<PAGE>
================================================================================

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

                                       OR

      [ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
              For the transition period from ______ to  ______


<TABLE>
<CAPTION>
Commission                     Registrant; State of Incorporation;                IRS Employer
File Number                      Address; and Telephone Number                  Identification No.
-----------                      -----------------------------                  ------------------
<S>            <C>                                                                 <C>
   1-2921                   PANHANDLE EASTERN PIPE LINE COMPANY, LLC               44-0382470
                             (A Delaware Limited Liability Company)
               5444 Westheimer Road, P.O. Box 4967, Houston, Texas 77210-4967
                                        (713)989-7000
</TABLE>

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 Registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

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<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                             Page
                                                                                                             ----
<S>                                                                                                          <C>
Glossary...................................................................................................... 3

PART I:  FINANCIAL INFORMATION
Item 1.  Financial Statements
     Consolidated Statements of Operations.....................................................................5
     Consolidated Statements of Cash Flows.....................................................................6
     Consolidated Balance Sheets...............................................................................7
     Consolidated Statements of Owner's Equity and Comprehensive Income........................................9
     Condensed Notes to Consolidated Financial Statements.....................................................10
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operation.................26
Item 3.  Quantitative and Qualitative Disclosures about Market Risk...........................................41
Item 4.  Controls and Procedures..............................................................................41

PART II: OTHER INFORMATION
Item 1.  Legal Proceedings....................................................................................41
Item 6.  Exhibits and Reports of Form 8-K.....................................................................41
SIGNATURES....................................................................................................42
CERTIFICATIONS................................................................................................45
</TABLE>
<PAGE>
                                    GLOSSARY


         Certain terms used in the text and financial statements are defined
below.

APB....................................... Accounting Principles Board
APB Opinion No. 30........................ APB Opinion No. 30, "Reporting
                                           Results of Operations - Reporting the
                                           Effects of Disposal of a Segment of a
                                           Business"
bcf....................................... Billion cubic feet
BG LNG Services........................... BG LNG Services, Inc., a subsidiary
                                           of BG Group of the United Kingdom
Centennial................................ Centennial Pipeline, LLC
Clean Air Act............................. Federal Clean Air Act, as amended
CMS....................................... CMS Energy and its subsidiaries
CMS Capital............................... CMS Capital Corp., a subsidiary of
                                           CMS Energy
CMS Energy................................ CMS Energy Corporation, indirect
                                           parent of Panhandle Eastern Pipe Line
                                           Company prior to June 11, 2003
CMS Energy Common Stock................... Common stock of CMS Energy, par value
                                           $.01 per share
CMS Enterprises........................... CMS Enterprises Company, a subsidiary
                                           of CMS Energy
CMS Gas Transmission...................... CMS Gas Transmission Company, direct
                                           parent of Panhandle Eastern Pipe Line
                                           Company prior to June 11, 2003
CMS MST................................... CMS Marketing, Services and Trading
                                           Company, a subsidiary of CMS
                                           Enterprises
Consumers................................. Consumers Energy Company, a
                                           subsidiary of CMS Energy
Duke Energy............................... Duke Energy Corporation, a
                                           non-affiliated company
EPA....................................... U. S. Environmental Protection Agency
FASB...................................... Financial Accounting Standards Board
FASB Interpretation No. 45................ FASB Interpretation No. 45,
                                           "Guarantor's Accounting and
                                           Disclosure Requirement for
                                           Guarantees, Including Indirect
                                           Guarantees of Indebtedness of Others"
FASB Interpretation No. 46................ FASB Interpretation No. 46,
                                           "Consolidation of Variable Interest
                                           Entities"
FERC...................................... Federal Energy Regulatory Commission
Guardian ................................. Guardian Pipeline, L.L.C.
INGAA .................................... Interstate Natural Gas Association of
                                           America
LNG....................................... Liquefied natural gas
LNG Holdings.............................. Trunkline LNG Holdings LLC, a
                                           directly and indirectly wholly-owned
                                           subsidiary of Panhandle Holdings, LLC
MACT...................................... Maximum Achievable Control Technology
MD&A...................................... Management's Discussion and Analysis
Missouri Gas Energy....................... Missouri Gas Energy, a division of
                                           Southern Union
Moody's .................................. Moody's Investors Service, Inc.
MPSC...................................... Missouri Public Service Commission
NOPR...................................... Notice of Proposed Rulemaking
OPEB...................................... Postretirement benefit plans other
                                           than pensions for retired employees
Panhandle................................. Panhandle Eastern Pipe Line Company,
                                           LLC, including all of its
                                           subsidiaries
Panhandle Eastern Pipe Line............... Panhandle Eastern Pipe Line Company,
                                           LLC, a wholly owned subsidiary of
                                           Southern Union Panhandle, LLC
                                           effective June 12, 2003
PCB....................................... Polychlorinated biphenyl
PP&E...................................... Property, plant and equipment


                                       3
<PAGE>
Sea Robin................................. Sea Robin Pipeline Company, a
                                           Louisiana joint venture, which is an
                                           indirect wholly-owned subsidiary of
                                           Panhandle
SEC....................................... U.S. Securities and Exchange
                                           Commission
SERP...................................... Supplemental Executive Retirement
                                           Plan
SFAS...................................... Statement of Financial Accounting
                                           Standards
SFAS No. 5................................ SFAS No. 5, "Accounting for
                                           Contingencies"
SFAS No. 34............................... SFAS No. 34, "Capitalization of
                                           Interest Cost"
SFAS No. 87............................... SFAS No. 87, "Employers' Accounting
                                           for Pensions"
SFAS No. 106.............................. SFAS No. 106, "Employers' Accounting
                                           for Postretirement Benefits Other
                                           than Pensions"
SFAS No. 121.............................. SFAS No. 121, "Accounting for the
                                           Impairment of Long-Lived Assets and
                                           for Long-Lived Assets to be Disposed
                                           of"
SFAS No. 123.............................. SFAS No. 123, "Accounting for
                                           Stock-Based Compensation"
SFAS No. 133.............................. SFAS No. 133, "Accounting for
                                           Derivative Instruments and Hedging
                                           Activities, as amended and
                                           interpreted"
SFAS No. 142.............................. SFAS No. 142, "Goodwill and Other
                                           Intangible Assets"
SFAS No. 143.............................. SFAS No. 143, "Accounting for Asset
                                           Retirement Obligations"
SFAS No. 145.............................. SFAS No. 145, "Rescission of FASB
                                           Statements No. 4, 44, and 64,
                                           Amendment of FASB Statement No. 13,
                                           and Technical Corrections"
SFAS No. 146.............................. SFAS No. 146, "Accounting for Costs
                                           Associated with Exit or Disposal
                                           Activities"
SFAS No. 148.............................. SFAS No. 148, "Accounting for
                                           Stock-Based Compensation"
SFAS No. 149.............................. SFAS No. 149, "Amendment of Statement
                                           133 on Derivative Instruments and
                                           Hedging Activities"
SFAS No. 150.............................. SFAS No. 150, "Accounting for Certain
                                           Financial Instruments with
                                           Characteristics of both Liabilities
                                           and Equity"
SIPS...................................... State Implementation Plans
Southwest Gas Storage..................... Pan Gas Storage, LLC, a wholly-owned
                                           subsidiary of Panhandle
Southern Union............................ Southern Union Company, the parent of
                                           Southern Union Panhandle
Southern Union Panhandle.................. Southern Union Panhandle Corp., LLC,
                                           a wholly owned subsidiary of Southern
                                           Union
Trunkline................................. Trunkline Gas Company, LLC, a
                                           wholly-owned subsidiary of Panhandle
Trunkline LNG............................. Trunkline LNG Company, LLC, a
                                           wholly-owned subsidiary of LNG
                                           Holdings


                                       4
<PAGE>
                   PANHANDLE EASTERN PIPE LINE COMPANY, LLC
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                                  (IN MILLIONS)



<Table>
<Caption>
                                            Post-acquisition |     Pre-acquisition       Post-acquisition |     Pre-acquisition
                                            ---------------- | -----------------------   ---------------- | ----------------------
                                                             |            Three Months                    |             Six Months
                                                June 12-     | April 1-      Ended            June 12-    |  Jan 1-        Ended
                                                June 30,     | June 11,     June 30,          June 30,    | June 11,      June 30,
                                                  2003       |   2003         2002              2003      |   2003         2002
                                                --------     | --------     --------          --------    | --------     --------
<S>                                            <C>           | <C>        <C>                 <C>         | <C>         <C>
Operating Revenue                                            |                                            |
      Transportation and storage of                          |                                            |
        natural gas                             $     21     | $     81    $     90           $     21    | $    197    $    204
      LNG terminalling revenue                         3     |       13          16                  3    |       27          29
      Equity losses from unconsolidated                      |                                            |
        subsidiaries                                  --     |       --          (2)                --    |       --          (3)
      Other                                            1     |        3           2                  1    |       10           9
                                                --------     | --------    --------           --------    | --------    --------
           Total operating revenue                    25     |       97         106                 25    |      234         239
                                                --------     | --------    --------           --------    | --------    --------
                                                             |                                            |
Operating Expenses                                           |                                            |
      Operation, maintenance and general              10     |       38          51                 10    |       91         100
      Depreciation and amortization                    3     |        9          13                  3    |       23          26
      General taxes                                    2     |        5           5                  2    |       12          12
                                                --------     | --------    --------           --------    | --------    --------
           Total operating expenses                   15     |       52          69                 15    |      126         138
                                                --------     | --------    --------           --------    | --------    --------
                                                             |                                            |
                                                             |                                            |
Pretax Operating Income                               10     |       45          37                 10    |      108         101
                                                             |                                            |
Other Income, Net                                     --     |        2           3                 --    |        6           6
                                                             |                                            |
Interest Expense                                             |                                            |
      Interest on long-term debt                       2     |       15          18                  2    |       33          38
      Other interest                                  --     |        1           1                 --    |        3          (1)
                                                --------     | --------    --------           --------    | --------    --------
           Total interest expense                      2     |       16          19                  2    |       36          37
                                                             |                                            |
Minority Interest                                     --     |       --           1                 --    |       --           2
                                                             |                                            |
Income Before Income Taxes                             8     |       31          20                  8    |       78          68
                                                             |                                            |
Income Taxes                                           3     |       12           8                  3    |       30          27
                                                --------     | --------    --------           --------    | --------    --------
                                                             |                                            |
Income Before Cumulative Effect of                           |                                            |
   Change in Accounting Principle                      5     |       19          12                  5    |       48          41
                                                             |                                            |
Cumulative Effect of Change in                               |                                            |
  Accounting Principle,                                      |                                            |
      Net of Tax:                                            |                                            |
           Goodwill, FAS 142                          --     |       --          --                 --    |       --        (369)
           Asset Retirement Obligations,                     |                                            |
              FAS 143                                 --     |       --          --                 --    |        2          --
                                                --------     | --------    --------           --------    | --------    --------
                                                             |                                            |
Consolidated Net Income (Loss)                  $      5     | $     19    $     12           $      5    | $     50    $   (328)
                                                ========     | ========    ========           ========    | ========    ========
</TABLE>

