      Texas
      Gas Transmission Corporation, Northern Natural Gas Company and Vector
      Pipeline.





***Environmental***





Panhandle
      Energy is subject to federal, state and local laws and regulations relating
      to
      the protection of the environment. These evolving laws and regulations may
      require expenditures over a long period of time to control environmental
      impacts. Panhandle Energy has established procedures for the ongoing evaluation
      of its operations to identify potential environmental exposures. These
      procedures are designed to achieve compliance with such laws and regulations.
      For additional information concerning the impact of environmental regulation
      on
      Panhandle Energy, see *Item
      8. Financial Statements and Supplementary Data, Note 13 - Commitments and
      Contingencies* .





***Insurance***





Panhandle
      Energy maintains insurance coverage provided under its policies or policies
      of
      Southern Union similar to other comparable companies in the same lines of
      business. The insurance policies are subject to terms, conditions, limitations
      and exclusions that do not fully compensate Panhandle Energy for all losses.
      Furthermore, as Panhandle Energy renews its policies, it is possible that full
      insurance coverage may not be obtainable on commercially reasonable terms due
      to
      the recent more restrictive insurance markets. For example, the deductible
      on
      property insurance coverage is $5
      million.





***Employees***





At
      December 31, 2005, Panhandle Energy had 978 full-time equivalent employees.
      Of
      these employees, 226
      were
      represented by the Paper, Allied-Industrial Chemical and Energy Workers
      International Union, AFL-CIO, CLC. In June 2003, Panhandle Energy entered into
      a
      new agreement with this union that expires on May 28,
      2006. The new agreement caps wage increases at three percent annually.








***Available
      Information***





Panhandle
      Eastern Pipe Line files annual, quarterly and special reports and other
      information as required with the Securities and Exchange Commission
      ( *SEC* ).
      Any
      document that Panhandle Eastern Pipe Line files with the SEC may be read or
      copied at the SEC’s public reference room at 100 F Street, N.E., Washington,
      D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public
      reference room. Panhandle Eastern Pipe Line’s SEC filings are also available at
      the SEC’s website at http://www.sec.gov.





**ITEM
      1A. Risk Factors.**





The
      risks
      and uncertainties described below are not the only ones faced by Panhandle
      Energy. Additional risks and uncertainties that it is unaware of, or that it
      currently deems immaterial, also may become important factors that affect it.
      If
      any of the following risks occur, Panhandle Energy’s business, financial
      condition or results of operations could be materially and adversely
      affected.







***Panhandle
      Energy has substantial debt and depends on its ability to access the capital
      markets.***






Panhandle
      Energy has a significant amount of debt outstanding. As of December 31, 2005,
      consolidated debt on the Consolidated Balance sheet totaled $1.18 billion
      outstanding compared to total capitalization (long term debt plus partners’
equity) of $2.03 billion.




Some
      of
      Panhandle Energy’s debt obligations contain financial covenants related to
      debt-to-capital ratios and interest coverage ratios. Panhandle Energy’s failure
      to comply with any of these covenants could result in an event of default which,
      if not cured or waived, could result in the acceleration of outstanding debt
      obligations or render it unable to borrow under certain credit agreements.
      Any
      such acceleration would cause a material adverse change in Panhandle Energy’s
      financial condition.





5





Panhandle
      Energy relies on access to both short-term and long-term credit as a significant
      source of liquidity for capital requirements not satisfied by the cash flow
      from
      its operations. Any worsening of Panhandle Energy’s financial condition could
      hamper its ability to access the credit markets. External events could also
      increase Panhandle Energy’s cost of borrowing or adversely affect its ability to
      access the capital markets.





Further,
      in order for Panhandle Energy to receive equity contributions or loans from
      its
      parent Southern Union, certain state regulatory approvals are required. This
      may
      limit Panhandle Energy’s overall access to sources of capital otherwise
      available. Restrictions on Panhandle Energy’s ability to access capital markets
      could affect its ability to execute its business plan or limit its ability
      to
      pursue improvements or acquisitions on which it may otherwise rely for future
      growth.





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





As
      of
      December 31, 2005, Panhandle Energy’s debt is currently rated Baa3 by Moody's
      Investor Services, Inc., BBB by Standard & Poor's and BBB by Fitch
      Ratings. If its current ratings are downgraded below investment grade or if
      there are times when it is placed on "credit watch," both borrowing costs and
      the costs of maintaining certain contractual relationships could increase.
      Panhandle Energy’s credit rating can be impacted by the credit rating and
      activities of its parent company, Southern Union Company. Thus, adverse impacts
      to Southern Union and its activities, which may include activities unrelated
      to
      Panhandle Energy may have adverse impacts on Panhandle Energy’s credit rating
      and financing and operating costs.





***Panhandle
      Energy is controlled by Southern Union.***





Panhandle
      Energy is an indirect wholly-owned subsidiary of Southern Union Company.
      Southern Union executives serve as the board of managers and as executive
      officers of Panhandle Energy. Accordingly, Southern Union controls and directs
      all Panhandle Energy business affairs and may unilaterally effect changes to
      its
      management team and decides all matters submitted for member approval. In
      circumstances involving a conflict of interest between Southern Union, on the
      one hand, and Panhandle Energy’s creditors, on the other hand, Panhandle Energy
      can give no assurance that Southern Union would not exercise its power to
      control Panhandle Energy in a manner that would benefit Southern Union to the
      detriment of its creditors.





***Panhandle
      Energy is subject to operating risks.***





Panhandle
      Energy’s operations are subject to all operating hazards and risks incident to
      handling, storing, transporting and providing customers with natural gas,
      including explosions, pollution, release of toxic substances, fires and other
      hazards, each of which could result in damage to or destruction of its
      facilities or damage to persons and property. If any of these events were to
      occur, Panhandle Energy could suffer substantial losses. Moreover, as a result,
      Panhandle Energy has been, and likely will be, a defendant in legal proceedings
      and litigation arising in the ordinary course of business. Although Panhandle
      Energy maintains insurance coverage, such coverage may not be adequate to
      protect Panhandle Energy from all material expenses related to these
      risks.





***Panhandle
      Energy 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.***





Panhandle
      Energy is subject to extensive federal, state and local laws and regulations
      regulating the environmental aspects of its business (including air emissions).
      These laws and regulations are complex and have tended to become increasingly
      strict over time. These laws and regulations have necessitated, and in the
      future may necessitate, increased capital expenditures and operating costs.
      In
      addition, certain environmental laws can impose liability without regard to
      fault concerning contamination at a broad range of properties, including those
      currently or formerly owned, leased or operated properties and properties where
      Panhandle Energy disposed of, or arranged for the disposal of,
      waste.





Panhandle
      Energy is currently monitoring or remediating contamination at a number of
      its
      facilities and at third party waste disposal sites pursuant to environmental
      laws and regulations and indemnification agreements. Panhandle Energy cannot
      predict with certainty the sites for which it may be responsible, the amount
      of
      resulting cleanup obligations that may be imposed on it or the amount and timing
      of future expenditures related to environmental remediation because of the
      difficulty of estimating cleanup costs and the uncertainty of payment by other
      potentially responsible parties.





6





Costs
      and
      obligations can also arise from claims for toxic torts and natural resource
      damages or from releases of hazardous materials on other properties as a result
      of ongoing operations or disposal of waste. Compliance with amended, new or
      more
      stringently enforced existing environmental requirements, or the future
      discovery of contamination, may require material unbudgeted expenditures. These
      costs or expenditures could have a material adverse effect on Panhandle Energy’s
      business, financial condition or results of operations, particularly if such
      costs or expenditures are not fully recoverable from insurance or through the
      rates charged to customers or if they exceed any amounts that have been
      reserved.





***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 Panhandle Energy’s results of
      operations.***





The
      impact that terrorist attacks, such as the attacks of September 11, 2001,
      may have on the energy industry in general, and on Panhandle Energy in
      particular, is not known at this time. Uncertainty surrounding military activity
      may affect its operations in unpredictable ways, including disruptions of fuel
      supplies and markets and the possibility that infrastructure facilities,
      including pipelines, LNG facilities, gathering facilities and processing plants
      could be direct targets of, or indirect casualties of, an act of terror or
      a
      retaliatory strike. Panhandle Energy may have to incur significant additional
      costs in the future to safeguard its physical assets.





***Panhandle
      Energy’s business is highly regulated.***





Panhandle
      Energy’s transportation and storage business is subject to regulation by federal
      and state regulatory authorities. FERC, the U.S. Department of Transportation
      and various state and local regulatory agencies regulate the interstate pipeline
      business. In particular, FERC regulates services provided and rates charged
      by
      Panhandle Energy. In addition, the U.S. Coast Guard has oversight over certain
      issues related to the importation of LNG.





Panhandle
      Energy’s rates and operations are subject to regulation by federal regulators as
      well as the actions of the Congress and state legislatures and, in some
      respects, state regulators. Panhandle Energy cannot predict or control what
      effect future actions of regulatory agencies may have on its business or its
      access to the capital markets. Furthermore, the nature and degree of regulation
      of natural gas companies has changed significantly during the past 25 years
      and there is no assurance that further substantial changes will not occur or
      that existing policies and rules will not be applied in a new or different
      manner.





Should
      new regulatory requirements regarding the security of its pipeline system or
      new
      accounting treatment for certain entities be imposed, Panhandle Energy could
      be
      subject to additional costs that could adversely affect its business, financial
      condition and results of operations if these costs are deemed unrecoverable
      in
      rates.





***The
      pipeline business of Panhandle Energy is subject to
      competition.***





The
      interstate pipeline business of Panhandle Energy competes with those of other
      interstate and intrastate pipeline companies in the transportation and storage
      of natural gas. The principal elements of competition among pipelines are rates,
      terms of service and the flexibility and reliability of service. Natural gas
      competes with other forms of energy available to Panhandle Energy’s customers
      and end-users, including electricity, coal and fuel oils. The primary
      competitive factor is price. Changes in the availability or price of natural
      gas
      and other forms of energy, the level of business activity, conservation,
      legislation and governmental regulations, the capability to convert to alternate
      fuels, and other factors, including weather and natural gas storage levels,
      affect the demand for natural gas in the areas served by Panhandle
      Energy.





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





Third
      parties own most of the natural gas transported and stored through the pipeline
      systems operated by Panhandle Energy. As a result, the volume of natural gas
      transported and stored depends on the actions of those third parties and is
      beyond Panhandle Energy’s control. Further, the following factors, most of which
      also are beyond Panhandle Energy’s control, may unfavorably impact its ability
      to maintain or increase current transmission and storage rates, to renegotiate
      existing contracts as they expire or to remarket unsubscribed
      capacity:





7








·
            future
                weather conditions, including those that favor alternative energy
                sources;


·
            the
                market price of natural gas;


·
            price
                competition;


·
            drilling
                activity and supply availability;


·
            the
                expiration of significant
                contracts;


·
            service
                area competition; and


·
            regulatory
                actions.





***The
      success of Panhandle Energy 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.***





The
      amount of revenue generated by Panhandle Energy depends substantially upon
      the
      volume of natural gas it transports. As the reserves available through the
      supply basins connected to the Panhandle Energy system naturally decline, a
      decrease in development or production activity could cause a decrease in the
      volume of natural gas available for transmission. Investments by third parties
      in the development of new natural gas reserves connected to Panhandle Energy’s
      facilities depend on many factors beyond Panhandle Energy’s
      control.





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





If
      natural gas prices in the supply basins connected to the pipeline systems of
      Panhandle Energy are higher than prices in other natural gas producing regions,
      especially Canada, the volume of gas transported by Panhandle Energy may be
      negatively impacted.





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





Panhandle
      Energy’s top four customers accounted for 52
      percent of its 2005 revenue. The loss of any one or more of these customers
      could have a negative adverse effect on Panhandle Energy’s business, financial
      condition or results of operation.





***The
      pipeline revenues of Panhandle Energy are generated under contracts that must
      be
      renegotiated periodically.***





The
      pipeline revenues of Panhandle Energy are generated under natural gas
      transportation contracts that expire periodically and must be replaced
      approximately every three years, on average. Although Panhandle Energy will
      actively pursue the renegotiation, extension and/or replacement of all of its
      contracts, it cannot assure that it will be able to extend or replace these
      contracts when they expire or that the terms of any renegotiated contracts
      will
      be as favorable as the existing contracts. If Panhandle Energy is unable to
      renew, extend or replace these contracts, or if Panhandle Energy renews them
      on
      less favorable terms, it may suffer a material reduction in revenues and
      earnings.





***Panhandle
      Energy is exposed to the credit risk of its customers in the ordinary course
      of
      business.***





Transportation
      service contracts obligate customers to pay charges for reservation of capacity,
      or reservation charges, regardless of whether they transport natural gas on
      the
      pipeline system. As a result, Panhandle Energy’s profitability will depend upon
      the continued financial performance and creditworthiness of its customers rather
      than just upon the amount of capacity provided under service
      contracts.





Generally,
      customers are rated investment grade or, as permitted by Panhandle Energy’s
      tariff, are required to make pre-payments or deposits, or to provide other
      collateral, if their creditworthiness is questionable. Nevertheless, Panhandle
      Energy cannot predict to what extent future declines in customers'
      creditworthiness may negatively impact its business.











8





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





Numerous
      operational risks are associated with the operation of a complex pipeline
      system. These include adverse weather conditions, accidents, the breakdown
      or
      failure of equipment or processes, the performance of pipeline facilities below
      expected levels of capacity and efficiency, the collision of equipment with
      pipeline facilities (such as may occur if a third party were to perform
      excavation or construction work near the facilities), and catastrophic events
      such as explosions, fires, earthquakes, floods, landslides, hurricanes,
      lightning or other similar events beyond Panhandle Energy’s control. It is also
      possible that infrastructure facilities could be direct targets or indirect
      casualties of an act of terror. A casualty occurrence might result in injury
      or
      loss of life, extensive property damage or environmental damage. Insurance
      proceeds may not be adequate to cover all liabilities or expenses incurred
      or
      revenues lost.





***Panhandle
      Energy’s assets and operations can be affected by weather and other natural
      phenomena.***





Panhandle
      Energy’s pipeline system, especially those portions that are located offshore,
      are subject to adverse weather conditions including hurricanes, earthquakes,
      tornadoes, extreme temperatures and other natural phenomena, making it more
      difficult for Panhandle Energy to realize the historic rates of return
      associated with these assets and operations.





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





The
      disclosure and analysis in this Form 10-K contains some forward-looking
      statements that set forth anticipated results based on management’s plans and
      assumptions. From time to time, Panhandle Energy also provides forward-looking
      statements in other materials it releases to the public as well as oral
      forward-looking statements. Such statements give Panhandle Energy’s current
      expectations or forecasts of future events; they do not relate strictly to
      historical or current facts. Panhandle Energy has tried, wherever possible,
      to
      identify such statements by using words such as “anticipate,” “estimate,”
“expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions
      in connection with any discussion of future operating or financial performance.
      In particular, these include statements relating to future actions, future
      performance or results of current and anticipated products, expenses, interest
      rates, the outcome of contingencies, such as legal proceedings, and financial
      results.





Panhandle
      Energy cannot guarantee that any forward-looking statement will be realized,
      although management believes that Panhandle Energy has been prudent in its
      plans
      and assumptions. Achievement of future results is subject to risks,
      uncertainties and potentially inaccurate assumptions. If known or unknown risks
      or uncertainties should materialize, or if underlying assumptions should prove
      inaccurate, actual results could differ materially from past results and those
      anticipated, estimated or projected. Readers should bear this in mind as they
      consider forward-looking statements.





Panhandle
      Energy Union undertakes no obligation publicly to update forward-looking
      statements, whether as a result of new information, future events or otherwise.
      Readers are advised, however, to consult any further disclosures Panhandle
      Energy makes on related subjects in its 10-Q and 8-K reports to the SEC. Also
      note that Panhandle Energy provides the following cautionary discussion of
      risks, uncertainties and possibly inaccurate assumptions relevant to its
      businesses. These are factors that, individually or in the aggregate, management
      thinks could cause Panhandle Energy’s actual results to differ materially from
      expected and historical results. Panhandle Energy notes these factors for
      investors as permitted by the Private Securities Litigation Reform Act of 1995.
      Readers should understand that it is not possible to predict or identify all
      such factors. Consequently, readers should not consider the following to be
      a
      complete discussion of all potential risks or uncertainties.








9





Factors
      that could cause actual results to differ materially from those expressed in
      Panhandle Energy’s forward-looking statements include, but are not limited to,
      the following:





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


·
            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 Panhandle
                Energy’s service territories, and the operational impact of disasters such
                as Hurricanes Katrina and Rita;


·
            changes
                in laws or regulations, third-party relations and approvals, decisions
                of
                courts, regulators and governmental bodies affecting or involving
                Panhandle Energy, 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
                Panhandle Energy’s business and the resulting effect on
                revenues;


·
            the
                outcome of pending and future
                litigation;


·
            Panhandle
                Energy’s ability to comply with or to challenge successfully existing or
                new environmental regulations;


·
            unanticipated
                environmental liabilities;


·
            Panhandle
                Energy’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;


·
            Panhandle
                Energy’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 Panhandle Energy’s debt securities or any of its
                subsidiaries;


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


·
            acts
                of nature, sabotage, terrorism or other acts causing damage greater
                than
                Panhandle Energy’s insurance coverage
                limits;


·
            market
                risks beyond Panhandle Energy’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.**





N/A





**ITEM
      2. Properties.**





See *Item
      1. Business* for
      information concerning the general location and characteristics of the important
      physical properties and assets of Panhandle Energy.





**ITEM
      3.Legal Proceedings.**





Panhandle
      Energy and certain of its affiliates are parties to routine lawsuits and
      administrative proceedings incidental to their business involving, for example,
      claims for personal injury and property damage, environmental matters,
      contractual matters, various tax matters, and rates and licensing. Reference
      is
      made to *Item
      1, Business - Regulation* ,
      as well
      as to *Item
      8. Financial Statements and Supplementary Data, Note 3 - Regulatory Matters
      and
      Note 13 - Commitments and Contingencies,* for a
      discussion of Panhandle Energy’s legal pro-ceedings. Also see *Item
      1A. Risk Factors - Cautionary Factors That May Affect Future
      Results.*





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





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





10





**PART
      II**





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





All
      of
      the partnership interests in Panhandle Eastern Pipe Line are privately held
      by
      Southern Union Panhandle, LLC and Southern Union. See *Item
      8. Financial Statements and Supplementary Data, Note 1 - Corporate
      Structure* .





**ITEM
      6. Selected Financial Data.**





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





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





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





***Overview***





Panhandle
      Energy’s business purpose is to provide natural gas transportation and storage
      in a safe, efficient and dependable manner. Panhandle Energy operates more
      than 10,000
      miles of interstate pipelines that transport up to 5.3
      Bcf/d
      of natural gas. For additional information related to Panhandle Energy’s line of
      business, locations of operations and services provided, see *Item
      1. Business* .




Historically,
      much of Panhandle Energy’s business was conducted through long-term contracts
      with customers. Over the past several years some of Panhandle Energy’s customers
      have shifted to shorter term transportation services contracts. This shift,
      which can increase the volatility of revenues, is primarily due to changes
      in
      market conditions and competition with other pipelines, new supply sources,
      changing supply sources and volatility in natural gas prices. However, changes
      in commodity prices and volumes transported do not generally have a significant
      short-term impact on revenues because the majority of Panhandle Energy’s
      revenues are related to firm capacity reservation charges. For additional
      information related to Panhandle Energy’s related risk factors and the weighted
      average remaining lives of firm transportation and storage contracts,
      See *Item
      1A. Risk Factors* and *Item
      1. Business* ,
      respectively *.*





Panhandle
      Energy’s regulated businesses periodically file for changes in their rates which
      are subject to approval by FERC. Changes in rates and other tariff provisions
      resulting from these regulatory proceedings have the potential to negatively
      impact Panhandle Energy’s results of operations and financial condition. For
      information related to the status of current rate filings, see *Item
      1. Business* .