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


                                       5


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



<Table>
<Caption>
                                                                            Post-acquisition  |        Pre-acquisition
                                                                            ----------------  |        ---------------
                                                                                June 12-      |     Jan 1-        Six Months
                                                                                June 30,      |    June 11,      Ended June 30,
                                                                                  2003        |      2003             2002
                                                                              ------------    |  ------------     ------------
<S>                                                                           <C>             |  <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                                          |
      Net income (loss)                                                       $          5    |  $         50     $       (328)
      Adjustments to reconcile net income (loss) to net cash provided                         |
           by operating activities:                                                           |
         Depreciation and amortization                                                   3    |            23               25
         Cumulative effect of change in accounting principle                          --      |            (2)             369
         Deferred income taxes                                                           3    |            30               32
         Changes in current assets and liabilities                                      15    |            10               (4)
         Other, net                                                                   --      |          --                 (1)
                                                                              ------------    |  ------------     ------------
           Net cash provided by operating activities                                    26    |           111               93
                                                                              ------------    |  ------------     ------------
                                                                                              |
CASH FLOWS FROM INVESTING ACTIVITIES                                                          |
      Capital and investment expenditures                                               (4)   |           (30)             (41)
      Purchase of system gas                                                          --      |            (3)            --
      Sale of Centennial                                                              --      |            40             --
      Retirements and other                                                             (1)   |          --                 (2)
                                                                              ------------    |  ------------     ------------
           Net cash provided by (used in) investing activities                          (5)   |             7              (43)
                                                                              ------------    |  ------------     ------------
                                                                                              |
CASH FLOWS FROM FINANCING ACTIVITIES                                                          |
      Contribution from LNG Holdings' Minority Interest                               --      |          --                  1
      Net (increase)/decrease in current Note receivable - CMS Capital                --      |           (62)             133
      Debt issuance                                                                   --      |            10             --
      Debt retirements                                                                --      |           (46)            (132)
      Debt issuance costs                                                             --      |          --                 (3)
      Gain on interest rate swap                                                      --      |          --                  3
      Return of capital                                                               --      |           (40)            --
      Dividend                                                                        --      |          --                (28)
                                                                              ------------    |  ------------     ------------
           Net cash used in financing activities                                      --      |          (138)             (26)
                                                                              ------------    |  ------------     ------------
                                                                                              |
      Net Increase (Decrease) in Cash and Temporary Cash Investments                    21    |           (20)              24
                                                                                              |
      CASH AND TEMPORARY CASH INVESTMENTS,                                                    |
           BEGINNING OF PERIOD                                                          61    |            81                3
      CASH AND TEMPORARY CASH INVESTMENTS,                                                    |
                                                                              ------------    |  ------------     ------------
           END OF PERIOD                                                      $         82    |  $         61     $         27
                                                                              ============    |  ============     ============
                                                                                              |
                                                                                              |
OTHER CASH FLOW ACTIVITIES WERE:                                                              |
      Interest paid (net of amounts capitalized)                              $       --      |  $         38     $         43
      Income taxes paid (net of refunds)                                              --      |          --                  2
OTHER NONCASH INVESTING AND FINANCING ACTIVITIES WERE:                                        |
      Return of capital - Guardian equity investment                          $       --      |  $        (28)    $         --
      Property contributions received                                                 --      |            15               --
</TABLE>

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


                                       6
<PAGE>
                    PANHANDLE EASTERN PIPE LINE COMPANY, LLC
                           CONSOLIDATED BALANCE SHEETS
                                  (IN MILLIONS)


<TABLE>
<CAPTION>
                                                                         Post-acquisition  |
                                                                         ----------------  |  Pre-acquisition
                                                                           (Unaudited)     |  ---------------
                                                                             June 30,      |   December 31,
                                                                               2003        |       2002
                                                                            ----------     |   ------------
<S>                                                                         <C>            |    <C>
ASSETS                                                                                     |
                                                                                           |
PROPERTY, PLANT AND EQUIPMENT                                                              |
      Cost                                                                  $    1,878     |    $    1,765
      Less accumulated depreciation and amortization                                 3     |           188
                                                                            ----------     |    ----------
          Sub-total                                                              1,875     |         1,577
      Construction work-in-progress                                                 60     |            44
                                                                            ----------     |    ----------
          Net property, plant and equipment                                      1,935     |         1,621
                                                                            ----------     |    ----------
                                                                                           |
INVESTMENTS IN AFFILIATES                                                            4     |            68
                                                                            ----------     |    ----------
                                                                                           |
CURRENT ASSETS                                                                             |
      Cash and temporary cash investments at cost, which approximates market        82     |            81
      Restricted cash                                                             --       |            64
      Accounts receivable, less allowances of $4 and $8 as of June 30, 2003                |
          and December 31, 2002, respectively                                       45     |            50
      Accounts receivable - related parties                                       --       |             9
      Gas imbalances - receivable                                                   35     |            18
      System gas and operating supplies                                             47     |            41
      Deferred income taxes                                                       --       |            13
      Note receivable - related party                                             --       |            60
      Other                                                                         10     |             6
                                                                            ----------     |    ----------
          Total current assets                                                     219     |           342
                                                                            ----------     |    ----------
                                                                                           |
      Goodwill, net                                                               --       |           113
      Debt issuance cost                                                          --       |            17
      Deferred income taxes                                                       --       |            40
      Non-current system gas                                                        23     |            15
      Other                                                                          7     |            16
                                                                            ----------     |    ----------
                                                                                           |
      TOTAL ASSETS                                                          $    2,188     |    $    2,232
                                                                            ==========     |    ==========
</TABLE>


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

                                       7
<PAGE>
                    PANHANDLE EASTERN PIPE LINE COMPANY, LLC
                          CONSOLIDATED BALANCE SHEETS
                                 (IN MILLIONS)

<TABLE>
<CAPTION>
                                                                                  Post-acquisition   |
                                                                                  -----------------  |   Pre-acquisition
                                                                                     (Unaudited)     |   ---------------
                                                                                       June 30,      |    December 31,
                                                                                         2003        |        2002
                                                                                     ------------    |    -------------
<S>                           <C>                                                    <C>             |     <C>
OWNER'S EQUITY AND LIABILITIES                                                                       |
                                                                                                     |
CAPITALIZATION                                                                                       |
      Owner's equity                                                                                 |
        Common stock, no par, 1,000 shares authorized, issued and outstanding        $        --     |     $          1
        Accumulated other comprehensive (loss) income                                           1    |              (39)
        Other paid-in capital                                                                 659    |            1,281
        Retained earnings/(deficit)                                                             5    |             (341)
        Note receivable - CMS Capital                                                         --     |             (150)
        Tax sharing receivable - Southern Union                                               (85)   |              --
                                                                                     ------------    |     ------------
          Total owner's equity                                                                580    |              752
      Long-term debt                                                                          915    |            1,150
                                                                                     ------------    |     ------------
          Total capitalization                                                              1,495    |            1,902
                                                                                     ------------    |     ------------
                                                                                                     |
CURRENT LIABILITIES                                                                                  |
      Accounts payable                                                                         15    |                9
      Accounts payable - related parties                                                        3    |                8
      Current portion of long-term debt                                                       304    |               12
      Note payable                                                                           --      |               30
      Gas imbalances - payable                                                                 65    |               41
      Accrued taxes                                                                             1    |               11
      Accrued interest                                                                         23    |               25
      Accrued liabilities                                                                      24    |               21
      Other                                                                                    32    |               38
                                                                                     ------------    |     ------------
          Total current liabilities                                                           467    |              195
                                                                                     ------------    |     ------------
                                                                                                     |
      Deferred income taxes                                                                    89    |             --
      Post-retirement benefits                                                                 33    |               53
      Other                                                                                   104    |               82
                                                                                     ------------    |     ------------
                                                                                                     |
      TOTAL OWNER'S EQUITY AND LIABILITIES                                           $      2,188    |     $      2,232
                                                                                     ============    |     ============
</TABLE>



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


                                       8
<PAGE>
                    PANHANDLE EASTERN PIPE LINE COMPANY, LLC
       CONSOLIDATED STATEMENT OF OWNER'S EQUITY AND COMPREHENSIVE INCOME
                                 (IN MILLIONS)
<TABLE>
<CAPTION>
                                                  Accumulated                                  Note       Tax Sharing
                                                    Other                       Retained    Receivable-   Receivable
                                       Common    Comprehensive   Other Paid-in   Earnings      CMS         Southern
                                       Stock        Income          Capital     (Deficit)     Capital       Union         Total
                                     ----------  -------------   -------------  ---------   -----------   -----------  -----------

<S>                                  <C>         <C>             <C>           <C>          <C>           <C>          <C>
Balance at January 1, 2003
  (Pre-acquisition)                          1    $      (39)     $    1,281   $     (341)  $     (150)   $            $      752

    Net earnings                           --            --              --            50          --                          50
    Unrealized loss related to
      interest rate swaps                  --             (4)            --           --           --                          (4)

    Return of capital - Centennial         --            --             (40)                       --                         (40)
    Return of capital - Guardian
      equity investment                    --            --             (28)                       --                         (28)
    Capital contribution from CMS
      Gas Transmission                     --            --              15                        --                          15
                                     ----------   ----------      ----------   ----------   ----------    ---------    ----------

Balance at June 11, 2003
  (Acquisition date)                         1          (43)          1,228         (291)        (150)                        745

    Acquisition adjustments to
      eliminate original balances           (1)          43          (1,228)         291          150                        (745)
    Pushdown of purchase price
      and related costs                    --            --              659          --          --                          659
    Tax sharing receivable -
      Southern Union                       --            --                           --          --             (85)         (85)
                                     ----------   ----------      ----------   ----------   ----------    ----------   ----------
        Subtotal                           --            --              659          --          --             (85)         574

    Net earnings                           --            --              --             5         --                            5
    Unrealized gain related to
      interest rate swaps                  --              1             --           --          --                            1
                                     ----------   ----------      ----------   ----------   ----------    ----------   ----------