11


**Results
        of Operations**


The
      following table illustrates the results of operations of Panhandle Energy for
      the periods presented:




**Year
                    Ended****December
                    31,**Year
                    Ended
                
                Year
                    Ended
                
                **2005
                    Versus 2004****December
                    31,**
                
                **December
                    31,**
                
                **Favorable/(Unfavorable)****2005**
                
                **2004**
                
                **Variances**(In
                    thousands)Operating
                    revenue:Transportation
                    and storage of natural gas
                
                $
                434,537
                
                $
                423,011
                
                $
                11,526LNG
                    terminalling revenue
                
                
                62,569
                
                
                56,537
                
                
                6,032Other
                    revenue
                
                
                8,127
                
                
                9,616
                
                
                (1,489
                )Total
                    operating revenue
                
                
                505,233
                
                
                489,164
                
                
                16,069Operating
                    expenses:Operation,
                    maintenance and general
                
                
                204,461
                
                
                212,106
                
                
                7,645Depreciation
                    and amortization
                
                
                62,171
                
                
                60,182
                
                
                (1,989
                )Taxes,
                    other than on income
                
                
                28,196
                
                
                26,867
                
                
                (1,329
                )Total
                    operating expenses
                
                
                294,828
                
                
                299,155
                
                
                4,327Operating
                    income
                
                
                210,405
                
                
                190,009
                
                
                20,396Other
                    income (expense):Interest
                    expense, net
                
                
                (48,285
                )
                
                (48,429
                )
                
                144Other,
                    net
                
                
                4,069
                
                
                2,409
                
                
                1,660Total
                    other expense, net
                
                
                (44,216
                )
                
                (46,020
                )
                
                1,804Earnings
                    before income taxes
                
                
                166,189
                
                
                143,989
                
                
                22,200Income
                    taxes
                
                
                64,627
                
                
                56,056
                
                
                (8,571
                )Net
                    earnings
                
                $
                101,562
                
                $
                87,933
                
                $
                13,629


***Operating
      Revenue.*** For
      the
      12 months ended December 31, 2005, operating revenue increased $16.1 million
      versus the same time period during 2004. The increase was affected
      by:


·
            Higher
                transportation and storage revenue of approximately $11.5 million
                primarily due:


o
            An
                $8.8 million increase on Panhandle Eastern Pipe Line, reflecting
                higher
                average reservation rates on new contracts. Reservation average rates
                are
                dependent on certain factors including but not limited to rate regulation,
                customer demand for reserved capacity, capacity sold levels for a
                given
                period, and, in some cases, utilization of
                capacity;


o
            A
                $7.4 million increase in Trunkline reservation revenues primarily
                related
                to the pipeline loop facilities extending from the Trunkline LNG
                terminal,
                which went into service in the third quarter of
                2005;


o
            Decreased
                commodity revenues on Trunkline of $2.3 million due to a reduction
                in
                commodity volumes of six percent resulting from low market spreads.
                Commodity revenues are dependent upon a number of variable factors,
                including weather, storage levels, and customer demand for firm,
                interruptible and parking services;
                and


o
            Impacts
                of Hurricane Rita, which significantly reduced volumes flowing on
                Sea
                Robin and caused shutdowns of liquids production, resulting in
                approximately $3 million of revenue decreases. Management estimates
                further revenue reductions of approximately $2 million will be experienced
                in 2006 as a result of the hurricanes, plus an estimated $8 million
                to $12
                million in lost opportunity revenues from delayed expansion in-service
                dates which were affected by the hurricanes and other technical
                issues.





12








·
            Higher
                LNG terminalling revenue of $6 million primarily due to expanded
                vaporization capacity and a base capacity increase on the BG LNG
                contract,
                partially offset by lower volumes resulting from fewer
                cargoes.





***Operating
      Expenses.***  Operating
      expenses for the 12 months ended December 31, 2005 decreased $4.3 million versus
      the same time period during 2004 primarily due to a decrease of $7.6 million
      in
      operation, maintenance and general expenses, partially offset by $2 million
      of
      higher depreciation and amortization primarily due to an increase in property,
      plant and equipment and $1.4 million of higher property tax assessments related
      to higher utility income. The operation, maintenance and general expense
      decrease of $7.6 million is primarily due to:


·
            A
                reduction in certain administrative and operating expenses of
                approximately $6.9 million primarily due to synergies associated
                with the
                workforce reduction undertaken in the fourth quarter of 2004 associated
                with the integration of CrossCountry Energy, LLC, an affiliate of
                Southern
                Union;


·
            A
                decrease of approximately $3.8 million of operating expenses due
                to a
                change in vacation pay practice and a corresponding accrual reduction;


·
            A
                decrease of approximately $3.4 million of benefit costs primarily
                due to
                headcount reductions and lower post-retirement costs due to Medicare
                Part
                D reimbursements enacted;


·
            Incurrence
                of approximately $1.7 million of severance-related costs in 2004
                associated with the Cross Country Energy, LLC integration;
                and


·
            Lower
                LNG power costs of approximately $1.5 million due to lower LNG volumes
                received in 2005.





Offsetting
      cost increases were as follows:


·
            The
                higher net recovery of previously under-recovered fuel volumes of
                approximately $4.2 million in 2004;


·
            Higher
                net expenses of approximately $7 million of damages directly associated
                with Hurricanes Katrina and Rita;
                and


·
            An
                increase of $1.4 million in property tax assessments related to higher
                utility income.





***Other
      Income (Expense).*** **** Other
      income, net for the 12 months ended December 31, 2005 increased $1.8 million
      versus the same time period during 2004, primarily due to higher related party
      interest income caused by increases in the underlying LIBOR-based rates in
      2005.
      For further discussion of Panhandle  Energy’s
      related party interest income, see *Item
      8. Financial Statements and Supplementary Data, Note 4 - Related Party
      Transactions* .





***Income
      Taxes.*** Income
      taxes during the 12 months ended December 31, 2005, versus the same time period
      during 2004, increased $8.6 million due to increases in pretax income, which
      reflects an effective tax rate of approximately 38.9 percent for both years
      ended December 31, 2005 and 2004.





***Liquidity
      and Capital Resources***





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





***Operating
      Activities.*** Cash
      generated from internal operations constitutes Panhandle Energy’s  primary
      source of liquidity. Additional sources of liquidity include use of available
      credit facilities, project and bank financings, issuance of long-term debt
      and
      proceeds from asset dispositions.





Cash
      flows from operating activities for the 12 months ended December 31, 2005 were
      $205.4 million versus $183.3 million for the same time period during 2004.
      Changes in operating assets and liabilities provided cash of $1 million for
      the
      years ended December 31, 2005 and 2004. The $22.1 million increase in cash
      flows
      from operating activities for the year ended December 31, 2005 versus 2004
      was
      primarily attributable to the increase in net earnings.








13





***Investing
      Activities.*** Panhandle Energy’s business strategy includes making prudent capital
      expenditures across its base of interstate transmission assets. Changes in
      cash
      flow resulting from investing activities associated with these objectives
      resulted primarily from ongoing expansion of its existing asset base through
      additions to property, plant and equipment. Historically, Panhandle Energy
      has
      utilized its operating cash flow to satisfy its general capital requirements
      and
      has accessed the capital markets only for extraordinary capital expenditures.
      Panhandle  Energy
      estimates the remaining capital expenditures associated with the Phase I and
      Phase II expansion of its LNG terminal to be approximately $32.1
      million in 2006, plus capitalized interest. Additionally,
      certain enhancements to the east end of the Panhandle Eastern Pipe Line system
      are planned with estimated capital outlays of $70 million and $27 million,
      plus
      capitalized interest, in years 2006 and 2007, respectively. Such enhancements
      will increase capacity and improve system integrity and efficiency. These
      estimates were developed for budgeting purposes and are subject to
      revision.





The
      following table is a summary of ongoing or planned expansion growth
      opportunities:





**Estimated**
              **Estimated**
              
              **Company**
              **Project****Project**
              **Annual**
              **Projected**
              **Ownership**
              **Status
                  at****Project
                  Name**
              **Capacity**
              **Cost
                  (1)**
              **EBIT**
              **In
                  Service**
              **Percentage**
              **December
                  31, 2005**(In
                  thousands)Trunkline
                  LNG Phase I
              .57
                  Bcf/d
              $137,000
              $28,000
              Late
                  first quarter or
              100%
              Vaporization
                  in service,2.7
                  Bcf storage
              
              
              early
                  second quarter 2006
              
              remainder
                  under constructionTrunkline
                  LNG Phase II
              .6
                  Bcf/d
              $82,000
              $16,000
              Mid
                  2006
              100%
              Under
                  constructionTrunkline
                  North Texas
              .3
                  to .6 Bcf/d
              $90,000
                  to $110,000
              (2)
              Late
                  2007
              100%
              Customer
                  negotiationsTrunkline
                  LNG Infrastructure
              Ambient
                  Air
              $250,000
                  to $280,000
              (2)
              Mid
                  2008
              100%
              Customer
                  negotiationsEnhancement
                  Project (IEP)
              Vaporization
                  andNGL
                  extraction(1)
                  Excludes capitalized interest.(2)
                  Amount is not currently determinable as related contractual discussions
                  are ongoing and/or the project economic analyses are still being
                  developed.











The
      following table presents a summary of property, plant and equipment additions
      related to major projects.




**Year**
              
              **Year**
              
              **Year****Ended**
              
              **Ended**
              
              **Ended****December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,****Property,
                  Plant and Equipment Additions**
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)LNG
                  Terminal Expansions
              
              $
              75,263
              
              $
              88,323
              
              $
              34,386Trunkline
                  LNG Loop
              
              
              25,329
              
              
              21,321
              
              
              -Pipeline
                  Integrity
              
              
              21,816
              
              
              18,378
              
              
              21,860System
                  Reliability
              
              
              22,637
              
              
              16,807
              
              
              14,581Information
                  Technology
              
              
              6,162
              
              
              6,226
              
              
              14,460Other
              
              
              38,208
              
              
              32,649
              
              
              13,678Total
                  (1)
              
              $
              189,415
              
              $
              183,704
              
              $
              98,965(1)
                  Includes net capital accruals totaling $(5,537), $10,657 and $5,356
                  for
                  the years ended December 31, 2005,December
                  31, 2004 and December 31, 2003,
                  respectively.


Late
      in
      the third quarter of 2005, Hurricanes Katrina and Rita came ashore along the
      Upper Gulf Coast after coming through the Gulf of Mexico. These hurricanes
      caused modest damage to property and equipment owned by Sea Robin, Trunkline,
      and Trunkline LNG. Approximately $900,000 of capital outlays were recorded
      in
      2005, with additional estimated capital outlays of approximately $20 million,
      prior to any insurance recoveries, expected to be incurred in 2006. Estimated
      capital outlays primarily include repair and replacement of equipment lost
      or
      damaged in the hurricanes, potential abandonment costs for certain facilities,
      which will be impacted by producer decisions regarding rebuilding their damaged
      platforms and reconnecting their gas reserves to Panhandle Energy’s pipelines,
      and higher LNG terminal construction costs.





Cash
      flows used in investing activities for the 12 months ended December 31, 2005
      increased by approximately $38.8 million versus the same time period in 2004.
      Such increase in investing activities is primarily due to an increase of $21.9
      million in capital expenditures, most of which is related to the Trunkline
      LNG
      expansion projects, and an increase in net loans made to Southern Union of
      approximately $16.4 million.





***Financing
      Activities.*** ****** As
      of
      December 31, 2005, Panhandle  Energy’s
      debt was rated BBB
      by
      Fitch Ratings, Inc. and Standard & Poor’s and Baa3 by Moody’s Investor
      Services, Inc. The instruments governing Panhandle  Energy’s
      rated debt require it to maintain a specified fixed charge coverage ratio and
      leverage ratio and restrict Panhandle Energy’s ability to make certain payments
      if these ratios are not maintained. The governing instruments also limit the
      ability of Panhandle Energy to subject its properties to certain liens. At
      December 31, 2005, as a result of these covenants, Panhandle  Energy
      was subject to a $495.7
      million limitation on additional restricted payments, including dividends and
      loans to affiliates, and a limitation of $232.6
      million of additional secured and subsidiary level indebtedness.
      Panhandle  Energy
      is
      also subject to a limitation of $401.6
      million of total additional indebtedness. If Panhandle  Energy’s
      debt ratings by Moody’s Investor Services, Inc. were to fall below Baa3, or if
      its debt ratings by Standard and Poor’s were to fall below BBB-, then the
      allowable restricted payments would be reduced to $445.6
      million. At
      December 31, 2005, Panhandle  Energy
      was in compliance with all covenants in the instruments governing its rated
      debt.





For
      additional information related to Panhandle Energy’s debt, see *Item
      8. Financial Statements and Supplementary Data, Note 11 - Debt* .





Cash
      flows used in financing activities for the 12 months ended December 31, 2005
      increased by approximately $18 million versus the same period in 2004 primarily
      due to a decrease in bank overdrafts of approximately $25.7 million, partially
      offset by net debt issuances of $7.7 million.





***Other
      Matters***





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





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





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





14





***Contractual
      Commitments.*** The
      following table summarizes Panhandle  Energy’s
      expected contractual obligations by payment due date as of December 31,
      2005.





**2011
                  and****2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **thereafter**(In
                  thousands)Operating
                  Leases (1)
              
              $
              13,849
              
              $
              11,956
              
              $
              8,065
              
              $
              7,313
              
              $
              6,529
              
              $
              20,906Total
                  long term debt (2)
              
              
              -
              
              
              455,626
              
              
              300,000
              
              
              60,623
              
              
              40,500
              
              
              316,305Interest
                  payments on debt (3)
              
              
              59,765
              
              
              45,264
              
              
              36,048
              
              
              25,242
              
              
              20,602
              
              
              125,761Firm
                  capacity payments (4)
              
              
              10,622
              
              
              8,831
              
              
              7,385
              
              
              7,116
              
              
              5,739
              
              
              25,511OPEB
                  funding (5)
              
              
              7,812
              
              
              7,812
              
              
              7,812
              
              
              7,812
              
              
              7,812
              
              
              -Total
              
              $
              92,048
              
              $
              529,489
              
              $
              359,310
              
              $
              108,106
              
              $
              81,182
              
              $
              488,483(1)
                  Lease of various assets utilized for operations.(2)
                  The long-term debt cash obligations exclude $12.2 million of unamortized
                  debt premium as of December 31, 2005.(3)
                  Interest payments at stated rate.(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 ofwhich
                  is
                  uncertain.





***Postretirement
      Benefits*** .
      Certain
      changes that were approved in the fourth quarter of 2005 relating to Panhandle
      Energy’s postretirement health care plan have reduced Panhandle  Energy’s
      accumulated postretirement benefit obligation by approximately $24.3 million
      and
      future expenses by approximately $1 million per quarter. For additional
      information on postretirement benefits, see *Item
      8. Financial Statements and Supplementary Data, Note 14 -
      Benefits* .





***Vacation
      Plan Change.*** Effective
      January 1, 2006, non-union employees will earn vacation on a monthly accrual
      basis versus having their complete vacation entitlement earned at the beginning
      of the year. At December 31, 2005, Panhandle Energy reduced the previously
      accrued obligation by $3.8
      million to reflect this new vacation pay practice.





***Inflation.*** Panhandle
      Energy believes that inflation has caused and will continue to cause increases
      in certain operating expenses and has required and will continue to require
      it
      to replace assets at higher costs. Panhandle Energy continually reviews the
      adequacy of its rates in relation to the increasing cost of providing service
      and the inherent regulatory lag in adjusting those rates.





***New
      Accounting Pronouncements***





Panhandle
      Energy adopted FASB Statement 123R, *Share-Based
      Payment* ,
      effective January 1, 2006, using the modified prospective method. The statement
      requires Panhandle Energy to measure all employee stock-based compensation
      using
      a fair value method and record such expense in its Consolidated Statement of
      Operations. Based
      upon unexercised stock option balances outstanding at December 31, 2005,
      Panhandle Energy estimates additional compensation expense resulting from the
      implementation of this Statement will be $736,000
      for year 2006, $732,000 for year 2007, $734,000 for year 2008 and $418,000
      for
      year 2009. Southern
      Union did not make any amendments to its then existing stock option arrangements
      as a result of considering the Statement’s adoption. Upon the Panhandle Energy’s
      adoption of the Statement, no cumulative effect of a change in accounting
      principle was required to be recorded since Southern Union has historically
      granted all options at their grant date fair value, and accordingly there is
      no
      historical intrinsic value option compensation expense to adjust.





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





15





**ITEM
      7A. Quantitativeand Qualitative Disclosures About Market
      Risks.**





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





At
      December 31, 2005, Panhandle  Energy
      had issued fixed-rate long-term debt aggregating $717.4
      million in principal amount (excluding net premiums on debt of $12.2 million)
      and having a fair value of $736.3
      million. These instruments are fixed-rate and, therefore, do not expose
      Panhandle  Energy
      to
      the risk of earnings loss due to changes in market interest rates. However,
      the
      fair value of these instruments would increase by approximately $19.9
      million if interest rates were to decline by ten percent from their levels
      at
      December 31, 2005. In general, such an increase in fair value would impact
      earnings and cash flows only if Panhandle  Energy
      were to reacquire all or a portion of these instruments in the open market
      prior
      to their maturity.





Panhandle  Energy’s
      floating-rate obligations aggregated $455.6
      million at December 31, 2005. The floating-rate obligations expose
      Panhandle  Energy
      to
      the risk of increased interest expense in the event of increases in short-term
      interest rates. If
      the
      floating rates were to increase by ten percent from December 31, 2005 levels,
      Panhandle  Energy’s
      consolidated interest expense would increase by approximately $181,000
      each month in which such increase continued. This amount has been determined
      by
      considering the impact of the hypothetical interest rates on the variable rate
      borrowings outstanding as of December 31, 2005.





In
      March
      2004, Panhandle  Energy
      entered into interest rate swaps to hedge the risk associated with the fair
      value of its $200 million in principal amount of 2.75% Senior Notes. These
      swaps
      are designated as fair value hedges and qualify for the short cut method under
      FASB Statement No. 133, *Accounting
      for Derivative Instruments and Hedging Activities, as amended* .
      Under
      the swap agreements, Panhandle Energy will receive fixed interest payments
      at a
      rate of 2.75 percent and will make floating interest payments based on the
      six-month LIBOR. No ineffectiveness is assumed in the hedging relationship
      between the debt instrument and the interest rate swap. As of December 31,
      2005
      and 2004, the fair values of the swaps are included in the Consolidated Balance
      Sheet as liabilities and matching adjustments to the underlying debt of $5.7
      million and $3.9 million, respectively .





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





**ITEM
      8. Financial Statementsand Supplementary
      Data**





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





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




N/A





**ITEM
      9A. Controlsand Procedures.**





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





Panhandle  Energy
      performed an evaluation under the supervision and with the participation of
      its
      management, including its President and Chief Operating Officer (principal
      executive officer) and Chief Financial Officer (principal financial officer),
      and with the participation of personnel from its Legal, Internal Audit, Risk
      Management and Financial Reporting Departments, of the effectiveness of the
      design and operation of Panhandle  Energy’s
      disclosure controls and procedures (as defined in Rule 13a-15(e) and 15(d)-15(e)
      under the Securities Exchange Act of 1934) as of the end of the period covered
      by this report. Based on that evaluation, Panhandle  Energy’s
      President and Chief Operating Officer and Chief Financial Officer concluded
      that
      its disclosure controls and procedures were effective as of December 31, 2005
      and have communicated that determination to the Board of Managers and Southern
      Union’s Audit Committee, which also serves as Panhandle Eastern Pipe Line’s
      Audit Committee.








16





***Changes
      in Internal Controls***





There
      were no changes in Panhandle  Energy’s
      internal control over financial reporting that occurred during the quarter
      ended
      December 31, 2005 that have materially affected, or is reasonably likely to
      materially affect, Panhandle  Energy’s
      internal controls over financial reporting.





**ITEM
      9B. OtherInformation.**





No
      information was required to be reported on Form 8-K for the quarter ended
      December 31, 2005.








**PART
      III**





**ITEM
      10. Directors and Executive Officers of the
      Registrant.**





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





**ITEM11.
      Executive Compensation.**





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





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





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





**ITEM13.
      Certain Relationships and Related
      Transactions.**





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








17







**ITEM
      14. PrincipalAccountant Fees and
      Services.**





Below
      is
      a summary of fees billed to Panhandle  Energy
      by
      its principal audit firms for the years ended December 31, 2005 and
      2004.




**Fee
                  Category**
              
              **2005**
              
              
              
              **2004**(in
                  thousands)Audit
                  Fees (1)PricewaterhouseCoopers
                  LLP
              
              $
              1,034
              
              
              
              $
              703Audit-Related
                  Fees (2)PricewaterhouseCoopers
                  LLP
              
              
              150
              
              
              
              
              409Ernst
                  & Young LLP
              
              
              -
              
              
              
              
              166All
                  Other Fees (3)
              
              
              -
              
              
              
              
              -Total
                  Fees
              
              $
              1,184
              
              
              
              $
              1,278


____________


(1)
      Audit
      Fees consists of fees billed for professional services rendered in connection
      with the audit of the annual financial statements


and
      review of the quarterly financial statements.