Balance at June 30, 2003
  (Post-acquisition)                 $     --     $        1      $      659   $        5   $     --      $      (85)  $      580
                                     ==========   ==========      ==========   ==========   ==========    ==========   ==========
</TABLE>


<TABLE>
<CAPTION>

                                         Post-acquisition  |      Pre-acquisition
                                         ----------------  |      ---------------
                                             June 12-      |    Jan 1-     Six Months
                                             June 30,      |   June 11,       Ended
                                               2003        |     2003     June 30, 2002
                                            ----------     |  ----------  -------------
<S>                                         <C>            |  <C>          <C>
Other comprehensive income                                 |
  Interest Rate Swaps                                      |
    Unrealized gain (loss) related to                      |
      interest rate swaps, net of tax       $        1     |  $       (4)  $       (4)
                                                           |
Net income (loss)                                    5     |          50         (328)
                                            ----------     |  ----------   ----------
                                                           |
Total Comprehensive Income (Loss)           $        6     |  $       46   $     (332)
                                            ==========     |  ==========   ==========
</TABLE>


                                        9
<PAGE>
                    PANHANDLE EASTERN PIPE LINE COMPANY, LLC
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

These interim financial statements are unaudited, but in management's opinion
reflect all adjustments necessary (including both normal recurring as well as
non-recurring) for a fair presentation of financial position, results of
operations and cash flows for the periods presented and should be read in
conjunction with the financial statements and notes thereto contained in
Panhandle's Form 10-K for the year ended December 31, 2002. Due to the seasonal
nature of Panhandle's operations, the results as presented for this interim
period are not necessarily indicative of results to be achieved for the fiscal
year.

1. CORPORATE STRUCTURE

Panhandle is an indirect wholly-owned subsidiary of Southern Union since June
11, 2003 when Southern Union acquired Panhandle from CMS. Panhandle was
incorporated in Delaware in 1929. Panhandle is primarily engaged in the
interstate transportation and storage of natural gas, owns a LNG regasification
plant and related facilities and is subject to the rules and regulations of the
FERC. It conducts operations in the central, gulf coast, midwest, and southwest
regions of the United States.

Southern Union acquired Panhandle from CMS for approximately $584 million in
cash (subject to a final working capital adjustment) plus 3 million shares of
Southern Union common stock valued at approximately $49 million based on market
prices at closing, and in connection therewith incurred transaction costs
estimated at $29 million. At the time of the acquisition, Panhandle had
approximately $1.159 billion of debt outstanding that it retained. Southern
Union financed the acquisition with most of the approximately $420 million in
cash proceeds it received for the January 1, 2003 sale of its Texas operations,
and some of the net proceeds from its June 2003 offerings of common stock.
Southern Union structured the Panhandle acquisition and the sale of its Texas
operations in a manner intended to qualify as a like-kind exchange of property
under Section 1031 of the Internal Revenue Code of 1986, as amended. Panhandle
Eastern Pipe Line, and five of its subsidiaries, as well as the Southern Union
subsidiary that became Panhandle's direct parent upon the acquisition, converted
from Delaware corporations to Delaware limited liability companies in June 2003.

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

The acquisition was accounted for using the purchase method of accounting in
accordance with accounting principles generally accepted in the United States
with Panhandle allocating the purchase


                                       10
<PAGE>
price paid by Southern Union to Panhandle's net assets as of the acquisition
date based on preliminary estimates. Accordingly, the post-acquisition financial
statements reflect a new basis of accounting and pre-acquisition period and
post-acquisition period financial results (separated by a heavy black line) are
presented but are not comparable.

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

<TABLE>
<CAPTION>
                                                                   IN MILLIONS

<S>                                                                <C>
Owner's Equity, pre-acquisition                                          $745
Fair Value adjustments to pre-acquisition net assets:
 Current assets (excluding system gas)                        (1)
 System gas                                                   13
 Property, plant and equipment (excluding intangibles)       238
 Intangibles                                                  20
 Goodwill                                                   (113)
 Deferred debt costs                                         (14)
 Current liabilities                                         (30)
 Long-term debt                                              (65)
                                                           -----
  Net fair value adjustments                                               48
  Net liabilities retained by CMS                                          51
  Elimination of CMS Capital Note Receivable                             (185)
  Deferred tax liability                                                  (85)
                                                                        -----
    Owner's Equity, post-acquisition                                     $574
                                                                        =====
</TABLE>

Estimated intangibles reflect $20 million of fair value assigned to customer
relationships. The intangible is currently estimated to be amortizable over a
period of five years.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

PRINCIPLES OF CONSOLIDATIONS: The consolidated financial statements include the
accounts of Panhandle and all majority-owned subsidiaries, after eliminating
significant intercompany transactions and balances. Investments in businesses
not controlled by Panhandle, but over which it has significant influence, are
accounted for using the equity method.

USE OF ESTIMATES: The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires management to make judgments, estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The principles of SFAS No. 5
guide the recording of contingent liabilities within the financial statements.
Certain accounting principles require subjective and complex judgments used in
the preparation of financial statements. Accordingly, a different financial
presentation could result depending on the judgment, estimates or assumptions
that are used. Such estimates and assumptions, include, but are not specifically
limited to: depreciation and amortization, interest rates, discount rates,
health care trend rates, inflation rates, future commodity prices,
mark-to-market valuations, investment returns, volatility in the price of
Southern Union and CMS Energy Common Stock, impact of new accounting standards,
future


                                       11
<PAGE>
costs associated with long-term contractual obligations, future compliance costs
associated with environmental regulations, and continuing creditworthiness of
counterparties. Although these estimates are based on management's knowledge of
current expected future events, actual results could materially differ from
those estimates.

SYSTEM GAS AND OPERATING SUPPLIES: System gas and operating supplies consists of
gas held for operations and materials and supplies, carried at the lower of
weighted average cost or market. The gas held for operations that is not
expected to be consumed in operations in the next twelve months has been
reflected in non-current assets. All system gas and materials and supplies
purchased are recorded at the lower of cost or market, while net gas received
from and owed back to customers is valued at market.

PROPERTY, PLANT AND EQUIPMENT: PP&E is stated at cost and includes intangible
assets and related amortization. Panhandle capitalizes all construction-related
direct labor and material costs, as well as indirect construction costs. The
cost of replacements and betterments that extend the useful life of PP&E is also
capitalized. The cost of repairs and replacements of minor items of PP&E is
charged to expense as incurred. Depreciation and amortization is generally
computed using the straight-line method.

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

FUEL TRACKER: Liability accounts are maintained for net volumes of fuel gas owed
to customers collectively. Trunkline records an asset whenever fuel is due from
customers from prior underrecovery based on contractual and specific tariff
provisions which support the treatment as an asset. Panhandle's other companies
that are subject to fuel tracker provisions record an expense when fuel is under
recovered. The pipelines' fuel reimbursement is in-kind and non-discountable.

RELATED PARTY TRANSACTIONS: Panhandle has a number of significant transactions
with its former related parties. These transactions include revenues for the
transportation of natural gas for Consumers, and other CMS affiliated entities,
which are based on regulated prices, market prices or competitive bidding.
Related party expenses include payments for services provided by affiliates and
payment of overhead costs and management and royalty fees to CMS , as well as
allocated benefit plan costs. Other income was primarily related to interest
income from the Note receivable - CMS Capital (See Note 5, Related Party
Transactions).

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


                                       12
<PAGE>
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: Panhandle amortizes premiums,
discounts and expenses incurred in connection with the issuance of long-term
debt consistent with the terms of the respective debt instrument.

ENVIRONMENTAL EXPENDITURES: Environmental expenditures that relate to an
existing condition caused by past operations that do not contribute to current
or future revenue generation are expensed. Environmental expenditures relating
to current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or clean-ups are
probable and the costs can be reasonably estimated.

REVENUES: Revenues on transportation, storage and terminalling of natural gas
are recognized as service is provided. Receivables are subject to normal trade
terms and are carried net of an allowance for doubtful accounts. Prior to final
FERC approval of filed rates, Panhandle is exposed to risk that the FERC will
ultimately approve the rates at a level lower than those requested. The
difference is subject to refund and reserves are established, where required,
for that purpose. (See Note 3, Regulatory Matters).

INTEREST COST CAPITALIZED: SFAS No. 34 requires capitalization of interest on
certain qualifying assets that are undergoing activities to prepare them for
their intended use. Interest costs incurred during the construction period are
capitalized and amortized over the life of the assets.

GOODWILL: Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of SFAS No. 142 as of
January 1, 2002. Goodwill acquired in a purchase business combination and
determined to have an indefinite useful life is not amortized, but instead
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. Panhandle's goodwill impairment test upon adoption of SFAS No. 142
in 2002 resulted in a $601 million pre-tax write-down ($369 million after-tax)
under the new standard. The impact has been reflected retroactively to the first
quarter of 2002 as a cumulative effect of a change in accounting for goodwill,
pursuant to the requirements of SFAS No. 142.

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

ACCOUNTING FOR RETIREMENT BENEFITS: Panhandle follows SFAS No. 87 to account for
pension costs and SFAS No. 106 to account for other postretirement benefit
costs. For defined benefit plans, under certain circumstances, these statements
require liabilities to be recorded on the balance sheet at the present value of
these future obligations to employees net of any plan assets. The calculation of
these liabilities and associated expenses requires the expertise of actuaries
and is subject to many assumptions, including life expectancies, present value
discount rates, expected long-term rate of return on plan assets, rate of
compensation increase and anticipated health care costs. Any change in these
assumptions can significantly change the liability and associated expenses
recognized in any given year.

Prior to the Panhandle acquisition by Southern Union, Panhandle employees
participated in the CMS Pension Plan, a defined benefit retirement plan for
employees of CMS Energy and its affiliates. Upon the consummation of the
Panhandle acquisition in June 2003, the CMS Pension Plan assets and obligations
associated with Panhandle employees, as well as obligations with respect to
certain supplemental retirement benefits for management employees were retained
by CMS Energy. In addition, upon the closing of the Panhandle


                                       13
<PAGE>
acquisition, Panhandle employees became ineligible to accrue additional benefits
under the CMS Pension Plan or other CMS plans. Following the Panhandle
acquisition, Panhandle does not maintain or participate in a defined benefit
retirement plan for its employees, but instead provides benefits to
substantially all employees under a defined contribution 401(k) plan. Under the
401(k) plan, Panhandle provides a matching contribution of 50 percent of the
employee's contribution to the 401(k) plan that does not exceed four percent of
the employee's eligible pay. In addition, Panhandle makes additional
contributions ranging from 4 to 6 percent of the employee's eligible pay,
depending on the employee's age and years of service. Panhandle has generally
retained the same active employee health insurance benefits that were offered
prior to the acquisition by Southern Union.