(2)
      Audit-Related Fees consists of fees billed for accounting research and
      professional services rendered in connection with debt


offerings
      and registration statements, state and federal regulatory audits, and review
      of
      internal controls.


(3)
      All
      Other Fees consists of fees associated with consulting services.




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










18





**PART
      IV**





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





(a)(1)
      and (2)  Financial
      Statements and Financial Statement Schedules.





(a)(3)  **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)
            1stSupplemental 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)
            3rdSupplemental 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)
            4thSupplemental Indenture dated as of March 12, 2004, between Panhandle,
                as
                Issuer and 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 herein by
                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.)  24
            Power
              of Attorney.  31.1
            Rule
              13a - 14(a)/15d - 14(a) Certification of Chief Executive Officer.  31.2
            Rule
              13a - 14(a)/15d - 14(a) Certification of Chief Financial Officer.  32.1
            Section
              1350 Certification of Chief
              Executive Officer.  32.2
            Section
                1350 Certification of Chief Financial
                Officer.





19





**SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, Panhandle Eastern Pipe Line Company, LP has duly caused this Annual
        Report
        on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
        authorized, on the 16th day of March 2006.
 
 PANHANDLE
        EASTERN PIPE LINE COMPANY, LP
 
 
 By:  /s/ ROBERT O. BOND
 Robert
        O.
        Bond
 President
        and Chief Operating Officer
 
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Annual Report
        has been signed below by the following persons on behalf of Panhandle Eastern
        Pipe Line Company, LP and in the capacities indicated and on the 16th
        day of March, 2006.
 
 **SIGNATURE**
              **TITLE**(i)
              Principal
                  executive officer:
                
                /s/
                  ROBERT O. BOND
                Robert
                  O. Bond
              President
                  and Chief Operating Officer(ii)
              Principal
                  financial officer:
                
                /s/
                  JULIE H. EDWARDS
                Julie
                  H.
                  Edwards
              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
 
 **SIGNATURE**
              **TITLE**(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./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/ JULIE H.
                  EDWARDS
                Senior
                  Vice President and
                Chief Financial Officer
                Attorney-in-fact
              *By:
/s/ ROBERT
                  O. BOND
                President
                  and Chief
                Operating Officer
                Attorney-in-fact









20





**PANHANDLE
      EASTERNPIPE LINE, LP**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**







Financial
                Statements and Supplementary Data:
            **Page:**Consolidated
                Statement of Operations - years ended December 31, 2005 and 2004,
                andthe
                periods June 12 - December 31, 2003 and January 1 - June 11,
                2003
            F-2Consolidated
                Balance Sheet - December 31, 2005 and December 31, 2004
            F-3
                - F-4Consolidated
                Statement of Cash Flows - years ended December 31, 2005 and 2004
                andthe
                periods June 12 - December 31, 2003 and January 1 - June 11,
                2003
            F-5Consolidated
                Statement of Owners' Equity and Comprehensive Income -years
                ended December 31, 2005 and 2004 and the periodsJune
                12 - December 31, 2003 and January 1 - June 11, 2003
            F-6Notes
                to Consolidated Financial Statements
            F-7Reports
                of Independent Registered Public Accounting Firm
            F-37
                - F-38











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








F-1




**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**CONSOLIDATED
      STATEMENT OF OPERATIONS**


**Post-acquisition**
              
              **Pre-acquisition****Year
                  Ended**
              
              **Year
                  Ended**
              
              
              
              **June
                  12 -****December
                  31, 2005**
              
              **December
                  31, 2004**
              
              
              
              **December
                  31, 2003**
              
              **January
                  1 - June 11, 2003**(In
                  thousands)**Operating
                  revenue**Transportation
                  and storage of natural gas
              
              $
              434,537
              
              $
              423,011
              
              
              
              
              $
              230,592
              
              $
              196,408LNG
                  terminalling revenue
              
              
              62,569
              
              
              56,537
              
              
              
              
              
              33,389
              
              
              26,750Other
                  revenue
              
              
              8,127
              
              
              9,616
              
              
              
              
              
              4,974
              
              
              10,701Total
                  operating revenue
              
              
              505,233
              
              
              489,164
              
              
              
              
              
              268,955
              
              
              233,859**Operating
                  expenses**Operation,
                  maintenance and general
              
              
              204,461
              
              
              212,106
              
              
              
              
              
              117,930
              
              
              90,800Depreciation
                  and amortization
              
              
              62,171
              
              
              60,182
              
              
              
              
              
              33,129
              
              
              23,110Taxes,
                  other than on income
              
              
              28,196
              
              
              26,867
              
              
              
              
              
              14,684
              
              
              12,478Total
                  operating expenses
              
              
              294,828
              
              
              299,155
              
              
              
              
              
              165,743
              
              
              126,388**Operating
                  income**
              
              
              210,405
              
              
              190,009
              
              
              
              
              
              103,212
              
              
              107,471**Other
                  income (expense)**Interest
                  expense, net
              
              
              (48,285
              )
              
              (48,429
              )
              
              
              
              
              (25,537
              )
              
              (35,416
              )Other,
                  net
              
              
              4,069
              
              
              2,409
              
              
              
              
              
              7,098
              
              
              6,488Total
                  other income (expense)
              
              
              (44,216
              )
              
              (46,020
              )
              
              
              
              
              (18,439
              )
              
              (28,928
              )**Earnings
                  before income taxes**
              
              
              166,189
              
              
              143,989
              
              
              
              
              
              84,773
              
              
              78,543**Income
                  taxes**(Note
                  6)
              
              
              64,627
              
              
              56,056
              
              
              
              
              
              33,321
              
              
              30,532**Earnings
                  before cumulative effect of change****in
                  accounting principles**
              
              
              101,562
              
              
              87,933
              
              
              
              
              
              51,452
              
              
              48,011**Cumulative
                  effect of change in accounting****principles,
                  net of tax:**Asset
                  retirement obligations, SFAS 143
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              2,003**Net
                  earnings**
              
              $
              101,562
              
              $
              87,933
              
              
              
              
              $
              51,452
              
              $
              50,014













The
      accompanying notes are an integral part of these consolidated financial
      statements.








F-2


**PANHANDLE
        EASTERN PIPE LINE COMPANY, LP**
 **CONSOLIDATED
        BALANCE SHEET**


**December
                  31, 2005**
              
              **December
                  31, 2004****Assets**
              
              (In
                  thousands)**Property,
                  plant and equipment**(Note
                  7)Plant
                  in service
              
              $
              2,163,474
              
              $
              1,947,524Construction
                  work-in-progress
              
              
              176,370
              
              
              203,0942,339,844
              
              
              2,150,618Less
                  accumulated depreciation and amortization
              
              
              145,550
              
              
              87,683Net
                  property, plant and equipment
              
              
              2,194,294
              
              
              2,062,935**Investment
                  in affiliate**(Note
                  9)
              
              
              1,468
              
              
              1,436**Current
                  assets**Cash
                  and cash equivalents
              
              
              585
              
              
              26,054Accounts
                  receivable, billed and unbilled,less
                  allowances of $1,168 and $1,289, respectively
              
              
              55,786
              
              
              48,085Accounts
                  receivable - related parties (Note 4)
              
              
              9,556
              
              
              7,287Gas
                  imbalances - receivable
              
              
              105,233
              
              
              36,122System
                  gas and operating supplies
              
              
              89,620
              
              
              98,250Deferred
                  income taxes, net (Note 6)
              
              
              2,086
              
              
              10,698Note
                  receivable - Southern Union (Note 4)
              
              
              110,580
              
              
              90,745Other
              
              
              11,501
              
              
              11,646Total
                  current assets
              
              
              384,947
              
              
              328,887Intangible
                  customer contract, net (Note 8)
              
              
              8,031
              
              
              8,496Restricted
                  cash
              
              
              -
              
              
              1,500Debt
                  issuance cost
              
              
              3,634
              
              
              4,471Non-current
                  system gas
              
              
              25,087
              
              
              30,471Other
              
              
              1,853
              
              
              1,964**Total
                  assets**
              
              $
              2,619,314
              
              $
              2,440,160








The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-3


**PANHANDLE
        EASTERN PIPE LINE COMPANY, LP**
 **CONSOLIDATED
        BALANCE SHEET** **(CONTINUED)**


**December
                  31, 2005**
              
              **December
                  31, 2004**(In
                  thousands)**Owners'
                  equity**Partners'
                  capital
              
              $
              903,968
              
              $
              802,406Accumulated
                  other comprehensive income
              
              
              1,339
              
              
              1,231Tax
                  sharing note receivable - Southern Union
              
              
              (50,862
              )
              
              (70,971
              )Total
                  owners' equity
              
              
              854,445
              
              
              732,666Long-term
                  debt (Note 11)
              
              
              1,179,534
              
              
              1,174,065Total
                  capitalization
              
              
              2,033,979
              
              
              1,906,731**Current
                  liabilities**Current
                  portion of long-term debt (Note 11)
              
              
              -
              
              
              12,548Accounts
                  payable
              
              
              3,054
              
              
              3,449Accounts
                  payable - overdrafts
              
              
              7,866
              
              
              20,103Accounts
                  payable - related parties (Note 4)
              
              
              8,560
              
              
              3,478Gas
                  imbalances - payable
              
              
              124,297
              
              
              102,567Accrued
                  taxes (Note 6)
              
              
              15,228
              
              
              10,750Accrued
                  interest
              
              
              19,569
              
              
              19,119Fuel
                  tracker obligation (Note 2)
              
              
              32,863
              
              
              5,296Labor
                  and benefit accruals
              
              
              16,643
              
              
              15,199Other
                  operating expense accruals
              
              
              11,938
              
              
              6,244Capital
                  accruals
              
              
              11,681
              
              
              17,582Post-retirement
                  benefits - current (Note 14)
              
              
              7,812
              
              
              7,811Other
              
              
              22,365
              
              
              33,107Total
                  current liabilities
              
              
              281,876
              
              
              257,253Deferred
                  income taxes, net (Note 6)
              
              
              205,787
              
              
              172,193Post-retirement
                  benefits (Note 14)
              
              
              26,103
              
              
              30,449Other
              
              
              71,569
              
              
              73,534Commitments
                  and contingencies (Note 13)**Total
                  owners' equity and liabilities**
              
              $
              2,619,314
              
              $
              2,440,160











The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-4


**PANHANDLE
        EASTERN PIPE LINE COMPANY, LP**
 **CONSOLIDATED
        STATEMENT OF CASH FLOWS**
   **Post-acquisition**
              
              **Pre-acquisition****Year
                  Ended**
              
              **Year
                  Ended**
              
              
              
              **June
                  12 -**
              
              **January
                  1 -****December
                  31,**
              
              **December
                  31,**
              
              
              
              **December
                  31,**
              
              **June
                  11,****2005**
              
              **2004**
              
              
              
              **2003**
              
              **2003**(In
                  thousands)**Cash
                  Flows From (Used In) Operating Activities**Net
                  earnings
              
              $
              101,562
              
              $
              87,933
              
              
              
              
              $
              51,452
              
              $
              50,014Adjustments
                  to reconcile net earnings to net cash from operating
                  activities:Depreciation
                  and amortization
              
              
              62,171
              
              
              60,182
              
              
              
              
              
              33,129
              
              
              23,110Gain
                  on extinguishment of debt
              
              
              -
              
              
              (231
              )
              
              
              
              
              (6,123
              )
              
              -Deferred
                  income taxes, net
              
              
              42,133
              
              
              39,574
              
              
              
              
              
              33,321
              
              
              30,532Debt
                  premium and discount amortization, net
              
              
              (1,293
              )
              
              (5,033
              )
              
              
              
              
              (8,272
              )
              
              (201
              )Cumulative
                  effect of change in accounting principle
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              (2,003
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (9,970
              )
              
              1,759
              
              
              
              
              
              4,212
              
              
              219Inventories
              
              
              (6,683
              )
              
              (31,693
              )
              
              
              
              
              (24,625
              )
              
              2,520Gas
                  imbalances - receivable
              
              
              735
              
              
              (9,148
              )
              
              
              
              
              21,742
              
              
              (30,952
              )Other
                  assets
              
              
              310
              
              
              (8,293
              )
              
              
              
              
              7,173
              
              
              11,955Payables
              
              
              4,687
              
              
              (3,564
              )
              
              
              
              
              (3,620
              )
              
              2,883Accrued
                  taxes
              
              
              24,587
              
              
              8,490
              
              
              
              
              
              9,979
              
              
              6,673Interest
                  accrued
              
              
              450
              
              
              (1,898
              )
              
              
              
              
              1,194
              
              
              (4,768
              )Gas
                  imbalances - payable
              
              
              (465
              )
              
              36,518
              
              
              
              
              
              (2,455
              )
              
              27,527Other
                  liabilities
              
              
              (12,851
              )
              
              8,714
              
              
              
              
              
              (5,088
              )
              
              (6,915
              )Net
                  cash flows from operating activities
              
              
              205,373
              
              
              183,310
              
              
              
              
              
              112,019
              
              
              110,594**Cash
                  Flows From (Used In) Investing Activities**Net
                  increase in Note receivable - Southern Union
              
              
              (19,835
              )
              
              (3,395
              )
              
              
              
              
              (87,350
              )
              
              -Net
                  increase in Note receivable - CMS Capital
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              (62,570
              )Capital
                  and investment expenditures
              
              
              (194,952
              )
              
              (173,047
              )
              
              
              
              
              (64,270
              )
              
              (29,339
              )Purchase
                  of system gas,net
              
              
              -
              
              
              -
              
              
              
              
              
              (3,939
              )
              
              (2,724
              )Sale
                  of Centennial
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              40,000Sale
                  of Atchafalaya
              
              
              -
              
              
              -
              
              
              
              
              
              2,200
              
              
              -Retirements
                  and other
              
              
              (657
              )
              
              (209
              )
              
              
              
              
              237
              
              
              (886
              )Net
                  cash flows used in investing activities
              
              
              (215,444
              )
              
              (176,651
              )
              
              
              
              
              (153,122
              )
              
              (55,519
              )**Cash
                  Flows From (Used In) Financing Activities**Increase
                  (decrease) in bank overdrafts
              
              
              (12,237
              )
              
              13,496
              
              
              
              
              
              (1,001
              )
              
              219Debt
                  issuance
              
              
              255,626
              
              
              200,000
              
              
              
              
              
              550,000
              
              
              10,000Debt
                  retirements
              
              
              (258,433
              )
              
              (209,671
              )
              
              
              
              
              (545,044
              )
              
              (45,852
              )Premium
                  on debt issuance
              
              
              -
              
              
              (190
              )
              
              
              
              
              -
              
              
              -Debt
                  issuance costs
              
              
              (354
              )
              
              (1,050
              )
              
              
              
              
              (4,434
              )
              
              -Debt
                  retirement costs
              
              
              -
              
              
              -
              
              
              
              
              
              (1,595
              )
              
              -Return
                  of capital
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              (40,000
              )Net
                  cash flows from (used in) financing activities
              
              
              (15,398
              )
              
              2,585
              
              
              
              
              
              (2,074
              )
              
              (75,633
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              (25,469
              )
              
              9,244
              
              
              
              
              
              (43,177
              )
              
              (20,558
              )**Cash
                  and cash equivalents at beginning of period**
              
              
              26,054
              
              
              16,810
              
              
              
              
              
              59,987
              
              
              80,545**Cash
                  and cash equivalents at end of period**
              
              $
              585
              
              $
              26,054
              
              
              
              
              $
              16,810
              
              $
              59,987**Supplemental
                  disclosures of cash flow information****Cash
                  paid during the period for:**Interest
                  (net of interest rate swap and amounts capitalized)
              
              $
              63,180
              
              $
              68,250
              
              
              
              
              $
              37,846
              
              $
              38,187Income
                  taxes (net of refunds)
              
              
              7
              
              
              66
              
              
              
              
              
              -
              
              
              83**Other
                  noncash Investing and Financing activities were:**Return
                  of capital - Guardian equity investment
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -
              
              $
              (27,781
              )Property
                  contributions received
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              15,149








The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-5





**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**CONSOLIDATED
      STATEMENT OF OWNERS’ EQUITY AND COMPREHENSIVE INCOME**




**Partners'
                  Capital**
              
              **Common
                  Stock**
              
              **Accumulated
                  Other Comprehensive Income (Loss)**
              
              **Other
                  Paid-in Capital**
              
              **Members'
                  Capital**
              
              **Retained
                  Earnings (Deficit)**
              
              **Note
                  Receivable-CMS Capital**
              
              **Tax
                  Sharing Note Receivable-Southern Union**
              
              
              
              **Total**(In
                  thousands)Balance
                  January 1, 2003 (Pre-acquisition)
              
              $
              -
              
              $
              1,000
              
              $
              (39,179
              )
              $
              1,280,794
              
              $
              -
              
              $
              (340,031
              )
              $
              (150,000
              )
              $
              -
              
              
              
              $
              752,584Comprehensive
                  income:Net
                  earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              50,014
              
              
              -
              
              
              -
              
              
              
              
              50,014Unrealized
                  loss related to interest rate swaps, net of tax
              
              
              -
              
              
              -
              
              
              (3,180
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              (3,180
              )Comprehensive
                  income
              
              
              -
              
              
              -
              
              
              (3,180
              )
              
              -
              
              
              -
              
              
              50,014
              
              
              -
              
              
              -
              
              
              
              
              46,834Return
                  of capital - Centennial
              
              
              -
              
              
              -
              
              
              -
              
              
              (40,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              (40,000
              )Return
                  of capital - Guardian equity investment
              
              
              -
              
              
              -
              
              
              -
              
              
              (27,781
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              (27,781
              )Capital
                  contribution from CMS Gas Transmission
              
              
              -
              
              
              -
              
              
              -
              
              
              15,149
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              15,149Other
              
              
              -
              
              
              -
              
              
              -
              
              
              194
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              194Balance
                  June 11, 2003 (Acquisition date)
              
              $
              -
              
              $
              1,000
              
              $
              (42,359
              )
              $
              1,228,356
              
              $
              -
              
              $
              (290,017
              )
              $
              (150,000
              )
              $
              -
              
              
              
              $
              746,980Balance
                  June 12, 2003 (Post-acquisition)
              
              $
              -
              
              $
              1,000
              
              $
              (42,359
              )
              $
              1,228,356
              
              $
              -
              
              $
              (290,017
              )
              $
              (150,000
              )
              $
              -
              
              
              
              $
              746,980Acquisition
                  adjustments to eliminate original balances
              
              
              -
              
              
              (1,000
              )
              
              42,359
              
              
              (1,228,356
              )
              
              -
              
              
              290,017
              
              
              150,000
              
              
              -
              
              
              
              
              (746,980
              )Pushdown
                  of purchase price and related costs
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              679,465
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              679,465Tax
                  sharing receivable - Southern Union
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (85,471
              )
              
              
              
              (85,471
              )Subtotal
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              679,465
              
              
              -
              
              
              -
              
              
              (85,471
              )
              
              
              
              593,994Comprehensive
                  income:Net
                  earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              51,452
              
              
              -
              
              
              -
              
              
              
              
              51,452Unrealized
                  gain related to interest rate swaps, net of tax
              
              
              -
              
              
              -
              
              
              1,372
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              1,372Comprehensive
                  income
              
              
              -
              
              
              -
              
              
              1,372
              
              
              -
              
              
              -
              
              
              51,452
              
              
              -
              
              
              -
              
              
              
              
              52,824Balance
                  December 31, 2003 (Post-acquisition)
              
              $
              -
              
              $
              -
              
              $
              1,372
              
              $
              -
              
              $
              679,465
              
              $
              51,452
              
              $
              -
              
              $
              (85,471
              )
              
              
              $
              646,818Adjustment
                  to pushdown of purchase price and related costs
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (16,444
              )
              
              -
              
              
              -
              
              
              -
              
              
              
              
              (16,444
              )Tax
                  sharing receivable - Southern Union
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (5,467
              )
              
              
              
              (5,467
              )Comprehensive
                  income:Net
                  earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              47,201
              
              
              -
              
              
              -
              
              
              
              
              47,201Unrealized
                  gain related to interest rate swaps, net of tax
              
              
              -
              
              
              -
              
              
              405
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              405Comprehensive
                  income prior to change in legal ownership structure
              
              
              -
              
              
              -
              
              
              405
              
              
              -
              
              
              -
              
              
              47,201
              
              
              -
              
              
              -
              
              
              
              
              47,606Change
                  in legal ownership structure (See Note 1)
              
              
              761,674
              
              
              -
              
              
              -
              
              
              -
              
              
              (663,021
              )
              
              (98,653
              )
              
              -
              
              
              -
              
              
              
              
              -Tax
                  sharing receivable - Southern Union (See Note 5)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              19,967
              
              
              
              
              19,967Comprehensive
                  income:Net
                  earnings
              
              
              40,732
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              40,732Unrealized
                  loss related to interest rate swaps, net of tax
              
              
              -
              
              
              -
              
              
              (546
              )
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              (546
              )Comprehensive
                  income
              
              
              40,732
              
              
              -
              
              
              (546
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              40,186Balance
                  December 31, 2004 (Post-acquisition)
              
              $
              802,406
              
              $
              -
              
              $
              1,231
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (70,971
              )
              
              
              $
              732,666Tax
                  sharing receivable - Southern Union (See Note 5)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              20,109
              
              
              
              
              20,109Comprehensive
                  income:Net
                  earnings
              
              
              101,562
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              101,562Unrealized
                  gain related to interest rate swaps, net of tax
              
              
              -
              
              
              -
              
              
              108
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              108Comprehensive
                  income
              
              
              101,562
              
              
              -
              
              
              108
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              101,670Balance
                  December 31, 2005 (Post-acquisition)
              
              $
              903,968
              
              $
              -
              
              $
              1,339
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (50,862
              )
              
              
              $
              854,445




















The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-6


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


**1.
      Corporate Structure**





Panhandle
      Eastern Pipe Line Company, LP ( *Panhandle
      Eastern Pipe Line* and,
      together with its subsidiaries *,
      Panhandle Energy* )
      became
      an indirect wholly-owned subsidiary of Southern Union Company ( *Southern
      Union Company* and,
      together with its subsidiaries, *Southern
      Union* )
      upon
      Southern Union’s June 11, 2003 acquisition of Panhandle  Energy
      ( *Panhandle
      Acquisition* )
      from
      CMS Gas Transmission Company ( *CMS
      Gas Transmission* ),
      a
      subsidiary of CMS Energy Corporation ( *CMS
      Energy* and,
      together with CMS Gas Transmission, *CMS* ).
      Panhandle  Energy
      is
      primarily engaged in the interstate transportation and storage of natural gas
      and also provides liquefied natural gas ( *LNG* )
      terminalling and regasification services. Panhandle  Energy
      is
      subject to the rules and regulations of the Federal Energy Regulatory Commission
      ( *FERC* ).
      The
      Panhandle  Energy
      entities include the following:





·
            Panhandle
                Eastern Pipe Line;


·
            Trunkline
                Gas Company, LLC (*Trunkline*),
                a direct wholly-owned subsidiary of Panhandle Eastern Pipe
                Line;


·
            Sea
                Robin Pipeline Company, LLC (*Sea
                Robin*),
                an indirect wholly-owned subsidiary of Panhandle Eastern Pipe
                Line;


·
            Trunkline
                LNG Holdings, LLC (*LNG
                Holdings*),
                an indirect wholly-owned subsidiary of Panhandle Eastern Pipe
                Line


·
            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 Panhandle Eastern Pipe Line.





Panhandle
      Energy’s pipeline assets include more than 10,000
      miles of interstate pipelines that transport natural gas from the Gulf of
      Mexico, South Texas and the panhandle regions of Texas and Oklahoma to major
      U.S. markets in the Midwest and Great Lakes region. The pipelines have a
      combined peak day delivery capacity of 5.3
      billion cubic feet per day ( *Bcf/d* )
      and 72
      billion cubic feet ( *Bcf* )
      of
      owned underground storage capacity. Trunkline LNG, located on Louisiana's Gulf
      Coast, operates one of the largest LNG import terminals in North America, based
      on current send out capacity, and has 6.3
      Bcf
      of above ground LNG storage capacity.





On
      June
      11, 2003, Southern Union acquired Panhandle  Energy
      from CMS Gas Transmission for approximately $581.7 million in cash and 3 million
      shares of Southern Union common stock (before adjustment for subsequent stock
      dividends), valued at approximately $48.9 million based on market prices at
      closing of the Panhandle Acquisition, and in connection therewith incurred
      transaction costs of approximately $31.9 million. At the time of the
      acquisition, Panhandle  Energy
      had approximately $1.16 billion of debt outstanding that it retained. Southern
      Union funded the cash portion of the acquisition with approximately $437 million
      in cash proceeds it received for the January 1, 2003 sale of its Southern Union
      Gas Company natural gas operating division and related assets ( *Texas
      Operations* ),
      approximately $121.3 million in cash proceeds it received from concurrent common
      stock and equity units offerings and with working capital available to Southern
      Union. Southern Union structured the acquisition of Panhandle and the sale
      of
      its Texas operations in a manner intended to qualify as a like-kind exchange
      of
      property under Section 1031 of the Internal Revenue Code of 1986, as amended.





Under
      the
      terms of the Panhandle  Energy
      sale agreement, CMS retained ownership of and all obligations associated with
      the Centennial Pipeline, LLC ( *Centennial* )
      and
      Guardian Pipeline, LLC ( *Guardian* )
      pipeline projects, as well as certain of Panhandle  Energy’s
      net deferred tax assets of $28.1 million, all tax liabilities of $17.4 million,
      net pension liabilities recorded of $43.0 million, certain other net
      post-retirement liabilities recorded of $16.4 million and other net liabilities
      of $2.2 million. CMS also retained financial responsibility for all existing
      stock options. Panhandle  Energy
      disposed of its interest in Centennial and Guardian and certain cash collateral
      related to Guardian was transferred to CMS. Such disposition to CMS via sale
      to
      its partners was recorded at Panhandle  Energy’s
      net book value with no gain or loss recognized. See *Note
      4 - Related Party Transactions* .
      The
      Note receivable from CMS Capital Corp. ( *CMS
      Capital* ),
      a
      subsidiary of CMS, was eliminated in the sale as the purchase by Southern Union
      from CMS included the offsetting Note payable of CMS Capital and thus the note
      was eliminated in purchase accounting and subsequently extinguished. See *Note
      4 - Related Party Transactions* .
      On
      March 1, 2003, certain assets previously held by CMS with a net book value
      of
      $15.1 million were contributed to Panhandle  Energy
      by
      CMS and were included in the Southern Union purchase.





F-7


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


The
      acquisition of Panhandle was accounted for using the purchase method of
      accounting in accordance with accounting principles generally accepted within
      the United States of America ( *GAAP* )
      with
      Panhandle  Energy
      allocating ( *pushdown* )
      the
      purchase price paid by Southern Union to Panhandle  Energy’s
      net assets as of the acquisition date. The Panhandle  Energy
      assets acquired and liabilities assumed have been recorded based on their
      estimated fair value as of the acquisition date based on the results of outside
      appraisals. Accordingly, the post-acquisition financial statements reflect
      a new
      basis of accounting and pre-acquisition period and post-acquisition period
      financial results (separated by a heavy black line) are presented but are not
      comparable.





The
      following table summarizes the final purchase accounting-based changes in
      owners’ equity associated with the acquisition as of June 11, 2003, including
      details of the fair value adjustments to the pre-acquisition carrying amounts
      of
      the net assets acquired.




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








Panhandle
      Eastern Pipe Line and five of its subsidiaries, as well as Southern Union
      Panhandle, LLC, converted from Delaware corporations to Delaware limited
      liability companies in June 2003. On June 29, 2004, Panhandle Eastern Pipe
      Line
      was converted from a Delaware limited liability company to a Delaware limited
      partnership. Pursuant to the conversion, all rights and liabilities of Panhandle
      Eastern Pipe Line Company, LLC vested in Panhandle Eastern Pipe Line Company,
      LP. As a result of the conversion, retained earnings and member’s capital were
      reclassified as partners’ capital. There was no effect on Panhandle Energy’s
      results of operations (including income taxes), cash flows or financial position
      as a result of this conversion. Southern Union Panhandle, LLC, a wholly-owned
      subsidiary of Southern Union Company, serves as the general partner of Panhandle
      Eastern Pipe Line and owns a one percent general partner interest in Panhandle
      Eastern Pipe Line. Southern Union Company owns a 99 percent limited partner
      interest in Panhandle Eastern Pipe Line.





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





***Basis
      of Presentation.*** Panhandle
      Energy’s consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of
      America.





In
      1999,
      Panhandle Energy discontinued the application of FASB Statement No. 71, *Accounting
      for the Effects of Certain Types of Regulation* ,
      primarily due to the level of discounting from tariff rates and its inability
      to
      recover all costs. The accounting required by the statement differs from the
      accounting required for businesses that do not apply its provisions.
      Transactions that are generally recorded differently as a result of applying
      regulatory accounting requirements include, among others, recording of
      regulatory assets and the capitalization of an equity component on regulated
      capital projects.





F-8


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


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





***Use
      of Estimates.*** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those estimates.





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





***System
      Gas and Operating Supplies.*** System
      gas and operating supplies consist of gas held for operations and materials
      and
      supplies, carried at the lower of weighted average cost or market. The gas
      held
      for operations that Panhandle Energy does not expect to consume in operations
      in
      the next 12 months has been reflected in non-current assets. Gas held for
      operations at December 31, 2005 was $102.5
      million, or 14,145,000 million British thermal units ( *MMBtu* ),
      of
      which $25.1 million is classified as non-current. Gas held for operations at
      December 31, 2004 was $116.8
      million, or 20,936,000 MMBtu, of which $30.5 million is classified as
      non-current.


All
      system gas and materials and supplies purchased are recorded at the lower of
      cost or market, while net gas received from and owed back to customers is valued
      at market.





***Gas
      Imbalances.*** **** Gas
      imbalances occur as a result of differences in volumes of gas received and
      delivered. Panhandle Energy records gas imbalance in-kind receivables and
      payables at cost or market, based on whether net imbalances have reduced or
      increased system gas balances, respectively. Net imbalances that have reduced
      system gas are valued at the cost basis of the system gas, while net imbalances
      that have increased system gas and are owed back to customers are priced, along
      with the corresponding system gas, at market.





***Fuel
      Tracker.*** **** Liability
      accounts are maintained for net volumes of fuel gas owed to customers
      collectively. Whenever fuel is due from customers from prior under-recovery
      based on contractual and specific tariff provisions, Trunkline and Trunkline
      LNG
      record an asset. Panhandle  Energy’s
      other companies that are subject to fuel tracker provisions record an expense
      when fuel is underrecovered. The pipelines’ fuel reimbursement is in-kind and
      non-discountable. At December 31, 2005, the fuel tracker liability was $32.9
      million, or 2,949,000 MMBtu. At December 31, 2004, the fuel tracker liability
      was $5.3
      million, or 1,129,000 MMBtu.





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





Ongoing
      additions of PP&E are stated at cost. Panhandle  Energy
      capitalizes all construction-related direct labor and material costs, as well
      as
      indirect construction costs. The cost of renewals and betterments that extend
      the useful life of PP&E is also capitalized. The cost of repairs and
      replacements of minor items of PP&E is charged to expense as incurred.





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





F-9


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


Depreciation
      is generally computed using the straight-line method. The composite
      weighted-average  depreciation
      rates w ere 2.9
      percent, 3.1
      percent and 3.0 percent for
      2005, 2004 and 2003, respectively.





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





***Asset
      Impairment.*** Panhandle  Energy
      applies the provisions of FASB Statement No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      to
      account for impairments on long-lived assets. Impairment losses are recognized
      for long-lived assets used in operations when indicators of impairment are
      present and the undiscounted cash flows are not sufficient to recover the
      assets’ carrying value. The amount of impairment is measured by comparing the
      fair value of the asset to its carrying amount. Certain Panhandle  Energy
      assets were evaluated at the end of the third quarter of 2005 because indicators
      of potential impairment resulting from impacts associated with Hurricanes Rita
      and Katrina were evident. Nevertheless, the analysis indicated, based on
      probability weighted estimated cash flows, that an impairment did not exist.





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





A
      portion
      of Panhandle  Energy’s
      revenues for the transportation of natural gas includes revenues from Missouri
      Gas Energy, a division of Southern Union that is a gas utility having a service
      territory covering Kansas City, Missouri and parts of western Missouri. Such
      transportation deliveries were at contracted rates that pre-dated the Panhandle
      Acquisition and are now subject to newly negotiated rates under agreements
      that
      became effective October 1, 2005.





For
      periods commencing with the Panhandle Acquisition, Panhandle Eastern Pipe Line
      and certain of its subsidiaries are not treated as separate taxpayers for
      federal and certain state income tax purposes. Instead, Panhandle  Energy’s
      income is taxable to Southern Union. Panhandle  Energy
      has entered into a tax sharing agreement with Southern Union pursuant to which
      Panhandle  Energy
      will be required to make payments to Southern Union in order to reimburse
      Southern Union for federal and state taxes that it pays on Panhandle  Energy’s
      income, or to receive payments from Southern Union to the extent that tax losses
      generated by Panhandle  Energy
      are utilized by Southern Union. In addition, Panhandle  Energy’s
      subsidiaries that are corporations are included in consolidated and combined
      federal and state income tax returns filed by Southern Union.
      Panhandle  Energy’s
      liability generally is equal to the liability which Panhandle  Energy
      and its subsidiaries would have incurred based upon Panhandle  Energy’s
      taxable income if Panhandle  Energy
      was a taxpayer filing separately from Southern Union, except that
      Panhandle  Energy
      will receive credit under an intercompany note for any increased liability
      resulting from its tax basis in its assets having been reduced as a result
      of
      the like-kind exchange under Section 1031 of the Internal Revenue Code of 1986,
      as amended ( *Code* ).
      In
      addition, Southern Union has agreed to pay Panhandle  Energy
      any indemnification payments that it receives from CMS with respect to its
      tax
      liability for periods prior to the Panhandle Acquisition. The tax sharing
      agreement can be amended from time to time. Depending upon the terms of the
      tax
      sharing agreement, Panhandle  Energy’s
      liability to Southern Union may be greater or less than the tax liability that
      Panhandle  Energy
      would have incurred if it were a corporation unaffiliated with Southern
      Union.





***Unamortized
      Debt Premium, Discount and Expense.*** Panhandle  Energy
      amortizes premiums, discounts and expenses incurred in connection with the
      issuance of long-term debt consistent with the terms of the respective debt
      instrument.





F-10


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


***Environmental
      Expenditures.*** **** Environmental
      expenditures that relate to an existing condition caused by past operations
      that
      do not contribute to current or future revenue generation are expensed.
      Environmental expenditures relating to current or future revenues are expensed
      or capitalized as appropriate. Liabilities are recorded when environmental
      assessments and/or clean-ups are probable and the costs can be reasonably
      estimated. Remediation obligations are not discounted because the timing of
      future cash flow streams is not predictable.





***Revenues.*** Panhandle  Energy’s
      revenues from transportation and storage of natural gas and LNG terminalling
      are
      based on capacity reservation charges and commodity usage charges. Reservation
      revenues are based on contracted rates and capacity reserved by the customers
      and are recognized monthly. Revenues from commodity usage charges are also
      recognized monthly, based on the volumes received from or delivered to the
      customer, depending on the tariff of that particular Panhandle  Energy
      entity, with any differences in received and delivered volumes resulting in
      an
      imbalance. Volume imbalances generally are settled in-kind with no impact on
      revenues, with the exception of Trunkline, which settles imbalances via cash
      pursuant to its tariff, and records gains and losses on such cashout sales
      as a
      component of revenue, to the extent not owed back to customers.





***Significant
      Customers and Credit Risk.*** Panhandle  Energy
      manages trade credit risks to minimize exposure to uncollectible trade
      receivables. Prospective and existing customers are reviewed for
      creditworthiness based upon pre-established standards. Customers that do not
      meet minimum standards are required to provide additional credit support.
      Panhandle  Energy
      utilizes the allowance method for recording its allowance for uncollectible
      accounts which is primarily based on the application of historical bad debt
      percentages applied against Panhandle  Energy’s
      aged accounts receivable. Increases in the allowance are recorded as a component
      of operation expenses. Reductions in the allowance are recorded when receivables
      are written off. Panhandle  Energy
      has recorded an allowance for doubtful accounts totaling $1.2
      million and $1.3
      million at December 31, 2005 and 2004, respectively, relating to its trade
      receivables.




The
      following table presents the balance in the allowance for doubtful accounts
      and
      activity for the years ended December 31, 2005 and 2004, and the periods June
      12
      - December 31, 2003 and January 1 - June 11, 2003:




**Post-acquisition**
              
              **Pre-acquisition****Year
                  Ended**
              
              **Year
                  Ended**
              
              
              
              **June
                  12-**
              
              **January
                  1 -****December
                  31,**
              
              **December
                  31,**
              
              
              
              **December
                  31,**
              
              **June
                  11,****Allowance
                  for Doubtful Accounts**
              
              **2005**
              
              **2004**
              
              
              
              **2003**
              
              **2003**(In
                  thousands)Beginning
                  Balance
              
              $
              1,289
              
              $
              1,464
              
              
              
              $
              4,138
              
              $
              8,444Additions:
                  Charged to Cost and Expenses
              
              
              (76
              )
              
              -
              
              
              
              
              -
              
              
              96Deductions:
                  Write-off of Uncollectible Accounts
              
              
              (45
              )
              
              (61
              )
              
              
              
              (36
              )
              
              (3,981
              )Other
              
              
              -
              
              
              (114
              )
              
              
              
              (2,638
              )
              
              (421
              )Ending
                  Balance
              
              $
              1,168
              
              $
              1,289
              
              
              
              $
              1,464
              
              $
              4,138








F-11


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


The
      following table presents the billed and unbilled receivables included in the
      Consolidated Balance Sheet at December 31, 2005 and 2004. Billed receivables
      are
      net of the allowance for doubtful accounts. Unbilled receivables reflect an
      estimate for services provided in the last month of each period presented which
      are billed in the following month.





**December
                  31, 2005**
              
              **December
                  31, 2004****Billed**
              
              **Unbilled**
              
              **Total**
              
              **Billed**
              
              **Unbilled**
              
              **Total**(In
                  thousands)Accounts
                  receivable
              
              $
              6,281
              
              $
              49,505
              
              $
              55,786
              
              $
              3,310
              
              $
              44,775
              
              $
              48,085Accounts
                  receivable - related parties
              
              
              5,003
              
              
              4,553
              
              
              9,556
              
              
              478
              
              
              6,809
              
              
              7,287Total
              
              $
              11,284
              
              $
              54,058
              
              $
              65,342
              
              $
              3,788
              
              $
              51,584
              
              $
              55,372




The
      following table presents the relative contribution to Panhandle  Energy’s
      total operating revenue of each customer that comprised at least ten percent
      of
      its operating revenues for the years ended December 31, 2005, 2004 and 2003.





**Percent
                  of Operating Revenue for****Twelve
                  months ended****December
                  31,****Customer**
              
              **2005**
              
              **2004**
              
              **2003**BG
                  LNG Services
              
              
              17
              %
              
              15
              %
              
              15
              %ProLiance
              
              
              16
              
              
              17
              
              
              16Ameren
                  Corp
              
              
              11
              
              
              12
              
              
              8CMS
                  Energy and affiliates (1)
              
              
              8
              
              
              10
              
              
              12Other
                  top 10 customers
              
              
              14
              
              
              14
              
              
              18Remaining
                  customers
              
              
              34
              
              
              32
              
              
              31Total
                  percentage
              
              
              100
              %
              
              100
              %
              
              100
              %________________________(1) 
                Primarily Consumers Energy





***Interest
      Cost Capitalized.*** Panhandle  Energy
      capitalizes a carrying cost on funds invested in its construction of long-lived
      assets that includes a return on the investment financed by debt, which is
      recorded as capitalized interest. The capitalized interest is calculated based
      on Panhandle  Energy’s
      average cost of debt. Capitalized interest for the 12 months ended December
      31,
      2005, 2004 and 2003 was $ 8.8
      million, $4.8 million and $2.6 million, respectively. The capitalized interest
      amounts are included as a reduction of interest expense. Capitalized carrying
      cost for debt is reflected as an increase in the cost of the asset on the
      balance sheet.





***Accounting
      for Retirement Benefits.*** **** Panhandle  Energy
      follows FASB Statement No. 87, *Employers’
      Accounting for Pensions* ,
      to
      account for pension costs. To account for other postretirement benefit costs,
      Panhandle  Energy
      follows FASB Statement No. 106, *Employers’
      Accounting for Postretirement Benefits Other Than Pensions* ,
      and
      FASB Statement No. 132R, *Employers’
      Disclosures about Pensions and Other Postretirement Benefits* ,
      as
      amended. For defined benefit plans, under certain circumstances, these
      statements require liabilities to be recorded on the balance sheet at the
      present value of these future obligations to employees net of any plan assets.
      The calculation of these liabilities and associated expenses requires the
      expertise of actuaries and is subject to many assumptions, including life
      expectancies, present value discount rates, expected long-term rate of return
      on
      plan assets, rate of compensation increase and anticipated health care costs.
      Any change in these assumptions can significantly change the liability and
      associated expenses recognized in any given year.