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

ACCOUNTING FOR DERIVATIVES: Panhandle utilizes interest-rate related derivative
instruments to manage its exposure on its debt instruments and does not enter
into derivative instruments for any purpose other than hedging purposes. All
derivatives are recognized on the balance sheet at their fair value. On the date
the derivative contract is entered into, Panhandle designates the derivative as
either a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), or a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge).

Interest rate swap agreements are used to reduce interest rate risks and to
manage interest expense. By entering into these agreements, Panhandle generally
converts floating-rate debt into fixed-rate debt, or may also convert fixed rate
debt into floating. Interest differentials to be paid or received due to swap
agreements are reflected as an adjustment to interest expense. These interest
rate swaps are financial derivative instruments that qualify for hedge
treatment. For derivatives treated as hedges of future cash flows, the effective
portion of changes in fair value is recorded in other comprehensive income until
the related hedge items impact earnings. Any ineffective portion of a cash flow
hedge is reported in earnings immediately. For derivatives treated as a hedge of
the fair value of a debt instrument, the effective portion of changes in fair
value are recorded as an adjustment to the hedged debt. The ineffective portion
of a fair value hedge is recognized in earnings. Upon termination of a fair
value hedge of a debt instrument, the resulting gain or loss is amortized to
income through the maturity date of the debt instrument. Current market pricing
models were used to estimate fair values of interest rate swap agreements. In
accordance with SFAS No. 133, an unrealized loss of $28 million pre-tax, $17
million after-tax, was recorded to other comprehensive loss through June 11,
2003. The negative fair value of interest rate swap agreements was $22 million
pre-tax, $13 million net of tax, at December 31, 2002.

                                       14
<PAGE>
As of the acquisition date, the negative fair value of the swaps was recognized
in purchase accounting and other comprehensive income was eliminated. Subsequent
changes in value recorded as other comprehensive income includes a $1 million
increase for the period from June 12, 2003 through June 30, 2003.

ACCOUNTING FOR GAINS AND LOSSES ON DEBT EXTINGUISHMENT: These statements have
been revised to reflect the application of SFAS No. 145, which dictates that
gains and losses on debt extinguished are no longer classified as extraordinary
items. This provision is effective for transactions occurring and financial
statements issued after May 15, 2002. Panhandle has adopted SFAS No. 145 and the
implementation resulted in a reclassification of $1 million of amounts
previously reflected as Extraordinary Gain related to debt retirements to Other
Income, Net for the three and six months ended June 30, 2002.

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

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

NEW ACCOUNTING STANDARDS

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

SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: In June 2001, the
FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("ARO"),
which is effective for fiscal years beginning after June 15, 2002. The standard
requires legal obligations associated with the retirement of long-lived assets
to be recognized at their fair value at the time that the obligations are
incurred. Upon initial recognition of a liability, cost should be capitalized as
part of the related long-lived asset and allocated to expense over the useful
life of the asset. Panhandle adopted the new rules on asset retirement
obligations on January 1, 2003. Adoption of the new rule resulted in an increase
in net property, plant and equipment of $10 million, recognition of an asset
retirement obligation of $6 million, and a cumulative effect of adoption that
increased net income and stockholder's equity by $2 million, net of tax; and
there were no settlements during the 2003 periods presented. Accretion expense
during 2003 through June 11, 2003 was approximately $0.3 million, and zero for
the period June 12 through June 30, 2003. Accretion expense for the first two
quarters of 2002 would have been approximately $0.2 million on a pro forma basis
if the accounting pronouncement had been applied during such period.

The fair value of ARO liabilities has been calculated using an expected present
value technique. This technique reflects assumptions, such as costs, inflation,
and profit margin that third parties would consider in order to take on the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included


                                       15
<PAGE>
in Panhandle's ARO fair value estimate since a reasonable estimate could not be
made. If a reasonable estimate of fair value cannot be made in the period the
asset retirement obligation is incurred, such as assets with an indeterminate
life, the liability will be recognized when a reasonable estimate of fair value
can be made. Generally, mass property such as onshore transmission assets have
an indeterminate life, retirement cash flows cannot be determined and there is a
low probability of a retirement date. Therefore no liability has been recorded
for these assets. The initial measurement of the ARO liability for some of
Panhandle's offshore lateral lines is based largely on cost estimates from third
parties.

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

<Table>
<Caption>
JUNE 30, 2003                                                                                           IN MILLIONS
--------------------------------------------------------------------------------------------------------------------
                                          IN SERVICE
ARO DESCRIPTION                              DATE              LONG LIVED ASSETS                          AMOUNT
--------------------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>                                              <C>
Retire offshore lateral lines              Various      Panhandle offshore lateral lines                   $9.6
</Table>

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

<Table>
<Caption>
JUNE 30, 2003                                                                                             IN MILLIONS
----------------------------------------------------------------------------------------------------------------------
                                                              ARO LIABILITY
                     -------------------------------------------------------------------------------------------------
                                                            PRE-ACQUISITION  POST-ACQUISITION
                                                            ---------------  ----------------
                                                             JAN 1-JUN 11     JUN 12-JUN 30
                        PRO FORMA                                2003             2003          CASH FLOW
ARO DESCRIPTION           1/1/02  1/1/03  INCURRED  SETTLED             ACCRETION               REVISIONS     6/30/03
----------------------------------------------------------------------------------------------------------------------
<S>                         <C>     <C>       <C>     <C>        <C>              <C>             <C>          <C>
Offshore laterals           $5.6    $6.0      $0.5    -          $0.3               -               -          $6.8
                     -------------------------------------------------------------------------------------------------
Total                       $5.6    $6.0      $0.5    -          $0.3               -               -          $6.8
                     =================================================================================================
</Table>

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

SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB on April 30,
2002, this Standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. This provision is effective for fiscal years
beginning after May 15, 2002. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain lease modifications
that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring and financial statements
issued after May 15, 2002. Panhandle has adopted SFAS No. 145 and the
implementation resulted in a reclassification of $1 million of amounts
previously reflected as Extraordinary Gain related to debt retirements to Other
Income, Net for the three and six months ended June 30, 2002.

SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES:
Issued by the FASB in July 2002, this standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan.


                                       16
<PAGE>
SFAS No. 146 supersedes previous accounting guidance, EITF No. 94-3, "Liability
recognition for Certain Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred In a Restructuring)." This standard is
effective for exit or disposal activities initiated after December 31, 2002. The
scope of SFAS No. 146 includes, (1) costs related to termination benefits of
employees who are involuntarily terminated, (2) costs to terminate a contract
that is not a capital lease, and (3) costs to consolidate facilities or relocate
employees. Any future exit or disposal activities that Panhandle may engage in
will be subject to the provisions of this statement.

SFAS NO. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Panhandle has adopted the fair value based method of
accounting for stock-based employee compensation effective December 31, 2002,
the amounts of which were immaterial during the fourth quarter of 2002, applying
the prospective method of adoption which requires recognition of all employee
awards granted, modified, or settled after the beginning of the year in which
the recognition provisions are first applied. Panhandle has adopted SFAS No. 148
for new awards granted since January 1, 2002, which resulted in no expense
recorded during the 2003 periods presented. CMS retained financial
responsibility for all stock options issued prior to June 11, 2003, and no
options have been subsequently granted.

SFAS NO. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES: In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" which is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions.
The standard (1) clarifies under what circumstances a contract with an initial
net investment meets the characteristic of a derivative, (2) clarifies when a
derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FASB Interpretation No. 45, and (4)
amends certain other existing pronouncements. Panhandle is still studying the
effects of SFAS No. 149, but does not expect the adoption of SFAS No. 149 to
have a material impact on its consolidated financial position or results of
operations.

SFAS NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY: In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 is effective at the beginning of the first
interim period beginning after June 15, 2003. The standard establishes
guidelines on how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. The standard
further defines and requires that certain instruments within the scope of SFAS
No. 150 be classified as liabilities on the financial statements. Panhandle is
currently studying the effects of SFAS No. 150 but does not expect adoption to
have a material impact on its consolidated financial position or results of
operations.

FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation expands on existing disclosure
requirements for most guarantees, and clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or

                                       17
<PAGE>
market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
interpretation is effective for guarantees issued or modified on and after
January 1, 2003. For contracts that are within the initial recognition and
measurement provision of this interpretation, the provisions are to be applied
to guarantees issued or modified after December 31, 2002. Implementation of the
standard had no material impact on Panhandle's consolidated financial position
or results of operations during the 2003 periods presented.

FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: Issued
by the FASB in January 2003, the interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The consolidation requirements of the interpretation apply immediately to
variable interest entities created after January 31, 2003. For Panhandle, the
consolidation requirements apply to pre-existing entities beginning July 1,
2003. Certain of the disclosure requirements apply to all financial statements
initially issued after January 31, 2003. Panhandle will be required to
consolidate any entities that meet the requirements of the interpretation.
Panhandle has adopted the interpretation effective January 1, 2003 and the
implementation had no impact on the financial statements presented.

3. REGULATORY MATTERS

In conjunction with a FERC order issued in September 1997, FERC required certain
natural gas producers to refund previously collected Kansas ad-valorem taxes to
interstate natural gas pipelines, including Panhandle Eastern Pipe Line. FERC
ordered these pipelines to refund these amounts to their customers. In June
2001, Panhandle Eastern Pipe Line filed with the FERC a proposed settlement,
which was supported by most of the customers and affected producers. In October
2001, the FERC approved that settlement. The settlement provided for a
resolution of the Kansas ad-valorem tax matter on the Panhandle Eastern Pipe
Line system for a majority of refund amounts. Certain producers and the state of
Missouri elected to not participate in the settlement. A FERC hearing to resolve
all outstanding issues has been scheduled for October 16, 2003. At March 31,
2003 and December 31, 2002, accounts receivable included $8 million for tax
collections due from natural gas producers. At June 30, 2003 and December 31,
2002, other current liabilities included $12 million for tax collections due to
customers. On January 2, 2003, the Commission issued an order indicating its
intention to cease collection efforts for approximately $5 million of the
amounts due from affected producers. Remaining amounts collected but not
refunded are subject to refund pending resolution of issues remaining in the
FERC docket and Kansas intrastate proceeding.