F-12


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Prior
      to
      Southern Union’s acquisition of Panhandle  Energy,
      the employees of Panhandle Energy participated in the CMS Pension Plan
      ( *CMS
      Pension Plan* ),
      a
      defined benefit retirement plan for employees of CMS and its affiliates. When
      Southern Union acquired Panhandle Energy in June 2003, CMS retained the CMS
      Pension Plan assets and obligations associated with Panhandle  Energy
      employees, as well as obligations with respect to certain supplemental
      retirement benefits for management employees. In addition, upon the closing
      of
      the Panhandle Acquisition, Panhandle  Energy
      employees became ineligible to accrue additional benefits under the CMS Pension
      Plan or other CMS plans. Since its acquisition by Southern Union,
      Panhandle  Energy
      has not maintained or participated in a defined benefit retirement plan for
      its
      employees, but instead provides benefits to substantially all employees under
      a
      defined contribution 401(k) plan. Under the 401(k) plan, Panhandle  Energy
      provides a matching contribution of 50 percent of the employee’s contribution to
      the 401(k) plan that does not exceed 4 percent of the employee’s eligible pay.
      Panhandle  Energy
      makes additional contributions to the 401(k) plan with
      the
      amount generally varying based on age and years of service under
      a
      Retirement Power Account benefit. Panhandle  Energy
      has generally retained the same active employee health and life benefits that
      were offered prior its acquisition by Southern Union.





In
      connection with Southern Union’s acquisition of Panhandle Energy, CMS, or its
      affiliates, also retained liabilities with respect to the postretirement benefit
      plans other than pensions ( *OPEB* )
      for
      Panhandle  Energy
      retirees and employees who were eligible to retire with such benefits as of
      the
      closing of the Panhandle Acquisition. CMS, or its affiliates, also retained
      all
      of the assets relating to OPEB, which were $2.0 million less than the
      liabilities retained. Since its acquisition by Southern Union,
      Panhandle  Energy
      has continued to provide certain postretirement health and life benefits to
      eligible, active employees ( *Panhandle* ** *Energy
      Plan* ).
      The
      accumulated net postretirement benefit obligation with respect to such
      postretirement health and life benefits as of June 11, 2003 was estimated to
      be
      approximately $42.8
      million and as of December 31, 2003, December 31, 2004 and December 31, 2005
      the
      balance was approximately $41.3 million, $38.3 million and $33.9
      million, respectively. Panhandle  Energy
      agreed to provide, or supplement, postretirement health benefits under the
      Panhandle  Energy
      Plan for certain employees eligible to receive retiree health benefits under
      the
      CMS Pension Plan, if the most valuable of the options under the CMS Pension
      Plan
      becomes less valuable than the most valuable option under the
      Panhandle  Energy
      Plan. Currently, no benefits are expected to be provided under the
      Panhandle  Energy
      Plan with respect to those eligible employees who elect to receive benefits
      as
      retirees under the CMS Pension Plan, and no liability is currently recognized
      for such employees. See *Note
      14 - Benefits* .





***Accounting
      for Derivatives and Hedging Activities.*** Panhandle  Energy
      follows FASB Statement No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* as
      amended, to account for derivative and hedging activities. See *Note
      5 - Accounting for Derivatives and Hedging Activities* .




***Accounting
      for Asset Retirement Obligations.*** Panhandle Energy follows the provisions of FASB Statement No. 143, *Accounting
      for Asset Retirement Obligations* and FASB
      Interpretation No. 47, *Accounting
      for Conditional Asset Retirement Obligations (FIN No. 47* )
      to
      account for its asset retirement obligations ( *AROs* ).
      Panhandle Energy adopted FASB Statement No. 143 on January 1, 2003. Upon
      adoption, Panhandle recorded a cumulative effect increase to net income of
      $2.0
      million, net of tax, resulting from a net increase in property, plant and
      equipment less deferred taxes. In addition a $6.0 million ARO liability was
      recorded, with a corresponding reduction in accumulated depreciation where
      negative salvage covering this liability had previously been recorded. These
      ARO
      assets and liabilities are related to certain offshore lateral lines in the
      Panhandle Energy system.





Panhandle
      Energy adopted FIN No. 47 as of December 31, 2005. Upon adoption of FIN No.
      47,
      Panhandle Energy recorded an increase in net property, plant and equipment
      and a
      liability for an ARO of $882,000.
      This new asset and liability related to obligations associated with the removal
      and disposal of asbestos and asbestos-containing materials on the Panhandle
      Energy system.





The
      statement requires an ARO to be recorded when a legal obligation to retire
      the
      asset exists. FIN No. 47 clarifies that an ARO should be recorded for all assets
      with legal retirement obligations, even if the enforcement of the obligation
      is
      contingent upon the occurrence of events beyond the company’s control
      ( *Conditional
      ARO* ).
      The
      fair values of the AROs were calculated using an expected present value
      technique. This technique reflects assumptions such as removal and remediation
      costs, inflation and profit margins that third parties would demand to settle
      the obligation. Panhandle Energy did not include a market risk premium for
      unforeseeable circumstances in its fair value estimates because such a premium
      could not be reliably estimated.





F-13


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Although
      a number of other assets in Panhandle Energy’s system are subject to agreements
      or regulations which give rise to an ARO or a Conditional ARO upon Panhandle
      Energy’s discontinued use of these assets, AROs were not recorded for most of
      these assets because the fair values of these AROs was not reliably estimable.
      The principal reason the fair values of these AROs were not subject to reliable
      estimation was because the lives of the underlying assets are indeterminate.
      Management has concluded that the Panhandle Energy pipeline system, as a whole,
      has an indeterminate life. In reaching this conclusion, management considered
      its intent for operating the pipeline system, the economic life of the
      underlying assets, its past practices and industry practice.





Panhandle
      Energy intends to operate the pipeline system indefinitely as a going concern.
      Individual component assets have been and will continue to be replaced, but
      the
      pipeline system will continue in operation as long as supply and demand for
      natural gas exists. Based on the widespread use of natural gas in industrial
      and
      power generation activities and current estimates of recoverable reserves,
      management expects supply and demand to exist for the foreseeable
      future.





Panhandle
      Energy has in place a rigorous repair and maintenance program that keeps the
      pipeline system in good working order. Therefore, although some of the
      individual assets on the pipeline system may be replaced, the pipeline system
      itself will remain intact indefinitely. AROs generally do not arise unless
      a
      pipeline system (or portion thereof) is abandoned. Panhandle Energy does not
      intend to make any such abandonments as long as supply and demand for natural
      gas remains relatively stable.




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




**December
                  31, 2005**
              
              
              
              **(In
                  thousands)****In
                  Service****ARO
                  Description**
              **Date**
              
              **Long-Lived
                  Assets**
              **Amount**Retire
                  offshore lateral lines
              Various
              
              Offshore
                  lateral lines
              $
                  2,803Remove
                  asbestos
              Various
              
              Mainlines
                  and compressors
              882





The
      following table is a reconciliation of the carrying amount of the ARO liability
      for the periods presented.




**Post-acquistion**
              
              **Pre-acquisition****Year
                  Ended**
              
              **Year
                  Ended**
              
              
              
              **June
                  12 -**
              
              **January
                  1 -****December
                  31,**
              
              **December
                  31,**
              
              
              
              **December
                  31,**
              
              **June
                  11,****2005**
              
              **2004**
              
              
              
              **2003**
              
              **2003****(In
                  thousands)**Beginning
                  Balance
              
              $
              5,657
              
              $
              7,479
              
              
              
              
              $
              7,115
              
              $
              6,024Incurred
              
              
              2,371
              
              
              -
              
              
              
              
              
              -
              
              
              809Settled
              
              
              (285
              )
              
              (2,365
              )
              
              
              
              
              -
              
              
              -Accretion
                  Expense
              
              
              457
              
              
              543
              
              
              
              
              
              364
              
              
              282Ending
                  Balance
              
              $
              8,200
              
              $
              5,657
              
              
              
              
              $
              7,479
              
              $
              7,115





During
      the second quarter of 2003, Panhandle  Energy
      reclassified $27.3 million of negative salvage previously included in
      accumulated depreciation to other non-current liabilities for amounts collected
      for asset retirement obligations on certain assets which are not recordable
      as
      FASB Statement No. 143 liabilities, but represent other
      obligations.











F-14


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





***Accounting
      for Gains and Losses on Debt Extinguishment.*** Panhandle  Energy
      follows FASB Statement No. 145, *Rescission
      of Financial Accounting Standards Board (FASB) Statements No. 4, 44, and 64,
      Amendment of FASB Statement No. 13, and Technical Corrections* ,
      to
      account for gains and losses on debt extinguishment. FASB Statement No. 145
      dictates that gains and losses on debt extinguished are no longer classified
      as
      extraordinary items. This provision is effective for transactions occurring
      and
      financial statements issued on or after May 15, 2002. Panhandle  Energy
      has adopted FASB Statement No. 145. During the post-acquisition period in 2003,
      Panhandle  Energy
      recorded a pre-tax gain on the extinguishment of debt of approximately $6.1
      million ($3.7 million, net of tax) that is classified as Other, net. During
      2004, Panhandle  Energy
      recorded an additional pre-tax gain on the extinguishment of debt of
      approximately $231,000 ($139,000, net of tax), which is classified as Other,
      net. See *Note
      11 - Debt* .





***Accounting
      for Taxes.*** Since
      its
      conversion to a limited partnership, Panhandle Eastern Pipe Line has been
      treated as a disregarded entity for federal income tax purposes. Accordingly,
      for federal and certain state income tax purposes, Panhandle Eastern Pipe Line’s
      subsidiaries are not treated as separate taxpayers; instead, their income is
      directly taxable to Southern Union Company. Pursuant to a tax sharing agreement
      with Southern Union Company, Panhandle  Energy
      will pay its share of taxes based on its taxable income, which will generally
      equal the liability that Panhandle  Energy
      would have incurred as a separate taxpayer. Panhandle  Energy
      will receive credit under an intercompany note from Southern Union Company
      for
      differences in tax depreciation resulting from the like-kind exchange over
      the
      taxable life of the related assets.





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





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





The
      following table illustrates the effect on net earnings if Panhandle  Energy
      had applied the fair value recognition provisions of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      as
      amended by FASB Statement No. 148, *Accounting
      for Stock-Based Compensation—Transition and Disclosure* ,
      to
      stock-based employee compensation for the stated periods:




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










F-15


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      fair
      value of each option is estimated on the date of grant using the Black-Scholes
      option-pricing model with the following assumptions used for incentive and
      non-qualified stock options and stock appreciation rights granted in the years
      ended December 31, 2005 and 2004:





**Year
                  ended**
              
              **Year
                  ended****December
                  31, 2005**
              
              **December
                  31, 2004**Dividend
                  yield
              
              0%
              
              0%Volatility
              
              37.36%
              
              36.75%Risk
                  free interest rate
              
              4.06%
              
              4.95%Expected
                  term
              
              6.25
                  years
              
              6
                  yearsExpected
                  forfeiture
              
              0%
              
              0%Weighted
                  average option fair value
              
              $10.64
              
              $7.33


Additionally,
      for the year ended December 31, 2005 Southern Union granted restricted stock
      with a weighted average option fair value of $24.06 per share. There were no
      restricted stock options granted prior to the year ended December 31,
      2005.  There
      were no options or shares of restricted stock granted above fair market value
      at
      the grant date during the year ended December 31, 2005. No options or
      stock-based compensation expense were granted during the year ended December
      31,
      2003.




***New
      Accounting Principles***





***Accounting
      Principles Recently Adopted.***





***FSP
      No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare
      Prescription Drug, Improvement and Modernization Act of 2003”
(*** **the** ***Medicare Prescription Drug Act).*** **** Issued
      by
      the Financial Accounting Standards Board (the *FASB* )
      in May
      2004, FASB Financial Staff Position ( *FSP* )
      No. FAS
      106-2 ( *FSP
      FAS 106-2* )
      requires entities to record the impact of the Medicare Prescription Drug Act
      as
      an actuarial gain in the postretirement benefit obligation for postretirement
      benefit plans that provide drug benefits covered by that legislation.
      Panhandle  Energy
      adopted this FSP as of March 31, 2005, the effect of which was not material
      to
      its consolidated financial statements. The effect of this FSP may vary as a
      result of any future changes to Panhandle  Energy  's
      benefit plans. See *Note
      14 - Benefits - Recently Enacted Legislation* .





***FSP
      No. FIN 46R-5, “Implicit Variable Interests under FASB Interpretation No. 46
      (revised December 2003), Consolidation of Variable Interest
      Entities.”*** ** Issued
      by
      the FASB in March 2005, this staff position addresses whether a reporting
      enterprise should consider whether it holds an implicit variable interest in
      a
      variable interest entity ( *VIE* )
      or
      potential VIE when specific conditions exist. An implicit variable interest
      is
      an implied pecuniary interest in an entity that indirectly changes with changes
      in the fair value of the entity's net assets exclusive of variable interests.
      Implicit variable interests may arise from transactions with related parties,
      as
      well as from transactions with unrelated parties. This FSP will be effective,
      for entities to which the interpretations of FIN 46(R) have been applied,
      beginning December 31, 2005. Panhandle  Energy
      adopted this FSP as of March 31, 2005, the effect of which had no impact on
      its
      consolidated financial position, results of operations and cash
      flows.





***FIN
      No. 47, “Accounting for Conditional Asset Retirement
      Obligations.”*** Issued
      by the FASB in March 2005, this interpretation clarifies that the term
“conditional asset retirement obligation” as used in FASB
      Statement No. 143 , *Accounting
      for Asset Retirement Obligations* ,
      refers
      to a legal obligation to perform an asset retirement activity in which the
      timing and/or method of settlement are conditional on a future event that may
      or
      may not be within the control of the entity. Accordingly, an entity is required
      to recognize a liability for the fair value of a conditional asset retirement
      obligation when incurred, if the fair value of the liability can be reasonably
      estimated. FIN No. 47 provides guidance for assessing whether sufficient
      information is available to record an estimate. This Interpretation was
      effective for Panhandle Energy beginning on December 31, 2005 and did not
      materially impact its consolidated financial statements. For additional
      information related to FIN No. 47, see *Note
      2 - Summary of Significant Accounting Policies and Other Matters - Accounting
      for Asset Retirement Obligations* .





F-16


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





***Accounting
      Principles not yet Adopted.***





***FASB
      Statement No. 123R, “Share-Based Payment (revised
      2004).”*** **** Issued
      by
      the FASB **** in
      December 2004, the statement revises FASB Statement No. 123 *,
      Accounting for Stock-Based Compensation* ,
      supersedes Accounting Principal Board Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      amends FASB Statement No. 95, *Statement
      of Cash Flows* .
      This
      statement will be effective for Southern Union, Panhandle  Energy’s
      parent company, beginning January 1, 2006, and will require Southern Union
      to
      measure all employee stock-based compensation awards using a fair value method
      and record such expense in its consolidated financial statements. 
Panhandle  Energy
      will be charged for its proportionate share of the expense recorded by Southern
      Union. In addition, the adoption of this statement will require additional
      accounting and disclosure related to the income tax and cash flow effects
      resulting from share-based payment arrangements. Based upon unexercised stock
      option balances outstanding at December 31, 2005, Panhandle Energy estimates
      additional compensation expense resulting from the implementation of this
      statement will be $736,000
      for year 2006, $732,000 for year 2007, $734,000 for year 2008 and $418,000
      for
      year 2009. Southern Union did not make any amendments to their existing stock
      option arrangements as a result of considering the statement’s adoption. Upon
      Panhandle Energy’s adoption of the statement, no cumulative effect of a change
      in accounting principle was required to be recorded since Southern Union has
      historically granted all options at their grant date fair value and,
      accordingly, there is no historical intrinsic value option compensation expense
      to adjust.




***FERC
      Accounting Release.*** On
      June
      30, 2005, FERC issued a final order on accounting for pipeline assessment costs
      that requires pipeline companies to expense rather than capitalize certain
      costs
      related to mandated pipeline integrity programs (under the Pipeline Safety
      Improvement Act of 2002). The accounting release determined that assessment
      activities associated with an integrity management program must be accounted
      for
      as maintenance and charged to expense in the period incurred. Costs associated
      with any remediation or rehabilitation can be capitalized. FERC accounting
      guidance is effective January 1, 2006, for regulatory accounting purposes.
      Panhandle  Energy expects
      to apply the order for its regulatory accounting beginning in 2006 with no
      impact on its current treatment for GAAP purposes.




**3.
      Regulatory Matters**




In
      December 2002, FERC approved a Trunkline LNG certificate application to expand
      the Lake Charles LNG terminal facility to approximately 1.2 Bcf per day of
      sustainable send out capacity and to increase terminal storage capacity to
      9 Bcf
      from the former level of 6.3 Bcf. BG LNG Services has contract rights for the
      .57 Bcf per day of additional capacity. Construction on the Trunkline LNG
      expansion project ( *Phase
      I* )
      commenced in September 2003 and is expected to be completed at an estimated
      cost
      of $137 million, plus capitalized interest, late in the first quarter or early
      in the second quarter of 2006. The expanded vaporization capacity portion of
      the
      expansion was placed into service on September 18, 2005. On September 17, 2004,
      as modified on September 23, 2004, FERC approved Trunkline LNG’s further
      incremental expansion project ( *Phase
      II* ).
      Phase
      II is estimated to cost approximately $82 million, plus capitalized interest,
      and will increase the LNG terminal’s sustainable send out capacity to 1.8 Bcf
      per day. Phase II has an expected in-service date of mid-2006. BG LNG Services
      has contracted for all the proposed additional capacity, subject to Trunkline
      LNG achieving certain construction milestones at this facility. Approximately $35
      million and $127
      million of costs are included in the line item Construction work-in-progress
      for
      the expansion projects through December 31, 2005 and December 31, 2004,
      respectively.








F-17


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





On
      December 15, 2003, the U.S. Department of Transportation issued a Final Rule
      requiring pipeline operators to develop integrity management programs to
      comprehensively evaluate their pipelines, and take measures to protect pipeline
      segments located in what the regulation defines as “high consequence areas”
( *HCA* ).
      This
      rule resulted from the enactment of the Pipeline Safety Improvement Act of
      2002,
      a bill signed into law on December 17, 2002. The rule requires operators to
      identify HCAs along their pipelines by December 2004, and to have begun baseline
      integrity assessments, comprised of in-line inspection (smart pigging),
      hydrostatic testing, or direct assessment, by June 2004. Operators must risk
      rank their pipeline segments containing HCAs, and must complete assessments
      on
      at least 50 percent of the segments using one or more of these methods by
      December 2007. Assessments will generally be conducted on the higher risk
      segments first with the balance being completed by December 2012. The costs
      of
      utilizing these methods typically range from a few thousand dollars per mile
      to
      well over $15,000 per mile. In addition, some system modifications will be
      necessary to accommodate the in-line inspections. All systems operated by
      Panhandle Energy will be compliant with the rule, however, while identification
      and location of all the HCAs has been completed, it is impossible to determine
      the total scope of required remediation activities prior to completion of the
      assessments and inspections. Therefore, the costs of implementing the
      requirements of this regulation are impossible to determine with certainty
      at
      this time. The required modifications and inspections are estimated to range
      from approximately $15 - $25 million per year, inclusive of remediation
      costs.





On
      February 11, 2005, Trunkline received final approval from FERC to construct,
      own
      and operate a 36-inch diameter, 23-mile natural gas pipeline loop from the
      LNG
      terminal. The pipeline creates additional transport capacity in association
      with
      the Trunkline LNG expansion and also includes new and expanded delivery points
      with major interstate pipelines. The new 36-inch pipeline was placed into
      service on July 22, 2005.





**4.
      Related Party Transactions**





During
      the pre-acquisition period, Panhandle  Energy
      had a number of significant transactions with former related parties. Revenue
      transactions, primarily for the transportation of natural gas for Consumers
      Energy Company and other CMS affiliates which were related parties until June
      12, 2003, were based on regulated prices, market prices or competitive bidding.
      Panhandle  Energy
      will continue transporting gas for these former related parties under the
      contracts currently in effect, and thereafter if contracts are renewed.
      Panhandle Eastern Pipe Line receives transportation revenues from Missouri
      Gas
      Energy, a Southern Union division, which account for less than one
      percent of annual consolidated revenues. These deliveries were at contracted
      rates that pre-dated the Panhandle Acquisition and are now subject to newly
      negotiated rates under agreements that became effective October 1, 2005.




****
              **Post-acquisition**********************************
              ****
              **Pre-acquisition**
              ********
              ****
              
              ****
              **Year
                  Ended******
              ****
              
              ****
              **Year Ended**
              ****
              
              ****
              **June
                  12 -**
              ****
              **January
                  1-**
              ********
              ****
              
              ****
              **December
                  31,******
              ****
              
              ****
              **December
                  31,**
              ****
              
              ****
              **December
                  31,**
              ****
              **June
                  11,**
              ******Related
                  Party Transactions**
              ****
              
              ****
              **2005**
              ****
              
              ****
              **2004**
              ****
              
              ****
              **2003**
              ****
              **2003**(In
                  thousands)Transportation
                  and storageof
                  natural gas
              
              
              
              
              $
              3,962
              
              
              
              
              $
              3,902
              
              
              
              
              $
              2,251
              
              $
              28,094Operation
                  and maintenance:Management
                  & royalty fees
              
              
              
              
              
              12,630
              
              
              
              
              
              12,215
              
              
              
              
              
              6,111
              
              
              -Other
                  expenses
              
              
              
              
              
              17,715
              
              
              
              
              
              24,607
              
              
              
              
              
              9,900
              
              
              9,727Other
                  income, net
              
              
              
              
              
              3,749
              
              
              
              
              
              1,779
              
              
              
              
              
              407
              
              
              6,572











F-18


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





On
      February 10, 2003, Panhandle  Energy
      sold its one-third interest in Centennial for $40 million to Centennial’s two
      other unaffiliated partners. There was no income or loss related to Centennial
      in the first quarter of 2003. In March 2003, the $40 million of cash from the
      sale of Centennial was distributed to CMS as a return of capital.





Net
      cash
      generated by Panhandle  Energy
      in
      excess of operating, investing or financing needs was previously loaned to
      CMS
      Capital. Panhandle  Energy
      was credited with interest on the note at one-month LIBOR plus 300 basis points.
      Included in Other income, net is interest income of $6.2 million for the period
      ended June 11, 2003 for interest on the Note receivable - CMS Capital. The
      Note
      receivable - CMS Capital of $184.9 million as of the acquisition date
      subsequently was eliminated following the acquisition of Panhandle  Energy
      by
      Southern Union. See *Note
      1 - Corporate Structure* .
      The
      $150 million portion of the note classified as a reduction to equity as of
      the
      acquisition date was eliminated.





Pursuant
      to a demand note with Southern Union Company under a cash management program,
      Panhandle  Energy
      has loaned excess cash, net of repayments, totaling $110. 6
      million
      to Southern Union since Southern Union acquired Panhandle Energy. Net loans
      of $19.8
      million were recorded during the 12 month period ended December 31, 2005.
      Panhandle  Energy
      is
      credited with interest on the note at a one month LIBOR rate. Included in Other,
      net in the accompanying Consolidated Statement of Operations is interest income
      of $3.5
      million and $1.6
      million for the years ended December 31, 2005 and 2004, respectively, and
      $271,000 for the period June 12-December 31, 2003 related to interest on the
      Note receivable - Southern Union. Panhandle  Energy
      expects to draw down on the note receivable over the next 12 months to fund
      capital expenditures in excess of operating cash flows and has thus reflected
      the note receivable from Southern Union as a current asset.





Southern
      Union structured the Panhandle Energy acquisition in a manner intended to
      qualify as a like-kind exchange of property under Section 1031 of the Internal
      Revenue Code of 1986, as amended. For tax purposes, the Panhandle  Energy
      assets that were part of the exchange were recorded at the tax basis of the
      Southern Union Company assets for which they were exchanged. The resulting
      transaction generated an estimated deferred tax liability of approximately
      $91
      million at the acquisition date and a corresponding receivable from Southern
      Union reflected as a reduction to owners’ equity on Panhandle  Energy’s
      Consolidated Balance Sheet. Repayment of the receivable from Southern Union
      is
      limited to actual tax liabilities otherwise payable by Panhandle  Energy
      pursuant to the tax sharing agreement with Southern Union Company. In the fourth
      quarter of 2004, Panhandle  Energy
      recorded a $12.2
      million reduction in its deferred tax liability and the corresponding Tax
      sharing note receivable from Southern Union due to revised calculations in
      the
      amount of Panhandle  Energy’s
      tax basis utilized by Southern Union in the like-kind exchange associated with
      the Panhandle Acquisition. During 2005 and 2004, Panhandle  Energy
      recorded a $20.1
      million and a $7.7
      million income tax liability settlement against the tax sharing note receivable,
      respectively.








F-19


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





On
      November 17, 2004, CCE Holdings, LLC ( *CCE
      Holdings* ),
      a
      joint venture in which Southern Union owns a 50 percent interest, acquired
      100
      percent of the equity interests of CrossCountry Energy, LLC ( *CrossCountry
      Energy* )
      from
      Enron Corp. and certain of its subsidiaries for approximately $2.45 billion
      in
      cash, including the assumption of certain consolidated debt. On November 5,
      2004, CCE Holdings entered into an Administrative Services Agreement
      ( *Management
      Agreement* )
      with SU
      Pipeline Management LP ( *Manager* ),
      a
      Delaware limited partnership and a wholly owned subsidiary of Southern Union,
      and Panhandle  Energy.
      Under the terms of the Management Agreement, Panhandle  Energy
      covenants, to the extent permitted by applicable law, to cause Manager to
      perform the duties and obligations of Manager. Manager has assembled an
      integrated pipeline management team, which includes employees of
      Panhandle  Energy
      and CrossCountry Energy. Pursuant to the Management Agreement, Manager is
      responsible for the operations and administrative functions of the enterprise.
      CCE Holdings and Manager will share certain operations of Manager and its
      affiliates, and CCE Holdings will be obligated to bear its share of costs of
      the
      Manager and its affiliates, as well as certain transition costs and, under
      certain conditions, pay annual management fees to Manager. Transition costs
      are
      non-recurring costs of establishing the shared services, including but not
      limited to severance costs, professional fees, certain transaction costs, and
      the costs of relocating offices and personnel, pursuant to the Management
      Agreement. At December 31, 2004, Panhandle  Energy
      recognized a liability of approximately $6 million for severance related costs,
      which is reimbursable from CCE Holdings for which an offsetting amount was
      recorded in Accounts receivable - related parties. At December 31 2005, Accounts
      receivable - related parties includes $1.2
      million and Accounts payable - related parties includes $2.2
      million for severance related costs.





On
      March
      10, 2003, Panhandle  Energy’s
      ownership interest in Guardian was transferred to CMS as a return of capital
      at
      the book value of $27.8 million and Panhandle  Energy
      was released from its guarantee obligations associated with the Guardian
      non-recourse guaranty by the note holders. See *Note
      13 - Commitments and Contingencies* .
      As a
      result, the $62.5 million in special deposits which collateralized the guaranty
      and had been reflected as restricted cash in Panhandle  Energy’s
      financial statements were advanced to CMS Capital as part of the demand Note
      receivable - CMS Capital and were then made available to CMS Gas
      Transmission.








F-20


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


**5.
      Derivatives Instruments and Hedging Activities**





Panhandle  Energy
      follows FASB Statement No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* as
      amended, to account for derivative and hedging activities. Panhandle  Energy
      utilizes interest-rate related derivative instruments to manage its exposure
      on
      its debt instruments and does not enter into derivative instruments for any
      purpose other than hedging purposes. All derivatives are recognized on the
      balance sheet at their fair value. On the date the derivative contract is
      entered into, Panhandle  Energy
      designates the derivative as either: (i) a hedge of the fair value of a
      recognized asset or liability or of an unrecognized firm commitment
      ( *fair
      value hedge* )
      or (ii)
      a hedge of a forecasted transaction or the variability of cash flows to be
      received or paid in conjunction with a recognized asset or liability
      ( *cash
      flow hedge* ).





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





On
      April
      29, 2005, LNG Holdings repaid in full all amounts due under its then existing
      bank loans in which were scheduled to expire in January 2007, using drawings
      under a Credit Agreement entered into on April 26, 2005 ( *the
      Credit Agreement* ).
      Interest rate swaps previously designated as cash flow hedges of the LNG
      Holdings’ bank loans were terminated upon repayment of the loans on April 29,
      2005 (see *Note
      11 - Debt* ).
      As a
      result, a gain of $3.5
      million ($2.1 million, net of tax) was recorded in Accumulated other
      comprehensive income during the second quarter of 2005 and is being amortized
      to
      interest expense through the maturity date of the original bank loans in 2007,
      of which $2.2
      million ($1.3 million, net of tax) remains at December 31, 2005.





Prior
      to
      the termination in April 2005 of the original loans due January 2007,
      Panhandle  Energy’s
      subsidiary LNG Holdings was party to interest rate swap agreements that fixed
      the interest rate applicable to floating rate long-term debt and that qualified
      for hedge accounting. From January 1, 2005 through the termination date of
      the
      swap agreements on April 29, 2005, there was no swap ineffectiveness. For the
      12
      month periods ended December 31, 2004 and 2003, the amount of swap
      ineffectiveness was not significant. From January 1, 2005 through the
      termination date, an unrealized gain of $1.4
      million ($842,000, net of tax) was recorded in Accumulated other comprehensive
      income related to these swaps. For the period from the termination date through
      December 31, 2005, a gain of $1.2
      million ($739,000, net of tax) was amortized to interest expense. For the 12
      months ended December 31, 2004, an unrealized loss of $236,000
      ($141,000, net of tax) was included in accumulated other comprehensive income
      related to these swaps. Current market pricing models were used to estimate
      fair
      values of interest rate swap agreements.





In
      March
      2004, Panhandle  Energy
      entered into interest rate swaps to hedge the risk associated with the fair
      value of its $200 million 2.75 percent Senior Notes. See *Note
      11 - Debt.* These
      swaps are designated as fair value hedges and qualify for the short cut method
      under FASB Statement No. 133. As of December 31, 2005 and 2004 the fair value
      position of the swaps was a liability of $5.7
      million and $3.9
      million, respectively, recorded as a reduction to long-term debt. Under the
      swap
      agreements, Panhandle  Energy
      will receive fixed interest payments at a rate of 2.75 percent and will make
      floating interest payments at an interest rate based on the six-month LIBOR.
      No
      ineffectiveness is assumed in the hedging relationship between the debt
      instrument and the interest rate swap. As of December 31, 2005, these swaps
      have
      an average floating interest rate of 4.48
      percent.








F-21


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


**6.
      Income Taxes**





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





**Post-acquisition**
              
              **Pre-acquisition****Year
                  Ended**
              
              **Year
                  Ended**
              
              
              
              **June
                  12 -**
              
              **January
                  1 -****December
                  31,**
              
              **December
                  31,**
              
              
              
              **December
                  31,**
              
              **June
                  11,****Income
                  Tax Expense**
              
              **2005**
              
              **2004**
              
              
              
              **2003**
              
              **2003**(In
                  thousands)Current
                  income taxesFederal
              
              $
              20,153
              
              $
              14,756
              
              
              
              
              $
              -
              
              $
              -State
              
              
              2,341
              
              
              1,726
              
              
              
              
              
              -
              
              
              -Total
                  current income taxes
              
              
              22,494
              
              
              16,482
              
              
              
              
              
              -
              
              
              -.Deferred
                  income taxesFederal
              
              
              34,330
              
              
              32,861
              
              
              
              
              
              27,823
              
              
              25,823State
              
              
              7,803
              
              
              6,713
              
              
              
              
              
              5,498
              
              
              4,709Total
                  deferred income taxes
              
              
              42,133
              
              
              39,574
              
              
              
              
              
              33,321
              
              
              30,532Total
                  income tax expense
              
              $
              64,627
              
              $
              56,056
              
              
              
              
              $
              33,321
              
              $
              30,532





The
      actual income tax expense differs from the amount computed by applying the
      statutory federal tax rate of 35% to income before income taxes as
      follows:





**Post-acquisition**
              
              
              **Pre-acquisition****Year
                  Ended**
              
              **Year
                  Ended**
              
              
              
              **June
                  12 -**
              
              **January
                  1-****Income
                  Tax Expense --**
              
              **December
                  31,**
              
              **December
                  31,**
              
              
              
              **December
                  31,**
              
              **June
                  11,****Reconciliation
                  to Statutory Rate**
              
              **2005**
              
              **2004**
              
              
              
              **2003**
              
              **2003**(In
                  thousands)Income
                  tax, computed at the statutory rate
              
              $
              58,166
              
              $
              50,396
              
              
              
              
              $
              29,671
              
              $
              27,490Adjustments:State
                  income tax, net of federal effect
              
              
              6,594
              
              
              5,485
              
              
              
              
              
              3,574
              
              
              3,061Permanent
                  differences and other
              
              
              (133
              )
              
              175
              
              
              
              
              
              76
              
              
              (19
              )Total
                  income tax expense
              
              $
              64,627
              
              $
              56,056
              
              
              
              
              $
              33,321
              
              $
              30,532Effective
                  tax rate
              
              
              38.9
              %
              
              38.9
              %
              
              
              
              
              39.3
              %
              
              38.9
              %





F-22


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      principal components of Panhandle  Energy’s
      deferred tax assets (liabilities) recognized in the Consolidated Balance Sheets
      for the 12 month periods ended December 31, 2005 and 2004 are as follows:




**December
                  31,**
              
              **December
                  31,****Net
                  Deferred Income Tax Asset (Liability) Components**
              
              **2005**
              
              **2004**(In
                  thousands)Property,
                  plant and equipment
              
              $
              (206,859
              )
              $
              (189,041
              )Investments
              
              
              (196
              )
              
              (116
              )Deferred
                  credits and other liabilities
              
              
              19,174
              
              
              26,534Other
                  assets
              
              
              5,554
              
              
              9,933Interest
                  rate swap
              
              
              -
              
              
              7,536State
                  deferred income taxes, net of federal tax effect
              
              
              (21,374
              )
              
              (16,341
              )Net
                  deferred income tax asset (liability)
              
              $
              (203,701
              )
              $
              (161,495
              )Gross
                  deferred tax liabilities
              
              $
              (229,442
              )
              $
              (205,498
              )Gross
                  deferred tax assets
              
              
              25,741
              
              
              44,003Net
                  deferred income tax asset (liability)
              
              $
              (203,701
              )
              $
              (161,495
              )Non
                  current deferred income tax asset (liability)
              
              $
              (205,787
              )
              $
              (172,193
              )Current
                  tax asset
              
              
              2,086
              
              
              10,698Net
                  deferred income tax asset (liability)
              
              $
              (203,701
              )
              $
              (161,495
              )





Under
      the
      terms of the Panhandle Energy sale agreement, CMS retained all net deferred
      tax
      assets of $28.1 million and all tax liabilities of $17.4 million as of June
      11,
      2003, the acquisition date. Panhandle  Energy
      recognized a deferred tax liability of $91 million, which resulted from the
      like-kind exchange of property under Section 1031 of the Internal Revenue Code
      of 1986, as amended. See *Note
      4 - Related Party Transactions* .
      During
      the years ended December 31, 2005 and 2004, Panhandle  Energy
      realized $20.1
      million and $7.7 million, respectively, of the Tax sharing receivable as an
      offset against its current income taxes payable, pursuant to the tax sharing
      agreement. In the fourth quarter of 2004, Panhandle  Energy
      recorded a $12.2
      million reduction in its deferred tax liability and the corresponding Tax
      sharing note receivable from Southern Union due to revised calculations in
      the
      amount of Panhandle  Energy’s
      tax basis utilized by Southern Union in the like-kind exchange associated with
      the Panhandle Acquisition.





Panhandle
      Energy had a deferred income tax asset attributable to temporary differences
      reflecting tax loss carry forwards of $8.1 million as of December 31, 2003,
      which was fully utilized in 2004.








F-23


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**7.
      Property, Plant and Equipment**





**Lives**
              
              **December
                  31,**
              
              **December
                  31,****Property,
                  Plant and Equipment**
              
              **In
                  Years**
              
              **2005**
              
              **2004**(In
                  thousands)Transmission
              
              
              36-46
              
              $
              1,285,848
              
              $
              1,181,182Gathering
              
              
              26
              
              
              45,822
              
              
              46,074Underground
                  storage
              
              
              36-46
              
              
              275,603
              
              
              274,337General
                  plant - LNG
              
              
              40
              
              
              494,827
              
              
              388,703General
                  plant - other (1)
              
              
              1-10
              
              
              61,374
              
              
              57,228Construction
                  work-in-progress
              
              
              
              
              
              176,370
              
              
              203,094Total
                  property, plant and equipment
              
              
              
              
              
              2,339,844
              
              
              2,150,618Less
                  accumulated depreciation and amortization
              
              
              
              
              
              145,550
              
              
              87,683Net
                  property, plant and equipment
              
              
              
              
              $
              2,194,294
              
              $
              2,062,935(1)
                  Includes capitalized computer software costs totaling:Computer
                  software cost
              
              
              
              
              $
              53,716
              
              $
              49,828Less
                  accumulated amortization
              
              
              
              
              
              12,386
              
              
              6,439Net
                  computer software costs
              
              
              
              
              $
              41,330
              
              $
              43,389


Amortization
      expense of capitalized computer software costs for years 2005, 2004, 2003 was $5.9
      million, $5.1
      million and $5.0 million, respectively. During the quarter ended September
      30,
      2004, Panhandle  Energy
      commenced utilization of an upgraded internally developed computer application
      to manage its pipeline administration. Panhandle  Energy
      recorded in General plant - other costs of $34.2
      million pursuant to SOP 98-1, *Accounting
      for the Costs of Computer Software Developed or Obtained for Internal
      Use* ,
      with
      related amortization expense during 2005 and 2004 totaling $3.7
      and $1.1
      million, respectively. The intangible asset will be amortized over a ten-year
      life.





**8.
      Intangible Customer Contract**





Based
      on
      the purchase price allocations and outside appraisals, the Panhandle Acquisition
      resulted in the recognition of an intangible asset related to the BG LNG
      contract with Trunkline LNG. The following table shows the carrying amount
      and
      accumulated amortization related to these intangibles.





**Useful****Lives**
              
              **December
                  31,**
              
              **December
                  31,****Intangible
                  customer contract**
              
              **In
                  Years**
              
              **2005**
              
              **2004**(In
                  thousands)Customer
                  contract
              
              
              20
              
              $
              9,503
              
              $
              9,503Accumulated
                  amortization
              
              
              
              
              
              1,472
              
              
              1,007Intangible
                  customer contract, net
              
              
              
              
              $
              8,031
              
              $
              8,496


Amortization
      expense on the customer contract for 2005 and 2004 was $465,000
      and $136,000,
      respectively. Panhandle  Energy
      estimates the annual amortization expense for years 2006-2010 and thereafter
      will be $465,000 per year.





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





F-24


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**9.
      Investment in Affiliates**





Panhandle  Energy
      owns a 29 percent interest in the Lee 8 partnership, which operates a
      2.4 Bcf natural gas storage facility in Michigan. The remaining interests
      in the Lee 8 partnership are currently owned by Proliance Energy (51 percent)
      and Howard Energy Company (20 percent). Panhandle Energy accounts for its
      investment in the Lee 8 partnership using the equity method of accounting.





**10.
      Financial Instruments**





Panhandle  Energy’s
      financial instruments include $1.18
      billion of total debt outstanding, including the current portion of long-term
      debt, at December 31, 2005 and 2004, with an approximate fair value of $1.19
      billion and $1.22
      billion as of December 31, 2005 and 2004, respectively. Estimated fair
      value amounts of long-term debt were obtained from independent parties. Judgment
      is required in interpreting market data to develop the estimates of fair value.
      Accordingly, the estimates determined as of December 31, 2005 and 2004
      are not necessarily indicative of the amounts Panhandle  Energy
      could have realized in current market exchanges.





The $110.6
      million and $90.7 million Note Receivable from Southern Union at December 31,
      2005 and December 31, 2004, respectively, is at fair value and the interest
      portion is calculated using an interest rate equal to the one month LIBOR rate.
      See *Note
      4 - Related Party Transactions* .