In July 2001, Panhandle Eastern Pipe Line filed a settlement with customers on
FERC Order 637 matters to resolve issues including capacity release and
imbalance penalties, among others. On October 12, 2001 and December 19, 2001,
FERC issued orders approving the settlement, with modifications. The settlement
changes became final effective February 1, 2002, and Panhandle recognized
approximately $3 million of income, after-tax, including interest.

In December 2001, Trunkline LNG filed with the FERC a certificate application to
expand the Lake Charles facility to approximately 1.2 billion cubic feet per day
of sendout capacity versus the current capacity of 630 million cubic feet per
day. BG LNG Services has contract rights for the 570 million cubic feet per day
of additional capacity. In December 2002, the FERC issued an order approving the
LNG terminal expansion. In March 2003, Trunkline LNG received FERC authorization
to commence construction. On April 17, 2003, Trunkline LNG filed to amend the
authority granted for its LNG expansion with certain facility modifications. The
filing included modifications which will not affect the


                                       18
<PAGE>
authorized additional storage capacity and daily sendout capability and confirms
the revised in-service date of January 1, 2006.

In February 2002, Trunkline Gas filed a settlement with customers on Order 637
matters to resolve issues including capacity release and imbalance penalties,
among others. On July 5, 2002, FERC issued an order approving the settlement,
with modifications. On October 18, 2002, Trunkline Gas filed tariff sheets with
the FERC to implement Order 637 changes effective November 1, 2002. On February
12, 2003, FERC issued an order approving the settlement, which became effective
November 1, 2002.

4. GOODWILL

Goodwill represents the excess of costs over fair value of assets of businesses
acquired. Panhandle adopted the provisions of SFAS No. 142 as of January 1,
2002. Goodwill acquired in a purchase business combination and determined to
have an indefinite useful life is not amortized, but instead tested for
impairment annually in accordance with the provisions of SFAS No. 142. SFAS No.
142's transitional goodwill impairment evaluation required Panhandle to perform
an assessment of whether there was an indication that goodwill was impaired as
of the date of adoption. Panhandle's goodwill, which resulted from its
acquisition by CMS Energy in March 1999, was tested for impairment as of January
1, 2002, based on valuations by independent appraisers. As defined in SFAS No.
142, Panhandle was considered a single reporting unit. The fair value of the
reporting unit was determined using a combination of the income approach based
on discounted cash flows and a market approach using public guideline companies
and market transactions. The goodwill impairment amount was determined by
comparing the fair value of goodwill to book value. The goodwill impairment test
resulted in a $601 million pre-tax write-down ($369 million after-tax) and was
recorded retroactive to the first quarter of 2002 as the cumulative effect of a
change in accounting for goodwill, pursuant to the requirements of SFAS No. 142.

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


                                       19
<PAGE>
5. RELATED PARTY TRANSACTIONS

<TABLE>
<CAPTION>
                                                                     PRE-                                       PRE-
                                                                 ACQUISITION                                ACQUISITION
                                        POST-         PRE-       -----------      POST-          PRE-       -----------
                                     ACQUISITION   ACQUISITION      THREE      ACQUISITION    ACQUISITION       SIX
                                     -----------   -----------      MONTHS     -----------    -----------      MONTHS
                                      JUNE 12 -      APRIL 1 -       ENDED       JUNE 12 -     JANUARY 1-       ENDED
                                      JUNE 30,       JUNE 11,      JUNE 30,      JUNE 30,       JUNE 11,      JUNE 30,
                                        2003          2003           2002         2003           2003           2002
                                     -----------   -----------   -----------   -----------    -----------   -----------
                                                                 IN MILLIONS
<S>                                    <C>           <C>            <C>           <C>           <C>            <C>
Transportation and storage
  of natural gas                        $ --          $ 13          $ 15          $ --          $ 28           $ 28
LNG Terminalling Revenue                  --            --             1            --            --              1
Other operating revenues                  --            --            (1)           --            --             (2)
Operation and maintenance
  Management & royalty fees               --            --             4            --            --              8
  Other Expenses (a)                       1             5             4             1            11             16
Interest income                           --             3             2            --             6              4
</TABLE>

(a) Includes allocated benefit plan costs

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

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

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


                                       20
<PAGE>

Interest income includes $3 million and $2 million for the period April 1
through June 11, 2003 and the three months ended June 30, 2002, respectively,
and $6 million and $4 million for the period January 1 through June 11, 2003 and
the six months ended June 30, 2002, respectively, related to interest on the
Note receivable from CMS Capital. The Note receivable from CMS Capital of $185
million as of the acquisition date ($60 million at December 31, 2002) has since
been eliminated under pushdown accounting effective June 12, 2003, following the
acquisition of Panhandle by Southern Union Panhandle (See Note 1, Corporate
Structure). The $150 million portion of the note classified as a reduction to
equity as of the acquisition date was also eliminated.

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

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

<Table>
<Caption>
                                                                          POST-ACQUISITION      PRE-ACQUISITION
                                                                              JUNE 30,            DECEMBER 31,
                                                                                2003                 2002
                                                                          ----------------      ---------------
                                                                            IN MILLIONS
<S>                                                                         <C>                  <C>
Note receivable - CMS Capital                                                 $    --              $    60

Accounts Receivable                                                                --                    5

Accounts receivable - tax                                                          --                    4

Accounts payable                                                                    3                    8

Owners equity - Note receivable - CMS Capital                                      --                 (150)

Owners equity - Tax Sharing Receivable - Southern Union                           (85)                  --
</Table>

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

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

On March 10, 2003, Panhandle's ownership interest in Guardian was transferred to
CMS as a return of capital at the book value of $28 million and Panhandle was
released from its guarantee obligations associated with the Guardian
non-recourse guaranty by the note holders (see Note 8, Commitments and
Contingencies). As a result, the $63 million in special deposits which
collateralized the guaranty and had been reflected as restricted cash in
Panhandle's financial statements were advanced to CMS Capital as


                                       21
<PAGE>
part of the demand Note Receivable from CMS Capital and were then made available
to CMS Gas Transmission.

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

6.  DEBT RATING

In June and July of 2002, the major debt ratings services lowered their ratings
on Panhandle's senior unsecured debt from BBB to BB based on concerns
surrounding the liquidity and debt levels of CMS Energy, Panhandle's former
parent. Following Panhandle's acquisition by Southern Union, Fitch Ratings, Inc.
and Standard & Poors restored their ratings to BBB, and Moody's raised its
rating on Panhandle to Baa3.

7. DEBT AND LIQUIDITY MATTERS

In accordance with the purchase method of accounting and accounting principles
generally accepted in the United States, the liabilities retained by Panhandle
when it was acquired by Southern Union were recorded at their fair values on
Panhandle's balance sheet as of June 11, 2003 based on preliminary estimates and
are subject to further assessment and adjustment pending the results of
independent third party appraisals of the assets and liabilities included. The
preliminary valuation resulted in debt premiums being recorded of $63 million in
excess of the principal amount of the debt due to lower current market interest
rates for comparable debt. These premiums will be amortized over the remaining
life of the respective debt issues.

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

Panhandle has $1.219 billion of debt recorded at June 30, 2003, of which $304
million is current. $882 million of the debt principal is at fixed rates ranging
from 6.125 percent to 8.25 percent, with $275 million of variable rate bank
loans secured by the Trunkline LNG facilities.

Historically, Panhandle's capital requirements have generally been satisfied
through operating cash flow, except that Panhandle relies on access to capital
markets for refinancing maturing debt and extraordinary capital expenditures.
Capital expenditures and investments, excluding interest costs capitalized, are
estimated to be $78 million for the remainder of 2003, $129 million in 2004, and
$108 million in 2005. These amounts include expenditures associated with the LNG
terminal expansion which was filed with FERC on December 26, 2001, as amended
April 17, 2003. The expansion expenditures are estimated to be $ 28 million for
the remainder of 2003, $65 million in 2004 and $29 million in 2005. These
estimates have been developed for budget planning purposes and are subject to
revision. Capital expenditures are funded using cash from operations.

Panhandle is also exploring credit efficient financing options. Panhandle
intends to obtain a working capital line of credit as another source of
liquidity to supplement existing cash balances and cash flow from operations.
New borrowings from capital markets are expected to cover the refinance
obligations of existing debt, of which $293 million of principal matures in
March 2004 and an additional $100 million matures in August 2004. Based on our
current level of operations, Management believes that cash flow from operations
and available cash will be adequate to meet other liquidity needs for at least
the next


                                       22
<PAGE>
12 months, although no assurances can be given as to the sufficiency of cash
flows or the ability to refinance existing obligations. Future operating
performance and ability to extend or refinance our indebtedness will be
dependent on future economic conditions and financial, business and other
factors beyond our control.

At June 30, 2003, Panhandle had scheduled debt payments of $6 million, $404
million, $13 million, $14 million, $232 million and $489 million for the
remainder of 2003 and for the years 2004 through 2007 and thereafter,
respectively.

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

In July 2003, Panhandle initiated conditional tender offers for certain
outstanding indebtedness and has also conditionally called $135 million of
certain redeemable debentures due 2023 and 2024. These retirements are planned
to be funded with new indebtedness. These potential transactions are designed to
reduce cash interest expense for Panhandle. Listed below are the principal
amounts of notes tendered as of August 7, 2003 on the conditional offer, which
has been extended to August 14, 2003.

<Table>
<Caption>
DESCRIPTION OF THE NOTES                                APPROXIMATE PRINCIPAL AMOUNT DEPOSITED
------------------------                                --------------------------------------
<C>                                                                 <C>
6.125% Senior Notes Due 3/15/04                                       $144,395,000
7.875% Senior Notes Due 8/15/04                                         47,507,000
6.500% Senior Notes Due 7/15/09                                         78,074,000
8.250% Senior Notes Due 4/1/10, Series B                                18,350,000
7.000% Senior Notes Due 7/15/29                                         68,950,000
</Table>

8. COMMITMENTS AND CONTINGENCIES

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

<Table>
<Caption>
                                    REMAINDER
IN MILLIONS                            2003         2004      2005     2006      2007   THEREAFTER
                                    ---------       ----      ----     ----      ----   ----------
<S>                                    <C>          <C>       <C>      <C>       <C>       <C>
Operating leases (1)                   $  6         $ 12      $ 11     $ 10      $  3      $  4

Storage contracts (2)                     6           10         9        9         9        64
                                       ----         ----      ----     ----      ----      ----

Total                                  $ 12         $ 22      $ 20     $ 19      $ 12      $ 68
                                       ====         ====      ====     ====      ====      ====
</Table>

1)  Lease of various assets utilized for operations
2)  Charges for third party storage capacity


                                       23
<PAGE>

CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and investments,
excluding interest costs capitalized, to be $78 million for the remainder of
2003, $129 million in 2004 and $108 million in 2005. These amounts include
expenditures associated with the LNG terminal expansion which was filed with
FERC on December 26, 2001, as amended April 17, 2003. The expansion expenditures
are estimated to be $28 million for the remainder of 2003, $65 million in 2004
and $29 million in 2005. Capital expenditures are funded using existing cash
balances and cash from operations. These estimates were developed for budgetary
planning purposes and are subject to revision.