**11.
      Debt**





**December
                  31, 2005**
              
              **December
                  31, 2004****Long-term
                  Debt**
              
              **Year
                  Due**
              
              **Book
                  Value**
              
              **Fair
                  Value**
              
              **Book
                  Value**
              
              **Fair
                  Value**(In
                  thousands)6.50%
                  Senior Notes
              
              
              2009
              
              $
              60,623
              
              $
              63,228
              
              $
              60,623
              
              $
              66,0248.25%
                  Senior Notes
              
              
              2010
              
              
              40,500
              
              
              45,135
              
              
              40,500
              
              
              47,4307.00%
                  Senior Notes
              
              
              2029
              
              
              66,305
              
              
              73,521
              
              
              66,305
              
              
              73,4924.80%
                  Senior Notes
              
              
              2008
              
              
              300,000
              
              
              300,000
              
              
              300,000
              
              
              305,2146.05%
                  Senior Notes
              
              
              2013
              
              
              250,000
              
              
              254,450
              
              
              250,000
              
              
              268,4502.75%
                  Senior Notes
              
              
              2007
              
              
              200,000
              
              
              200,000
              
              
              200,000
              
              
              200,000Bank
                  loans
              
              
              2007
              
              
              255,626
              
              
              255,626
              
              
              258,433
              
              
              258,433Total
                  debt outstanding
              
              
              
              
              
              1,173,054
              
              $
              1,191,960
              
              
              1,175,861
              
              $
              1,219,043Current
                  portion of long-term debt
              
              
              
              
              
              -
              
              
              
              
              
              (12,548
              )Interest
                  rate swaps (2.75% Senior Notes)
              
              
              
              
              
              (5,725
              )
              
              
              
              
              (3,936
              )Unamortized
                  debt premium, net
              
              
              
              
              
              12,205
              
              
              
              
              
              14,688Total
                  long-term debt
              
              
              
              
              $
              1,179,534
              
              
              
              
              $
              1,174,065


Panhandle  Energy
      has $1.18
      billion of debt recorded at December 31, 2005. Debt of $729.6 million, including
      net premiums of $12.2 million, is at fixed rates ranging from 4.80 percent
      to
      8.25 percent, with an average interest rate for 2005 of 5.69
      percent including debt premium, discount and issuance cost amortization and
      5.78
      percent excluding debt premium, discount and issuance cost amortization. The
      $ 455.6
      million of floating rate debt had an average interest rate of 4.78
      percent for the 12-month period ended December 31, 2005.





Panhandle  Energy’s
      notes are subject to certain requirements such as the maintenance of a fixed
      charge coverage ratio and a leverage ratio, which if not maintained restrict
      the
      ability of Panhandle Energy to make certain payments and impose limitations
      on
      the ability of Panhandle Energy to subject its property to liens. At December
      31, 2005, Panhandle  Energy,
      based on the currently most restrictive debt covenant requirements, was subject
      to a $495.7
      million limitation on additional restricted payments including dividends and
      loans to affiliates, and a limitation of $232.6
      million of additional secured or subsidiary level indebtedness or other defined
      liens based on a limitation on liens covenant. Panhandle  Energy
      is
      also subject to a limitation of $401.6
      million of total additional indebtedness. At December 31, 2005,
      Panhandle  Energy
      was in compliance with all covenants.





F-25


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





At
      December 31, 2005, Panhandle  Energy
      had no scheduled debt principal payments for 2006 and scheduled payments of
      $455.6 million, $300 million, $60.6 million, $40.5 million and $316.3 million
      for the years 2007 through 2010 and in total thereafter,
      respectively.





LNG
      Holdings, as borrower, and Panhandle Eastern Pipe Line and Trunkline LNG, as
      guarantors, entered into a Credit Agreement dated as of April 26, 2005, with
      a
      consortium of banks for a senior term loan financing in the aggregate principal
      amount of $255.6 million, which matures on March 15, 2007. The senior term
      loan
      carries a floating interest rate tied to LIBOR or prime interest rates at
      Panhandle  Energy’s
      option, in addition to a margin which is tied to the rating of
      Panhandle  Energy’s
      unsecured senior funded debt. On April 29, 2005, the proceeds from the Credit
      Agreement were used to repay all outstanding indebtedness under LNG Holdings’
floating rate bank loans that were due in 2007.





On
      March
      12, 2004, Panhandle Energy issued $200 million principal amount of its 2.75%
      Senior Notes due 2007, the proceeds of which were used to fund the redemption
      of
      the remaining $146.1 million principal amount of its 6.125% Senior Notes due
      2004 that matured on March 15, 2004 and to provide working capital. A portion
      of
      the remaining net proceeds was also used to repay the remaining $52.5 million
      principal amount of Panhandle Energy’s 7.875% Senior Notes due 2004 that matured
      on August 15, 2004.





In
      July
      2003, Panhandle Energy announced a tender offer for any and all of the $747.4
      million outstanding principal amount of five of its series of senior notes
      outstanding at that point in time ( *Panhandle
      Tender Offer* )
      and
      also called for redemption of all of the outstanding $134.5 million principal
      amount of its two series of debentures that were outstanding ( *Panhandle
      Calls* ).
      Panhandle Energy repurchased approximately $378.3 million of the principal
      amount of its outstanding debt through the Panhandle Tender Offer for total
      consideration of approximately $396.4 million plus accrued interest through
      the
      purchase date. Panhandle Energy also redeemed approximately $134.5 million
      of
      debentures through the Panhandle Calls for total consideration of $139.4
      million, plus accrued interest through the redemption dates. As a result of
      the
      Panhandle Tender Offer, Panhandle Energy recorded a pre-tax gain on the
      extinguishment of debt of $6.1 million during the year ended December 31, 2003.
      During 2004, Panhandle Energy recorded an additional pre-tax gain of $231,000.
      In August 2003, Panhandle Energy issued $300 million of its 4.80% Senior Notes
      due 2008 and $250 million of its 6.05% Senior Notes due 2013, principally to
      refinance the repurchased notes and redeemed debentures. Also in August and
      September 2003, Panhandle Energy repurchased $3.2 million principal amount
      of
      its senior notes on the open market through two transactions for total
      consideration of $3.4 million, plus accrued interest through the repurchase
      date.





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








F-26


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**12.
      Comprehensive Income**





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




**Post-acquisition**
              
              
              **Pre-acquisition****Year
                  ended**
              
              **Year
                  ended**
              
              
              
              **June
                  12 -**
              
              **January
                  1 -****December
                  31,**
              
              **December
                  31,**
              
              
              
              **December
                  31,**
              
              **June
                  11,****2005**
              
              **2004**
              
              
              
              **2003**
              
              **2003**(In
                  thousands)Net
                  earnings
              
              $
              101,562
              
              $
              87,933
              
              
              
              
              $
              51,452
              
              $
              50,014Unrealized
                  gain (loss) related to interest rate swaps,net
                  of taxes of $1,587, $3,407, $2,769 and$(2,137),
                  respectively
              
              
              2,495
              
              
              5,345
              
              
              
              
              
              4,276
              
              
              (3,180
              )Reclassifications
                  of (gains) losses in net income, net of taxesof
                  $(1,515), $(3,502) and $(1,847), respectively
              
              
              (2,387
              )
              
              (5,486
              )
              
              
              
              
              (2,904
              )
              
              -Total
                  comprehensive income (loss)
              
              $
              101,670
              
              $
              87,792
              
              
              
              
              $
              52,824
              
              $
              46,834










**13.
      Commitments and Contingencies**





***Leases.***  Panhandle  Energy
      utilizes assets under operating leases in several areas of operation.
      Consolidated rental expense amounted to $12.9
      million in 2005, $13.4
      million in 2004 and $12.5 million in 2003. Future minimum rental payments under
      Panhandle  Energy’s
      various operating leases for the years 2006 through 2010 are $13.8
      million, $12.0 million, $8.1 million, $7.3 million and $6.5 million,
      respectively, and $20.9 million in total thereafter.





***Capital
      Expenditures.*** Panhandle  Energy
      estimates expenditures associated with its Phase I and Phase II LNG terminal
      expansion to be approximately $32.1
      million in 2006, plus capitalized interest. These estimates were developed
      for
      budgeting purposes and are subject to revision.





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





Hope
      Land
      Mineral Corporation ( *Hope
      Land* )
      contends that it owns the storage rights to property that contains a portion
      of
      Panhandle  Energy’s
      Howell storage field. During June 2003, the Michigan Court of Appeals reversed
      the trial court’s previous order, which had granted summary judgment in favor of
      Panhandle  Energy
      and dismissed the case. Panhandle  Energy
      filed an appeal of the Court of Appeals order with the Michigan Supreme Court,
      which was denied in December of 2003. In April 2005, Hope Land filed trespass
      and unjust enrichment complaints against Panhandle  Energy
      to
      prevent running of the statute of limitations. Panhandle  Energy
      then filed an action for condemnation to obtain the storage rights from Hope
      Land. Pursuant to a pre-filing settlement with Hope Land, Panhandle  Energy
      obtained legal title to the storage rights upon the filing of the condemnation
      action. As a result, the only issue to be determined at trial is the value
      of
      such rights and the amount of trespass damages to which Hope Land is entitled.
      The trial court has not yet issued a scheduling order, but Panhandle Energy
      expects the trial to be scheduled for the second quarter of 2006.
      Panhandle  Energy
      does not believe the outcome of this case will have a material adverse effect
      on
      Panhandle  Energy’s
      consolidated results of operations, cash flows or financial
      position.





F-27


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Jack
      Grynberg, an individual, has filed actions against a number of companies,
      including Panhandle  Energy,
      now transferred to the U.S. District Court for the District of Wyoming, for
      damages for mis-measurement of gas volumes and Btu content, resulting in lower
      royalties to mineral interest owners. On May 13, 2005, the Special Master in
      this case issued a recommended decision that would, if adopted by the District
      Judge, result in dismissal of Panhandle  Energy
      and its affiliates from the case. A similar action, known as the Will Price
      litigation, also has been filed against a number of companies, including
      Panhandle  Energy,
      in U.S. District Court for the District of Kansas. Panhandle  Energy
      is
      currently awaiting the decision of the trial judge on the defendants’ motion to
      dismiss the Will Price action. Panhandle  Energy
      believes that its measurement practices conformed to the terms of its FERC
      Gas
      Tariff, which was filed with and approved by FERC. As a result,
      Panhandle  Energy
      believes that it has meritorious defenses to the complaints (including
      FERC-related affirmative defenses, such as the filed rate/tariff doctrine,
      the
      primary/exclusive jurisdiction of FERC, and the defense that
      Panhandle  Energy
      complied with the terms of its tariff) and is defending the suits
      vigorously.





***Environmental
      Matters*** .
      Panhandle Energy’s operations are subject to federal, state and local laws and
      regulations regarding water quality, hazardous and solid waste management,
      air
      quality control and other environmental matters. These laws and regulations
      require Panhandle Energy to conduct its operations in a specified manner and
      to
      obtain and comply with a wide variety of environmental registrations, licenses,
      permits, inspections and other approvals. Failure to comply with environmental
      requirements may expose Panhandle Energy to significant fines, penalties and/or
      interruptions in operations. Panhandle Energy’s environmental policies and
      procedures are designed to achieve compliance with such laws and regulations.
      These evolving laws and regulations and claims for damages to property,
      employees, other persons and the environment resulting from current or past
      operations may result in significant expenditures and liabilities in the future.
      Panhandle Energy is currently updating and revising its procedures for the
      ongoing evaluation of its operations to identify potential environmental
      exposures and enhance compliance with regulatory requirements .





Panhandle
      Energy follows the provisions of American Institute of Certified Public
      Accountants Statement of Position 96-1, *Environmental
      Remediation Liabilities,* for
      recognition, measurement, display and disclosure of environmental remediation
      liabilities.





Panhandle
      Energy is responsible for environmental remediation at certain sites on its
      gas
      transmission systems. The contamination resulted from the past use of lubricants
      containing polychlorinated biphenyls ( *PCBs* )
      in
      compressed air systems; the past use of paints containing PCBs; and the prior
      use of wastewater collection facilities and other on-site disposal areas.
      Panhandle Energy has developed and is implementing a program to remediate such
      contamination. Remediation and decontamination has been completed at 26 of
      35
      compressor station sites where auxiliary buildings that house the air compressor
      equipment have been impacted by the past use of lubricants containing PCBs.
      At
      some locations, PCBs have been identified in paint that was applied many years
      ago. A program has been implemented to remove and dispose of PCB impacted paint
      during painting activities. Other remediation typically involves the management
      of contaminated soils and may involve remediation of groundwater. Activities
      vary with site conditions and locations, the extent and nature of the
      contamination, remedial requirements, complexity and sharing of responsibility.
      The ultimate liability and total costs associated with these sites will depend
      upon many factors. If remediation activities involve statutory joint and several
      liability provisions, strict liability, or cost recovery or contribution
      actions, Panhandle Energy could potentially be held responsible for
      contamination caused by other parties. In some instances, such as the Pierce
      Waste Oil sites described below, Panhandle Energy may share liability associated
      with contamination with other potentially responsible parties, Panhandle Energy
      may also benefit from contractual indemnities that cover some or all of the
      cleanup costs. These sites are generally managed in the normal course of
      business or operations. Panhandle Energy believes the outcome of these matters
      will not have a material adverse effect on its financial position, results
      of
      operations or cash flows.








F-28


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Panhandle
      Eastern Pipe Line and Trunkline, together with other non-affiliated parties,
      have been identified as potentially liable for conditions at three former waste
      oil disposal sites in Illinois - the Pierce Oil Springfield site, the Dunavan
      Waste Oil site and the McCook site (collectively the Pierce Waste Oil sites).
      Panhandle Eastern Pipe Line and Trunkline received notices of potential
      liability from the United States Environmental Protection Agency ( *U.S.
      EPA* )
      for the
      Dunavan site. The notice demanded reimbursement to the U.S. EPA for all its
      costs incurred to date in the amount of approximately $1.8
      million and encouraged each potentially responsible party ( *PRP* )
      to
      voluntarily negotiate an administrative settlement agreement with the U.S.
      EPA within certain limited time frames providing for the PRPs to conduct or
      finance the response activities required at the site.  The demand was
      declined in a joint letter dated December 15, 2005 by the major PRPs including
      Panhandle Eastern Pipe Line and Trunkline. Although no formal notice has been
      received for the Pierce Oil Springfield site, special notice letters are
      anticipated and the process of listing the site on the National Priority List
      has begun. No formal notice has been received for the McCook site. Panhandle
      Energy believes the outcome of these matters will not have a material adverse
      effect on its financial position, results of operations or cash flows.





On
      June
      16, 2005, Panhandle Eastern Pipe Line experienced a release of liquid
      hydrocarbons near Pleasant Hill, Illinois. The release occurred in the form
      of a
      mist at a valve that was in use to reduce the pressure in the pipeline as part
      of maintenance activities. The hydrocarbon mist affected several acres of
      adjacent agricultural land and a nearby marina. Approximately 27 gallons,
      initially reported as 45 gallons, of hydrocarbons reached the Mississippi River.
      Panhandle Eastern Pipe Line contacted appropriate federal and state regulatory
      agencies and the U.S. EPA took the lead role in overseeing the subsequent
      cleanup activities, which have been completed. Panhandle Eastern Pipe Line
      has
      resolved claims of affected boat owners and the marina operator. Panhandle
      Eastern Pipe Line received a violation notice from the Illinois Environmental
      Protection Agency (Illinois EPA) alleging that Panhandle Eastern Pipe Line
      is in
      apparent violation of several sections of the Illinois Environmental Protection
      Act by allowing the release. The violation notice did not propose a
      penalty.  Responses to the violation notice were submitted and the
      responses were discussed with the agency. On December 14, 2005 the Illinois
      EPA
      notified Panhandle Eastern Pipe Line that the matter might be considered for
      referral to the Office of the Attorney General, the State’s Attorney or the U.S.
      EPA for formal enforcement action and the imposition of penalties. Panhandle
      Energy believes the outcome of this matter will not have a material adverse
      effect on its financial position, results of operations or cash flows.





Panhandle  Energy
      expects the cleanup programs for all of the above matters to continue for
      several years and has estimated its share of remaining cleanup costs to range
      from approximately $4.8
      million to $13.6 million as of December 31, 2005. The
      table
      below reflects the amount of accrued liabilities recorded in the Consolidated
      Balance Sheet at December 31, 2005 to cover probable environmental response
      actions:





**December
                  31,****2005**
              
              **2004**(In
                  thousands)Current
              
              $
              2,337
              
              $
              3,046Noncurrent
              
              
              8,385
              
              
              9,866Total
                  Environmental Liabilities
              
              $
              10,722
              
              $
              12,912





During
      2005, Panhandle  Energy
      spent $2.2
      million related to environmental cleanup programs.




Based
      on
      information available at this time, and the reviews undertaken by
      Panhandle  Energy
      to
      identify potential exposure, Panhandle  Energy
      believes the amount reserved for all of the above environmental matters is
      adequate to cover the potential exposure for clean-up costs.








F-29


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





***Air
      Quality Control.***  U.S.
      EPA
      issued a final rule on regional ozone control in April 2004 that impacts
      Panhandle Energy in two Midwestern states, Indiana and Illinois. Based on a
      U.S.
      EPA guidance document negotiated with gas industry representatives in 2002,
      Panhandle Energy will be required in states that follow the EPA guidance to
      reduce nitrogen oxide ( *NOx* )
      emissions by 82 percent on the identified large internal combustion engines
      and
      will be able to trade off engines within the company in an effort to create
      a
      cost effective NOx reduction solution. The final implementation date is May
      2007. The rule will affect 20 large internal combustion engines on the Panhandle
      Energy system in Illinois and Indiana with an approximate cost of $20
      million for capital improvements through 2007, based on current projections.
      Approximately $16 million of the $20 million of capital expenditures have been
      incurred as of December 31, 2005. Indiana has promulgated state regulations
      to
      address the requirements of the NOx SIP Call rule that essentially follow the
      EPA guidance.





The
      Illinois EPA has distributed several draft versions of a rule to control NOx
      emissions from reciprocating engines and turbines statewide. The latest draft
      requires controls on engines regulated under the U.S. EPA NOx SIP Call by May
      1,
      2007 and the remaining engines by January 1, 2009. The state is requiring the
      controls to comply with U.S. EPA rules regarding the NOx SIP Call, ozone
      non-attainment and fine particulate standards. The Illinois EPA has held
      multiple meetings with industry representatives to discuss the draft rule and
      is
      expected to propose the rule in early 2006. The rule is currently being reviewed
      for potential impact to Panhandle Energy. As drafted, the rule applies to all
      Panhandle Eastern Pipe Line and Trunkline stations in Illinois and significant
      expenditures in addition to the $20
      million associated with NOx reductions described above would be required for
      emission control.





In
      2002,
      the Texas Commission on Environmental Quality enacted the Houston/Galveston
      SIP
      regulations requiring reductions in NOx emissions in an eight-county area
      surrounding Houston. Trunkline’s Cypress compressor station is affected and
      requires the installation of emission controls. New regulations also require
      certain grandfathered facilities in Texas to enter into the new source permit
      program which may require the installation of emission controls at one
      additional facility owned by Panhandle. Management estimates capital
      improvements of $17
      million will be needed at the two affected Texas locations. Approximately $6
      million of the $17 million of capital expenditures have been incurred as of
      December 31, 2005.





The
      U.S.
      EPA promulgated various Maximum Achievable Control Technology rules in February
      2004. The rules require that Panhandle Eastern Pipe Line and Trunkline control
      Hazardous Air Pollutants ( *HAPs* )
      emitted
      from certain internal combustion engines at major HAPs sources. Most Panhandle
      Eastern Pipe Line and Trunkline compressor stations are major HAPs sources.
      The
      HAPs pollutant of concern for Panhandle Eastern Pipe Line and Trunkline is
      formaldehyde. As promulgated, the rule seeks to reduce formaldehyde emissions
      by
      76 percent from these engines. Catalytic controls will be required to reduce
      emissions under these rules with a final implementation date of June 2007.
      Panhandle Eastern Pipe Line and Trunkline have approximately 20 internal
      combustion engines subject to the rules. Management expects that compliance
      with
      these regulations will necessitate an estimated expenditure of $1.7
      million for capital improvements, based on current projections.





***Spill
      Control.*** Environmental
      regulations were recently modified for U.S. EPA’s Spill Prevention, Control and
      Countermeasures ( *SPCC* )
      program. Panhandle Energy is currently reviewing the impact to its operations
      and expects to expend resources on tank integrity testing and any associated
      corrective actions as well as potential upgrades to containment structures.
      Costs associated with tank integrity testing and resulting corrective actions
      cannot be reasonably estimated at this time, but Panhandle Energy believes
      such
      costs will not have a material adverse effect on its financial position, results
      of operations or cash flows.








F-30


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





***Other
      Commitments and Contingencies.*** Late
      in
      the third quarter of 2005, Hurricanes Katrina and Rita came ashore along the
      Upper Gulf Coast after coming through the Gulf of Mexico. These hurricanes
      caused modest damage to property and equipment owned by Sea Robin, Trunkline,
      and Trunkline LNG. Based on the latest damage assessments, there are revenue,
      expense and capital impacts resulting from Hurricanes Katrina and Rita in 2005
      and 2006, mostly impacting Sea Robin and Trunkline LNG. For 2005, Panhandle
      Energy recorded lower revenues of approximately $3 million and expense increases
      of $7 million. Incremental capital outlays of approximately $900,000 were
      recorded in 2005, with additional estimated capital outlays expected in 2006
      of
      approximately $20 million, prior to any insurance recoveries. Estimated expenses
      and capital outlays primarily include repair and replacement of equipment lost
      or damaged in the hurricanes, potential abandonment costs for certain
      facilities, which will be impacted by producer decisions regarding rebuilding
      their damaged platforms and reconnecting their gas reserves to Panhandle
      Energy’s pipelines, higher insurance premiums, higher LNG terminal construction
      costs, as well as employee assistance related expenses. The revenue losses
      relate primarily to reduced volumes on Sea Robin which are expected to continue
      into 2006. Hurricane impacts have resulted in delays in the completion of
      Trunkline LNG’s Phase I and Phase II expansions from the original completion
      dates. Additionally, Panhandle Energy anticipates reimbursement from its
      property insurance carrier for damages from Hurricane Rita in excess of its
      $5
      million deductible .




In
      1993,
      the U.S. Department of the Interior announced its intention to seek, through
      its
      Mineral Management Service ( *MMS* ),
      additional royalties from gas producers as a result of payments received by
      such
      producers in connection with past take-or-pay settlements and buyouts and
      buydowns of gas sales contracts with natural gas pipelines. Panhandle Eastern
      Pipe Line and Trunkline, with respect to certain producer contract settlements,
      may be contractually required to reimburse or, in some instances, to indemnify
      producers against such royalty claims. The potential liability of the producers
      to the government and of the pipelines to the producers involves complex issues
      of law and fact, which are likely to take substantial time to resolve. If
      required to reimburse or indemnify the producers, Panhandle Eastern Pipe Line
      and Trunkline may file with FERC to recover these costs from pipeline customers.
      Management believes these commitments and contingencies will not have a material
      adverse effect on Panhandle  Energy’s
      business, financial condition or results of operations.





In
      conjunction with its acquisition by Southern Union, Panhandle  Energy
      initiated a plan designed to reduce its workforce by approximately five percent.
      The workforce reduction initiative was an involuntary plan with a voluntary
      component, and was fully implemented by the end of the third quarter of 2003.
      Total workforce reduction initiative costs of approximately $10 million are
      included in the $31.9 million of transaction costs incurred. See *Note
      1 - Corporate Structure* .





In
      conjunction with Southern Union’s investment in CCE Holdings and CCE
      Holding’s acquisition of Cross Country Energy from Enron Corp. and certain of
      its subsidiaries, Panhandle  Energy
      initiated an additional workforce reduction plan designed to reduce the
      workforce by approximately an additional six percent. Approximately $6 million
      of the approximately $7.7 million of the resulting severance and related costs
      are reimbursable by CCE Holdings pursuant to agreements between the parties
      involved. As of December 31, 2005, approximately $5.5
      million of these costs have been paid out and $5.1 million have been reimbursed
      by CCE Holdings.





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





On
      September 10, 2003, Panhandle Eastern Pipe Line provided a guarantee to CB&I
      Constructors, Inc. for the full performance by Trunkline LNG, its subsidiary,
      of
      the engineering, procurement and construction contract between Trunkline LNG
      and
      CB&I Constructors, Inc. The contract is for the construction of the
      expansion of the Trunkline LNG Lake Charles facility, and covers approximately $6
      million of the remaining cost of the Phase I expansion through the early portion
      of the second quarter of 2006 and approximately $13 million of the remaining
      cost of the Phase II expansion through mid-2006. Under the terms of the
      guarantee, Panhandle Eastern Pipe Line would be required to perform should
      Trunkline LNG be in default of its obligation, as it relates to services already
      rendered. There are no amounts being carried as liabilities for
      Panhandle  Energy’s
      obligations under these guarantees.




***Controlled
      Group Pension Liabilities.*** Southern
      Union (including certain of its divisions) sponsors a number of defined benefit
      pension plans for employees. Under applicable pension and tax laws, upon being
      acquired by Southern Union, Panhandle  Energy
      became a member of Southern Union’s “controlled group” with respect to those
      plans, and, along with Southern Union and any other members of that group,
      is
      jointly and severally liable for any failure by Southern Union (along with
      any
      other persons that may be or become a sponsor of any such plan) to fund any
      of
      these pension plans or to pay any unfunded liabilities that these plans may
      have
      if they are ever terminated. In addition, if any of the obligations of any
      of
      these pension plans is not paid when due, a lien in favor of that plan or the
      Pension Benefit Guaranty Corporation may be created against the assets of each
      member of Southern Union’s controlled group, including Panhandle  Energy
      and each of its subsidiaries. As of December 31, 2005, the aggregate amount
      of
      the projected benefit obligations of these pension plans was approximately $415.3
      million and the estimated fair value of all of the assets of these plans was
      approximately $298.3 million.





**14.
      Benefits**





***Employee
      Retirement Benefits.***  Until
      June 11, 2003, Panhandle  Energy,
      through its former parent company, participated in a defined benefit retirement
      plan which covered most employees with a minimum of one year vesting service
      and
      provided additional retirement benefits under a number of different plans,
      including certain health care and life insurance, benefits to certain management
      employees under a SERP, and benefits to substantially all its employees under
      a
      defined benefit pension plan and a defined contribution 401(k) plan
      ( *CMS
      Pension Plan* ).
      None
      of the assets or liabilities related to the CMS defined benefit retirement
      plan
      and OPEB plan were transferred in connection with Southern Union’s acquisition
      of Panhandle  Energy.
      Panhandle  Energy
      employees, following the sale, are no longer eligible to accrue benefits or
      make
      contributions to the CMS plans.





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





For
      the
      CMS Pension Plan, the total pension plan expense, which was allocated to
      Panhandle  Energy
      by
      CMS, was approximately $3.0 million for the period January 1 through June 11,
      2003. There were no contributions made by Panhandle  Energy
      to
      CMS on behalf of the CMS Pension Plan for the period January 1 through June
      11,
      2003.





The
      net
      periodic postretirement benefit cost allocated to Panhandle  Energy
      was approximately $2.6 million for the period January 1 through June 11, 2003.
      Contributions made by Panhandle  Energy
      for the OPEB plan during the CMS ownership period was $3.5 million for the
      period January 1 through June 11, 2003. In connection with Southern Union’s
      acquisition of Panhandle Energy, CMS or its affiliates retained liabilities
      with
      respect to OPEB for Panhandle  Energy
      retirees and employees who were eligible to retire with such benefits as of
      the
      closing of the Panhandle Acquisition. CMS, or its affiliates, also retained
      all
      of the assets relating to OPEB, which were estimated to be $2.0 million less
      than the liabilities retained.





Following
      its June 11, 2003 acquisition by Southern Union, Panhandle  Energy
      continues to provide certain retiree benefits through employer contributions
      to
      a qualified defined contribution plan, with the amount generally varying based
      on age and years of service. Panhandle  Energy
      generally has retained the same active employee health insurance benefits that
      were offered prior to its acquisition by Southern Union. The new OPEB plan
      resulted in the recording of a $42.8 million liability as of June 12, 2003
      and
      Panhandle  Energy
      continues to fund the plan at approximately $7.8 million per year, with $20.4
      million and $12.2 million of plan assets accumulated at December 31, 2005 and
      2004, respectively. Since retirement eligible active employees as of June 12,
      2003 have primary coverage through a benefit they are eligible to receive from
      CMS, no liability is currently recognized for these employees under the new
      Panhandle  Energy
      plan.





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





F-31


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Panhandle  Energy’s
      general policy is to fund accrued postretirement health care costs into an
      irrevocable trust. Panhandle  Energy
      accrues on an actuarial basis, health and life benefit costs over the active
      service period of employees to the date of full eligibility for the benefits.
      The following table represents a reconciliation of Panhandle Energy’s OPEB plan
      at December 31, 2005 and 2004.




**Post-acquisition****Year
                  ended**
              
              **Year
                  ended****December
                  31,**
              
              **December
                  31,****OPEB**
              
              **2005**
              
              **2004**(In
                  thousands)Change
                  in Benefit ObligationBenefit
                  obligation at beginning of period
              
              $
              62,845
              
              $
              47,085Service
                  cost
              
              
              2,264
              
              
              2,327Interest
                  cost
              
              
              2,926
              
              
              3,004Amendments
              
              
              (24,285
              )
              
              (1,600
              )Actuarial
                  loss (gain)
              
              
              (4,156
              )
              
              12,029Benefit
                  obligation at end of year
              
              $
              39,594
              
              $
              62,845Change
                  in Plan AssetsFair
                  value of plan assets at beginning of period
              
              $
              12,196
              
              $
              4,314Return
                  on plan assets
              
              
              392
              
              
              70Employer
                  contributions
              
              
              7,812
              
              
              7,812Benefits
                  paid
              
              
              -
              
              
              -Fair
                  value of plan assets at end of year
              
              $
              20,400
              
              $
              12,196Funded
                  StatusFunded
                  status at end of year
              
              $
              (19,194
              )
              $
              (50,649
              )Unrecognized
                  net actuarial loss
              
              
              10,101
              
              
              13,989Unrecognized
                  prior service cost
              
              
              (24,822
              )
              
              (1,600
              )Net
                  liability recognized at December 31
              
              $
              (33,915
              )
              $
              (38,260
              )








Panhandle
      Energy’s accumulated postretirement benefit obligation was lower by $23.3
      million at December 31, 2005 versus December 31, 2004 primarily due to
      approximately $24.3 million related to a fourth quarter of 2005 amendment to
      reduce Panhandle Energy’s future contribution levels and $9.7 million of
      reductions associated with Medicare Part D subsidies.








F-32


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      weighted-average assumptions used to determine Panhandle Energy’s benefit
      obligations for the years ended December 31, 2005 and December 31, 2004 and
      the
      period June 12, 2003 to December 31, 2003 were as follows:





**Post-acquisition****As
                  of December 31**
              
              **2005**
              
              **2004**
              
              **2003**Discount
                  rate
              
              5.50%
              
              5.75%
              
              6.25%Rate
                  of compensation increase
              
              N/A
              
              N/A
              
              N/AHealth
                  care cost trend rates:Medical
                  (graded to 4.65% and 4.75% byyear
                  2012 for years 2005 and 2004, respectively)
              
              12.00%
              
              13.00%
              
              14.00%Dental
              
              N/A
              
              N/A
              
              8.00%




Panhandle  Energy’s
      OPEB benefit cost for the periods presented consisted of the
      following:




**Post-acquisition****Year
                  Ended**
              
              **Year
                  Ended**
              
              **June
                  12 -****December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,****OPEB**
              
              **2005**
              
              **2004**
              
              **2003**(In
                  thousands)Service
                  cost
              
              $
              2,264
              
              $
              2,327
              
              $
              1,302Interest
                  cost
              
              
              2,926
              
              
              3,004
              
              
              1,425Expected
                  return on plan assets
              
              
              (891
              )
              
              (425
              )
              
              -Amortization
                  of prior service cost
              
              
              (1,077
              )
              
              -
              
              
              -Recognized
                  actuarial loss
              
              
              231
              
              
              -
              
              
              -Net
                  periodic benefit cost
              
              $
              3,453
              
              $
              4,906
              
              $
              2,727











The
      weighted-average assumptions used to determine Panhandle Energy’s OPEB benefit
      costs for the periods presented were:


**Post-acquisition**
              
              **Post-acquisition****Period
                  Ended December 31**
              
              **2005**
              
              **2004**
              
              **2003**Discount
                  rate
              
              5.75%
              
              6.25%
              
              6.00%Rate
                  of compensation increase
              
              N/A
              
              N/A
              
              N/AExpected
                  long-term return on plan assets:a.
                  Union VEBA rate
              
              7.00%
              
              7.00%
              
              N/Ab.
                  Non union VEBA rate
              
              5.00%
              
              5.00%
              
              N/AHealth
                  care cost trend rates:Medical
                  (graded to 4.75% by year 2012)
              
              12.00%
              
              13.00%
              
              13.00%Dental
                  (graded to 4.75% by year 2012)
              
              N/A
              
              8.00%
              
              8.00%





F-33


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      sensitivity to changes in assumed health care cost trend rates for Panhandle
      Energy’s OPEB is as follows:




**One
                  Percentage**
              
              **One
                  Percentage****Point
                  Increase**
              
              **Point
                  Decrease**(In
                  thousands)Effect
                  on total service and interest cost components
              
              $
              848
              
              $
              (660
              )Effect
                  on postretirement benefit obligation
              
              $
              8,063
              
              $
              (6,364
              )








***Discount
      Rate Selection.*** The
      discount rate for each measurement date is selected via a benchmark approach
      that reflects comparative changes in the Moody’s Long Term Corporate Bond Yield
      for AA Bond ratings with maturities 20 years and above and the Citigroup Pension
      Liability Index Discount Rate. The result is compared for consistency with
      the
      single rate determined by projecting the aggregate employer provided benefit
      cash flows from each plan for each future year, discounting such projected
      cashflows using annual spot yield rates published as the Citigroup Pension
      Discount Curve on the Society of Actuaries website for each measurement date
      and
      determining the single discount rate that produces the same discounted value.
      The result is rounded to the nearest multiple of 25 basis points.





***Plan
      Asset Information***





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





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





Panhandle  Energy’s
      OPEB weighted-average asset allocations by asset category are as
      follows:




**December
                  31,****2005**
              
              **2004**Equity
                  securities
              
              
              
              
              
              0
              %
              
              0
              %Debt
                  securities
              
              
              
              
              
              0
              %
              
              0
              %Cash
                  and cash equivalents
              
              
              
              
              
              100
              %
              
              100
              %Total
              
              
              
              
              
              100
              %
              
              100
              %





***Cash
      Flow Information***





Panhandle  Energy
      expects to contribute an amount of approximately $7.8 million to its OPEB plan
      in 2006 and approximately $7.8 million annually thereafter until modified by
      rate case proceedings.





The
      following table illustrates the estimated benefit payments for other
      post-retirement benefits, which reflect expected future service, as appropriate,
      that are projected to be paid:





**Year**
            ****
            **Expected
                Benefit Before Effect of Medicare Part D**
            ****
            **Payments
                Medicare Part D**
            ****
            **Net**2006
            
            $
            42,534
            
            $
            0
            
            $
            42,5342007
            
            
            81,276
            
            
            0
            
            
            81,2762008
            
            
            171,806
            
            
            0
            
            
            171,8062009
            
            
            334,306
            
            
            0
            
            
            334,3062010
            
            
            623,217
            
            
            3,899
            
            
            619,318Years
                2011 through 2015
            
            
            11,147,149
            
            
            198,522
            
            
            10,948,627








***Vacation
      Plan Change.*** Effective
      January 1, 2006, employees will earn vacation on a monthly as incurred basis
      versus having their complete vacation entitlement earned at the beginning of
      the
      year. At December 31, 2005, Panhandle Energy reduced the accrued obligation
      by
      $3.8 million to reflect this new vacation pay practice.





***Recently
      Enacted Legislation.*** The
      Medicare Prescription Drug Act was signed into law December 8, 2003. The Act
      introduces a prescription drug benefit under Medicare (Medicare Part D) as
      well
      as a federal subsidy, which is not taxable, to sponsors of retiree healthcare
      benefit plans that provide a prescription drug benefit that is at least
      actuarially equivalent to Medicare Part D. Issued by the FASB in May 2004,
      FSP
      FAS 106-2 requires entities to record the impact of the Medicare Prescription
      Drug Act as an actuarial gain in the postretirement benefit obligation for
      postretirement benefit plans that provide drug benefits covered by that
      legislation. Panhandle  Energy
      adopted this FSP as of March 31, 2005. The effect of Medicare Part D was a
      one-time actuarial gain to liability (a reduction in APBO) of $9.7 million
      and a
      reduction of $1.2 million in 2005 expense. The effect of this FSP may vary
      as a
      result of any future changes to Panhandle Energy’s benefit plans.





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





F-34


**PANHANDLE
      EASTERN PIPE LINE COMPANY, LP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      following table provides information on stock options granted, exercised,
      canceled and outstanding under the 2003 Plan for employees of Panhandle Energy
      for the year ended December 31, 2005:




**2003
                  Plan****Weighted****Shares
                  Under**
              
              **Average****Option**
              
              **Exercise
                  Price**Outstanding
                  December 31, 2003
              
              
              -Granted
              
              
              254,708
              
              $
              16.83Exercised
              
              
              -Canceled
              
              
              (31,423
              )
              
              16.83Outstanding
                  December 31, 2004
              
              
              223,285
              
              $
              16.83Granted
              
              
              177,991
              
              $
              22.90Exercised
              
              
              (31,425
              )
              $
              16.83Canceled
              
              
              (8,821
              )
              
              16.83Outstanding
                  December 31, 2005
              
              
              361,030
              
              $
              19.82





The
      weighted average remaining contractual life of options outstanding under the
      2003 Plan at December 31, 2005 was 8.87 years. There were 30,840 shares
      exercisable under the 2003 Plan at December 31, 2005.





Panhandle  Energy’s
      former parent company retained financial responsibility for all stock options
      issued prior to the sale of Panhandle  Energy
      as
      of June 11, 2003. There were no compensation costs, which were allocated by
      its
      former parent company for the period January 1 through June 11,
      2003.





**15.
      Quarterly Financial Data (Unaudited)**








**First**
              
              **Second**
              
              **Third**
              
              **Fourth****Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Total**(In
                  thousands)**2005**Operating
                  revenue
              
              $
              135,400
              
              $
              110,421
              
              $
              115,945
              
              
              143,467
              
              $
              505,233Operating
                  income
              
              
              62,514
              
              
              40,395
              
              
              46,109
              
              
              61,387
              
              
              210,405Net
                  earnings
              
              
              31,470
              
              
              18,670
              
              
              21,470
              
              
              29,952
              
              
              101,562**First**
              ****
              ****
              **Second**
              ****
              ****
              **Third**
              ****
              ****
              **Fourth**
              ****
              ****
              ****
              ********
              ****
              **Quarter**
              ****
              ****
              **Quarter**
              ****
              ****
              **Quarter**
              ****
              ****
              **Quarter**
              
              
              **Total**(In
                  thousands)**2004**Operating
                  revenue
              
              $
              138,169
              
              $
              108,251
              
              $
              109,264
              
              $
              133,480
              
              $
              489,164Operating
                  income
              
              
              65,771
              
              
              34,117
              
              
              37,917
              
              
              52,204
              
              
              190,009Net
                  earnings
              
              
              33,057
              
              
              14,144
              
              
              16,056
              
              
              24,676
              
              
              87,933














F-35


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


**16.
      Subsequent Event**





On
      March
      1, 2006, Southern Union entered into a bridge loan to fund the acquisition
      of
      Sid Richardson Energy Services, Ltd. and related entities (collectively, *SRES)* ,
      in the
      principal amount of $1.6 billion. The bridge loan is subject to customary terms
      and conditions and becomes due and payable on February 28, 2007. Southern
      Union’s obligations under the bridge loan are secured by Southern Union’s pledge
      of its interests in Panhandle Energy and a pledge of the equity interests in
      SRES.











F-36





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











To
      Southern Union Company and Board of Managers of


Panhandle
      Eastern Pipe Line Company, LP:





In
      our
      opinion, the accompanying consolidated balance
      sheet and the related consolidated statements of operations, owners’ equity and comprehensive income and cash flows
      present fairly, in all material respects, the financial position of Panhandle
      Eastern Pipe Line Company, LP and its subsidiaries (collectively, “the
      Company”) **** at
      December 31, 2005  and
      2004,
      and the results of their operations and their cash flows for the years ended
      December 31, 2005 and 2004 and the period from June 12 through December 31,
      2003, in conformity with accounting principles generally accepted in the United
      States of America. These financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits. We conducted our audits of these
      statements in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). Those standards require that we plan and
      perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.











/s/
      PricewaterhouseCoopers LLP











Houston,
      Texas


March
      16,
      2006











F-37





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











To
      Southern Union Company and Board of Managers of


Panhandle
      Eastern Pipe Line Company, LP:








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





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








/s/
      PricewaterhouseCoopers LLP





Houston,
      Texas


March
      5,
      2004





F-38