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

ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken cleanup
programs at these sites. The contamination resulted from the past use of
lubricants containing PCBs in compressed air systems and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle cleanup programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation, and claims or assessments. Duke Energy's cleanup activities have
been completed on all but one of the agreed-upon sites. Should additional
information be requested regarding sites where compliance information has been
submitted, Panhandle would be obligated to respond to these requests.

As part of the cleanup program resulting from contamination due to the use of
lubricants containing PCBs in compressed air systems, Panhandle Eastern Pipe
Line and Trunkline have identified PCB levels above acceptable levels inside the
auxiliary buildings that house the air compressor equipment at thirty-two
compressor station sites. Panhandle has developed and is implementing an
EPA-approved process to remediate this PCB contamination in accordance with
federal, state and local regulations. One site has been decontaminated per the
EPA approved process as prescribed in the EPA regulations.

At some locations, PCBs have been identified in paint that was applied many
years ago. In accordance with EPA regulations, Panhandle is implementing a
program to remediate sites where such issues have been identified during
painting activities. If PCBs are identified above acceptable levels, the paint
is removed and disposed of in an EPA-approved manner. Approximately 15 percent
of the paint projects in the last few years have required this special
procedure.

The Illinois EPA notified Panhandle Eastern Pipe Line and Trunkline, together
with other non-affiliated parties, of contamination at three former waste oil
disposal sites in Illinois. Panhandle and 21 other non-affiliated parties
conducted an initial investigation of one of the sites. Based on the information
found during the initial investigation, Panhandle and the 21 other
non-affiliated parties have decided to further delineate the extent of
contamination by authorizing a Phase II investigation at this site. Once data
from the Phase II investigation is evaluated, Panhandle and the 21 other
non-affiliated parties will determine


                                       24
<PAGE>
what additional actions will be taken. Panhandle Eastern Pipe Line's and
Trunkline's estimated share for the costs of assessment and remediation of the
sites, based on the volume of waste sent to the facilities, is approximately
17 percent.

Panhandle expects these cleanup programs to continue for several years and has
estimated its share of remaining cleanup costs not indemnified by Duke Energy to
range from $11 million to $18 million. Panhandle has accrued approximately $15
million of such costs, of which $2 million is included in Other Current
Liabilities for the estimated current amounts and $13 million is included in
Other Non-current Liabilities on the Consolidated Balance Sheet at June 30,
2003. At December 31, 2002, Panhandle had $4 million included in Other Current
Liabilities and $18 million included in Other Non-current Liabilities.

Panhandle paid approximately $7 million during the second quarter of 2003 in
connection with the May 13, 2003, execution of a cleanup liability assumption
agreement with Duke Energy and a third party relating to a site in Liberial,
Kansas. The agreement provides for the third party to assume all liability and
responsibility for remediation of the site, excluding any potential third-party
liabilities. In connection with the agreement, a $30 million insurance policy
with a 10-year term was purchased to cover any such potential third-party
liabilities. The Company had provided accruals related to this liability in
prior periods.

AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded to the EPA the sections of
the rule that affected Panhandle. Based on EPA guidance to these states for
development of SIPs, Panhandle expects future compliance costs to be
approximately $17 million for capital improvements to be incurred from 2004
through 2007.

As a result of the 1990 Clean Air Act Amendments, the EPA must issue MACT rules
controlling hazardous air pollutants from internal combustion engines and
turbines. These rules are expected in late 2003 and mid-2004. Beginning in 2002,
the Texas Commission on Environmental Quality enacted the Houston/Galveston SIP
regulations requiring reductions in nitrogen oxide emissions in an eight county
area surrounding Houston. Trunkline's Cypress compressor station is affected and
may require the installation of emission controls. In 2003, the new regulations
will also require all "grandfathered" facilities to enter into the new source
permit program which may require the installation of emission controls at five
additional facilities. The company expects future capital costs for these
programs to be approximately $21 million.

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

ACCOUNTING FOR RETIREMENT BENEFITS: SFAS No. 87 describes how to account for
pension costs and SFAS No. 106 describes how to account for other postretirement
benefit costs. For defined benefit plans, under certain circumstances, these
statements require liabilities to be recorded on the balance sheet at the
present value of these future obligations to employees net of any plan assets.
The calculation of these liabilities and associated expenses requires the
expertise of actuaries and is subject to many assumptions, including life
expectancies, present value discount rates, expected long-term rate of return 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.


                                       25
<PAGE>
Until June 11, 2003, Panhandle, through its former parent company, participated
in a non-contributory defined benefit retirement plan which covered most
employees with a minimum of one year vesting service and provided additional
retirement benefits under a number of different plans, including certain health
care and life insurance under OPEB, benefits to certain management employees
under SERP, and benefits to substantially all its employees under a defined
benefit pension plan and a defined contribution 401(k) plan. No portion of the
assets or liabilities related to the defined benefit retirement plan and OPEB
plan was transferred with the sale of Panhandle. Panhandle employees, following
the sale, are no longer eligible to accrue benefits or make contributions to
these plans.

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

CONTROLLED GROUP PENSION LIABILITIES: Southern Union (including certain of its
divisions) sponsors a number of defined benefit pension plans arising from any
of its (including any of its present or former divisions) or a predecessor's
business at some time before or when Southern Union acquired Panhandle. Under
applicable pension and tax laws, upon being acquired by Southern Union, each of
Panhandle and its subsidiaries became a member of Southern Union's "controlled
group" with respect to those plans, and, along with Southern Union and any other
members of that group, is jointly and severally liable for any failure by
Southern Union (along with any other persons that may be or become a sponsor of
any such plan) to fund any of these pension plans or to pay any unfunded
liabilities that these plans may have if they are ever terminated. In addition,
if any of the obligations of any of these pension plans is not paid when due, a
lien in favor of that plan or the Pension Benefit Guaranty Corporation may be
created against the assets of each member of Southern Union's controlled group,
including us and each of our subsidiaries. As of March 31, 2002, the aggregate
amount of the projected benefit obligations of these pension plans was
approximately $343 million and the estimated fair value of all of the assets of
these plans was approximately $317 million.

OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements and buyouts and buydowns of gas sales contracts with
natural gas pipelines. Panhandle Eastern Pipe Line and Trunkline, with respect
to certain producer contract settlements, may be contractually required to
reimburse or, in some instances, to indemnify producers against such royalty
claims. The potential liability of the producers to the government and of the
pipelines to the producers involves complex issues of law and fact which are
likely to take substantial time to resolve. If required to reimburse or
indemnify the producers, Panhandle Eastern Pipe Line and Trunkline may file with
FERC to recover a portion of these costs from pipeline customers. Management
believes these commitments and contingencies will not have a materially adverse
effect on consolidated results of operations, liquidity or financial position.
As of the acquisition date and at June 30, 2003, Panhandle has accrued
approximately $14 million related to this matter, which is included in
Non-current Liabilities on the Consolidated Balance Sheet.

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


                                       26
<PAGE>
In November 2001, in conjunction with the Guardian project, Panhandle provided a
$60 million guaranty related to project financing during the construction and
initial operating period of the project. The guaranty is released when Guardian
reaches certain operational and financial targets. Due to rating agency
downgrades of Panhandle's debt, the Guardian lender assessed credit fees and
required additional credit support from Panhandle. In October 2002, Panhandle
provided a letter of credit to the lenders, which constitutes acceptable credit
support under the Guardian financing agreement. This letter of credit was cash
collateralized by Panhandle with approximately $63 million which, including
accumulated interest, is reflected as Restricted Cash on the Consolidated
Balance Sheet at December 31, 2002. On March 10, 2003, Panhandle's ownership
interest in Guardian was transferred back to CMS Gas Transmission (see Note 5,
Related Party Transactions). Panhandle was also released from the guaranty
obligations associated with the Guardian non-recourse debt as of March 10, 2003,
by the partners, and the noteholders.

Occasionally, Panhandle will purchase surety bonds to indemnify third parties
for unforeseen events, which may occur in the course of construction or repair
projects. As of June 30, 2003, Panhandle has purchased $2 million of these
surety bonds.

In conjunction with its acquisition by Southern Union, Panhandle has initiated a
workforce reduction initiative designed to reduce the workforce by approximately
5 percent. The workforce reduction initiative is an involuntary plan with a
voluntary component, and is expected to be fully implemented by the end of
September 2003.


                                       27
<PAGE>
                    PANHANDLE EASTERN PIPE LINE COMPANY, LLC

                      MANAGEMENT'S DISCUSSION AND ANALYSIS


ACQUISITION OF PANHANDLE

On June 11, 2003, Southern Union, acquired Panhandle from CMS for approximately
$584 million in cash (subject to a final working capital adjustment) plus 3
million shares of Southern Union common stock valued at approximately $49
million based on market prices at closing, and in connection therewith incurred
transaction costs estimated at $29 million. At the time of the acquisition,
Panhandle had approximately $1.159 billion of debt outstanding that it retained.
Southern Union financed the acquisition with most of the approximately $420
million in cash proceeds it received for the January 1, 2003 sale of its Texas
operations, and some of the net proceeds from its June 2003 offerings of common
stock and equity units. Southern Union structured the Panhandle acquisition and
the sale of its Texas operations in a manner intended to qualify as a like-kind
exchange of property under Section 1031 of the Internal Revenue Code of 1986, as
amended. Panhandle Eastern Pipe Line and five of its subsidiaries as well as the
Southern Union subsidiary that became Panhandle's direct parent upon the
acquisition converted from Delaware corporations to Delaware limited liability
companies in June 2003.

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION


                                       28
<PAGE>
The Management's Discussion and Analysis of Financial Condition and other
sections of this Form 10-Q may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements constitute forward-looking statements that are based on current
expectations, estimates and projections about the industry in which Panhandle
operates and Management's beliefs and assumptions. These forward-looking
statements are not historical facts, but rather reflect current expectations
concerning future results and events. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. Similarly, statements that describe objectives, plans or goals are
or may be forward-looking statements.

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

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

   o  customer growth;

   o  gas throughput volumes and available sources of natural gas;

   o  abnormal weather conditions in Panhandle's service territories;

   o  new legislation and government regulations affecting or involving
      Panhandle;

   o  ability to comply with or to challenge successfully existing or new
      environmental regulations;

   o  the outcome of pending and future litigation;

   o  the impact of relations with labor unions of bargaining-unit union
      employees; the impact of future rate cases or regulatory rulings;

   o  ability to control costs successfully and achieve operating efficiencies,
      including the purchase and implementation of new technologies for
      achieving such efficiencies;

   o  the nature and impact of any extraordinary transactions, such as any
      acquisition or divestiture of a business unit or any assets;

   o  the economic climate and growth in our industry and service territories
      and competitive conditions of energy markets in general;


                                       29
<PAGE>
   o  inflationary trends;

   o  changes in gas or other energy market commodity prices and interest rates;

   o  the current market conditions causing more customer contracts to be of
      shorter duration, which may increase revenue volatility;

   o  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;

   o  Panhandle or any of its affiliates' debt securities ratings;

   o  factors affecting operations such as maintenance or repairs, environmental
      incidents or gas pipeline system constraints;

   o  the possibility of war or terrorist attacks; and

   o  other risks and unforeseen events.

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

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

CRITICAL ACCOUNTING POLICIES

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

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

USE OF ESTIMATES: The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires management to make judgments, estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and


                                       30
<PAGE>
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. The principles of SFAS No. 5
guide the recording of contingent liabilities within the financial statements.
Certain accounting principles require subjective and complex judgments used in
the preparation of financial statements. Accordingly, a different financial
presentation could result depending on the judgment, estimates or assumptions
that are used. Such estimates and assumptions, include, but are not specifically
limited to: depreciation and amortization, interest rates, discount rates,
healthcare trend: rates, inflation rates, future commodity prices,
mark-to-market valuations, investment returns, volatility in the price of
Southern Union or CMS Energy Common Stock, impact of new accounting standards,
future costs associated with long-term contractual obligations, future
compliance costs associated with environmental regulations and continuing
creditworthiness of counterparties. Although these estimates are based on
management's knowledge of current expected future events, actual results could
materially differ from those estimates.

RESULTS OF OPERATIONS

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


                                       31
<PAGE>
<TABLE>
<CAPTION>
                                               IN MILLIONS
----------------------------------------------------------
JUNE 30                                               2003
----------------------------------------------------------
<S>                                                  <C>
Three month presentation
April 1 - June 11, 2003 (Pre-acquisition)            $  19
June 12 - June 30, 2003 (Post-acquisition)               5
                                                     -----
Combined three months ended June 30, 2003               24
April 1 - June 30, 2002                                 12
                                                     -----
Change                                               $  12

Six month presentation
January 1 - June 11, 2003 (Pre-acquisition)          $  50
June 12 - June 30, 2003 (Post-acquisition)               5
                                                     -----
Combined six months ended June 30, 2003                 55
January 1 - June 30, 2002                             (328)
                                                     -----
Change                                               $ 383
==========================================================
</TABLE>

<Table>
<Caption>
                                                                                             IN MILLIONS
--------------------------------------------------------------------------------------------------------
                                      POST-           PRE-         COMBINED    PRE-ACQUISITION
                                   ACQUISITION     ACQUISITION   THREE MONTHS   THREE MONTHS
                                    JUNE 12 -        APRIL 1 -      ENDED          ENDED          THREE
                                     JUNE 30,        JUNE 11,      JUNE 30,       JUNE 30,        MONTHS
REASONS FOR THE CHANGE:               2003            2003           2003           2002          CHANGE
--------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>           <C>           <C>                <C>
Reservation revenue                    $ 17           $ 64           $ 81           $ 74           $  7
LNG terminalling revenue                  3             13             16             16             --
Commodity revenue                         4             17             21             16              5
Equity and other revenue                  1              3              4             --              4
Operation, maintenance and
     general                            (10)           (38)           (48)           (51)             3
Depreciation and amortization            (3)            (9)           (12)           (13)             1
General taxes                            (2)            (5)            (7)            (5)            (2)
Other income, net                        --              2              2              3             (1)
Interest charges                         (2)           (16)           (18)           (19)             1
Minority interest                        --             --             --             (1)             1
Income taxes                             (3)           (12)           (15)            (8)            (7)
                                   ---------------------------------------------------------------------
Total                                  $  5           $ 19           $ 24           $ 12           $ 12
========================================================================================================
</Table>


                                       32
<PAGE>
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------
                                      POST-           PRE-         COMBINED    PRE-ACQUISITION
                                   ACQUISITION     ACQUISITION    SIX MONTHS     SIX MONTHS
                                    JUNE 12 -      JANUARY 1 -      ENDED          ENDED           SIX
                                     JUNE 30,        JUNE 11,      JUNE 30,       JUNE 30,        MONTHS
REASONS FOR THE CHANGE:               2003            2003           2003           2002          CHANGE
---------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>            <C>          <C>                <C>
Reservation revenue                  $  17           $ 161          $ 178          $ 172          $   6
LNG terminalling revenue                 3              27             30             29              1
Commodity revenue                        4              36             40             32              8
Equity and other revenue                 1              10             11              6              5
Operation, maintenance and
     general                           (10)            (91)          (101)          (100)            (1)
Depreciation and amortization           (3)            (23)           (26)           (26)            --
General taxes                           (2)            (12)           (14)           (12)            (2)
Other income, net                       --               6              6              6             --
Interest charges                        (2)            (36)           (38)           (37)            (1)
Minority interest                       --              --             --             (2)             2
Income taxes                            (3)            (30)           (33)           (27)            (6)
Cumulative effect of change in
accounting principles                   --               2              2           (369)           371
                                   ----------------------------------------------------------------------
Total                                $   5           $  50          $  55          $(328)         $ 383
=========================================================================================================
</Table>

For the combined three months ended June 30, 2003, Panhandle had combined net
income of $24 million. The increase of $12 million from the three months ended
June 30, 2002 is primarily due to higher natural gas transportation volumes
resulting from colder weather in 2003 and low storage volumes leading to heavier
storage refill volumes being transported by customers.

For the combined six months ended June 30, 2003, Panhandle had net income of $55
million. The increase of $383 million from the six months ended June 30, 2002 is
primarily due to higher natural gas transportation volumes and a goodwill
impairment charge of $601 million ($369 million after-tax) in the first quarter
of 2002 which was recorded in conjunction with the adoption of SFAS No. 142.

RESERVATION REVENUE: For the combined three and six months ended June 30, 2003,
reservation revenue increased $7 million and $6 million, respectively, compared
to 2002, due to higher average reservation rates realized on Panhandle due to
increased demand during the period.

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


                                       33
<PAGE>
COMMODITY REVENUE: For the combined three and six months ended June 30, 2003,
commodity revenue increased $5 million and $8 million, respectively, compared to
2002, primarily due to an increase in commodity volumes. Volumes increased 6
percent and 11 percent in the combined three and six months ended June 30, 2003,
respectively, compared to 2002 primarily due to a colder winter in the midwest
market area during the first quarter of 2003 compared to 2002 and heavier
volumes transported to fill storage in the second quarter.

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

OPERATION, MAINTENANCE AND GENERAL: Operation, maintenance and general expenses
decreased by $3 million for the combined three months ended June 30, 2003,
compared to 2002, primarily due to discontinued CMS Energy royalty and service
fees, which were $4 million in 2002. Operation, maintenance, and general
expenses increased by $1 million for the combined six months ended June 30,
2003, compared to 2002, with lower CMS Energy corporate charges offset partially
by higher benefit costs, under recovered Panhandle fuel costs and higher
operational costs.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased by $1
million for the combined three months ended June 30, 2003 compared to 2002 due
to certain intangible assets becoming fully depreciated in March 2003.
Depreciation and amortization remained unchanged in the combined six months
ended June 30, 2003 compared to 2002.

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

OTHER INCOME, NET: Other income, net, for the three month period ended June 30,
2003, decreased $1 million compared to 2002, primarily due to a $1 million gain
in 2002 on debt extinguishment which has been reclassified to Other Income, Net
pursuant to the application of SFAS No. 145.

INTEREST CHARGES: Interest charges for the combined three months ended June 30,
2003 decreased $1 million compared to 2002 due to elimination of interest on
$129 million of long-term debt principal retired in April 2002 and May 2002.
Interest charges for the combined six months ended June 30, 2003 increased $1
million primarily due to higher charges for certain of LNG Holding's interest
rate swaps and a non-recurring gain of $2 million in the first quarter of 2002
for reversal of interest expense related to the Order 637 settlement. These
increases were partially offset by the retirement of approximately $129 million
in long-term debt in April 2002 and May 2002, and an increase in interest on
short-term debt of approximately $40 million issued during December 2002 and
January 2003 which was retired in June 2003. On June 9, 2003, Panhandle retired
the remaining outstanding balance of approximately $33 million of the short-term
bank loans. For further discussion of Panhandle's long-term debt and guarantees,
see Note 8, Commitments and Contingencies - Other Commitments and Contingencies.


                                       34
<PAGE>
MINORITY INTEREST: Minority interest decreased $1 million and $2 million for the
combined three and six months ended June 30, 2003, respectively, compared to
2002 due to Panhandle purchasing Dekatherm Investor Trust's interest in LNG
Holdings during November 2002 for approximately $41 million. As a result,
Panhandle owns 100 percent of LNG Holdings and therefore no minority interest
exists subsequent to that purchase.

INCOME TAXES: Income taxes during the combined three and six months ended June
30, 2003, compared to 2002, increased $7 million and $6 million, respectively,
due to increases in pretax income, which reflects an effective tax rate of
approximately 38 percent and 40 percent for the periods ended June 30, 2003 and
June 30, 2002, respectively.

FINANCIAL CONDITION AND LIQUIDITY

Panhandle is a leading United States interstate natural gas pipeline system and
also owns one of the nation's largest operating LNG regasification terminals and
intends to optimize results through expansion and better utilization of its
existing facilities and construction of new facilities. This involves providing
additional transportation, storage and other asset-based value-added services to
customers such as gas-fueled power plants, local distribution companies,
industrial and end-users, marketers and others. Panhandle conducts operations
primarily in the central, gulf coast, midwest, and southwest regions of the
United States.

On June 11, 2003, Southern Union acquired Panhandle for approximately $584
million in cash plus 3 million shares of Southern Union common stock valued at
approximately $49 million based on market prices at closing (subject to working
capital adjustment), and incurred transaction costs estimated at $29 million. At
the time of the acquisition, Panhandle had approximately $1.159 billion of debt
outstanding.

The acquisition was accounted for using the purchase method of accounting in
accordance with accounting principles generally accepted in the United States of
America with Panhandle allocating the purchase price paid by Southern Union to
Panhandle's net assets as of the acquisition date based on preliminary
estimates. Assets acquired and liabilities assumed are recorded at their
estimated fair value and are subject to further assessment and adjustment
pending the results of independent third party appraisals.

On February 10, 2003, Panhandle sold its one-third equity interest in Centennial
to Centennial's two unaffiliated other partners, for $40 million with no gain or
loss resulting from the sale in 2003 (see Note 5, Related Party Transactions).
Centennial had been written down to the sale price in the fourth quarter of
2002. On March 10, 2003, Panhandle's ownership interest in Guardian was
transferred to CMS (see Note 5, Related Party Transactions).

LIQUIDITY

In June and July of 2002, the major debt ratings services lowered their ratings
on Panhandle's senior unsecured debt from BBB to BB based on concerns
surrounding the liquidity and debt levels of CMS Energy, Panhandle's former
parent. Following Panhandle's acquisition by Southern Union, Fitch Ratings, Inc.
and Standard & Poors restored Panhandle's ratings to BBB and Moody's raised its
rating on Panhandle to Baa3. Panhandle's senior unsecured note provisions are
not directly impacted by debt rating changes, but are subject to other
requirements such as the maintenance of a fixed charge coverage ratio and a
leverage ratio which restrict certain payments if not maintained and limitations
on liens. At June 30, 2003, Panhandle was subject to a $206 million limitation
on additional restricted payments,


                                       35
<PAGE>
including dividends and loans to affiliates. At June 30, 2003, Panhandle was in
compliance with all covenants.

In conjunction with the Centennial and Guardian pipeline projects, Panhandle
provided guarantees related to the project financing during the construction
phases and initial operating periods. In July 2002, following the Panhandle debt
ratings downgrades by Moody's and S&P, pursuant to the terms of the guaranty
agreements, Panhandle was required to provide acceptable credit support for its
pro rata portion of those construction loans, which aggregated $110 million. In
September 2002, Centennial's other partners provided credit support of $25
million each in the form of guarantees to the lender to cover Panhandle's
obligation of $50 million of loan guarantees. The partners were paid credit fees
by Panhandle on the outstanding balance of the guarantees for the periods which
they were in effect. In December 2002, Panhandle recorded a $26 million pre-tax
($16 million after-tax) write-down of its investment in Centennial to $40
million as a result of indicated values upon announcement of the definitive
agreement to sell Panhandle and the associated efforts to sell Centennial. On
February 10, 2003, Panhandle sold its one-third equity interest in Centennial
for $40 million to Centennial's two unaffiliated other partners. Panhandle has
been released by the partners and the lenders for any liabilities related to
Panhandle's $50 million parent guaranty of the project debt. In March 2003, $40
million of cash from the sale of Centennial was paid to CMS Gas Transmission as
a return of capital.

In October 2002, Panhandle provided a letter of credit to the Guardian lenders
which constitutes acceptable credit support under the Guardian financing
agreement. This letter of credit was cash collateralized by Panhandle with
approximately $63 million. Effective March 10, 2003, Panhandle's ownership
interest in Guardian was transferred to CMS Gas Transmission. Panhandle was
released from its guarantee obligations associated with the Guardian
non-recourse guaranty as of March 10, 2003 by Prudential and the other
noteholders. For further information, see Note 5, Related Party Transactions.

In December 2002 and January 2003, Panhandle secured short-term bank loans in
the amounts of $30 million and $10 million, respectively, with interest payable
at rates of LIBOR plus 4 percent. The loans were due the earlier of December
2003 or upon the sale of Panhandle. The stock of most of Panhandle's
subsidiaries were pledged as collateral for the loans. On March 31, 2003,
Panhandle retired approximately $7 million of the short-term bank loans and on
June 9, 2003, Panhandle retired the remaining outstanding balance of
approximately $33 million of the short-term bank loans with proceeds from
repayment by CMS Capital of a portion of the Note Receivable owed Panhandle.

On March 1, 2003, certain assets held by a subsidiary of CMS were contributed to
Panhandle by CMS with a net book value of $15 million, which were included in
the operations sold to Southern Union Panhandle on June 11, 2003.

Panhandle received a waiver and extension until April 30, 2003 to provide
certified September 30, 2002 financial statements to the LNG Holdings lenders
under that credit facility. Panhandle has since satisfied that requirement.
Panhandle also received a waiver and extension until June 30, 2003 of a
requirement to provide certain documentation and Panhandle has satisfied that
requirement.

The CMS Capital Note Receivable of $335 million, including $150 million included
as a reduction to equity, was eliminated in the purchase by Southern Union
Panhandle from CMS, which included the assumption of the offsetting note payable
obligation of CMS Capital and thus the note is eliminated in pushdown
accounting.


                                       36
<PAGE>
Historically, Panhandle's capital requirements have generally been satisfied
through operating cash flow, except that Panhandle relies on access to capital
markets for refinancing maturing debt and extraordinary capital expenditures.
Capital expenditures and investments, excluding interest costs capitalized, are
estimated to be $78 million for the remainder of 2003, $129 million in 2004, and
$108 million in 2005. These amounts include expenditures associated with the LNG
terminal expansion that was filed with FERC on December 26, 2001, as amended
April 17, 2003. The expansion expenditures are estimated to be $28 million for
the remainder of 2003, $65 million in 2004 and $29 million in 2005. These
estimates have been developed for budget planning purposes and are subject to
revision.

Panhandle is exploring credit efficient financing options. Panhandle intends to
obtain a working capital line of credit as another source of liquidity to
supplement existing cash balances and cash flow from operations. New borrowings
from capital markets are expected to cover the refinance obligations of existing
debt, of which $293 million of principal matures in March 2004 and an additional
$100 million matures in August 2004. Based on our current level of operations,
Management believes that cash flow from operations and available cash will be
adequate to meet other liquidity needs for at least the next 12 months, although
no assurances can be given as to the sufficiency of cash flows or the ability to
refinance existing obligations. Future operating performance and ability to
extend or refinance our indebtedness will be dependent on future economic
conditions and financial, business and other factors beyond our control.

At June 30, 2003, Panhandle had scheduled debt payments of $6 million, $404
million, $13 million, $14 million, $232 million and $489 million for the
remainder of 2003 and for the years 2004 through 2007 and thereafter,
respectively.

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

In July 2003, Panhandle has initiated conditional tender offers for certain
outstanding indebtedness and has also conditionally called $135 million of
certain redeemable debentures due 2023 and 2024. These retirements are planned
to be funded with new indebtedness. These potential transactions are designed to
reduce cash interest expense for Panhandle. Listed below are the principal
amounts of notes tendered as of August 7, 2003 on the conditional offer, which
has been extended to August 14, 2003.

<Table>
<Caption>
DESCRIPTION OF THE NOTES                                APPROXIMATE PRINCIPAL AMOUNT DEPOSITED
----------------------------------------------------    --------------------------------------
<S>                                                     <C>
6.125% Senior Notes Due 3/15/04                                      $144,395,000
7.875% Senior Notes Due 8/15/04                                        47,507,000
6.500% Senior Notes Due 7/15/09                                        78,074,000
8.250% Senior Notes Due 4/1/10, Series B                               18,350,000
7.000% Senior Notes Due 7/15/29                                        68,950,000
</Table>


                                       37
<PAGE>
OTHER MATTERS

CUSTOMER CONCENTRATION: For the six months ended June 30, 2003, sales to
Proliance Energy, LLC, a nonaffiliated local distribution company and gas
marketer, accounted for 16 percent of Panhandle's consolidated revenues.

Sales to BG LNG Services, a nonaffiliated gas marketer, accounted for 12
percent, and sales to subsidiaries of CMS Energy, the former parent, also
accounted for 12 percent of Panhandle's consolidated revenues. No other customer
accounted for 10 percent or more of consolidated revenues during the same
period. Aggregate sales to Panhandle's top 10 customers accounted for 65 percent
of revenues for the six months ended June 30, 2003.

ENVIRONMENTAL MATTERS

Panhandle is subject to federal, state, and local laws and regulations governing
environmental quality and pollution control. These laws and regulations under
certain circumstances require Panhandle to remove or remedy the effect on the
environment of specified substances at its operating sites.

PCB ASSESSMENT AND CLEAN-UP PROGRAMS: Panhandle previously identified
environmental contamination at certain sites on its systems and undertook
clean-up programs at these sites. The contamination resulted from the past use
of lubricants containing PCBs in compressed air systems and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle is
also taking actions regarding PCBs in paints at various locations. For further
information, see Note 8, Commitments and Contingencies - Environmental Matters.

AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. Based on EPA guidance to these states for development of
these SIPS, Panhandle expects future compliance costs to be approximately $17
million for capital improvements to be incurred from 2004 through 2007.

Panhandle expects final rulings from the EPA in 2003 and 2004 regarding control
of hazardous air pollutants, and expects that some of its engines and turbines
will be affected. In 2002, the Texas Commission on Environmental Quality enacted
the Houston/Galveston SIP regulations requiring reductions in nitrogen oxide
emissions in an eight-county area surrounding Houston. Trunkline's Cypress
compressor station is affected and may require the installation of emission
controls. In 2003, the new regulations will also require all grandfathered
facilities to enter into the new source permit program which may require the
installation of emission controls at five additional facilities. The company
expects to incur future capital costs of approximately $21 million in order to
comply with these programs.

For further information on the above environmental matters, see Note 8,
Commitments and Contingencies - Environmental Matters.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

The SEC has adopted new rules that require the company to provide, in a separate
captioned subsection of the MD&A, a comprehensive explanation of its off-balance
sheet arrangements that have, or are reasonably likely to have, a current or
future effect on the company that is material to investors. As of December 31,
2002, Panhandle had guarantees related to the Centennial and Guardian pipeline
projects of $50 million and $60 million, respectively, and a letter of credit
for $63 million supporting the Guardian guarantee. Panhandle has since been
released from these guarantees and the letter of credit obligation has been
transferred to CMS Gas Transmission (see Panhandle Financial Condition section
of


                                       38
<PAGE>
this MD&A). As of June 30, 2003, Panhandle has purchased $2 million of surety
bonds to indemnify third parties for unforeseen events which may occur in the
course of construction or repair projects.

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

<Table>
<Caption>
                         REMAINDER
IN MILLIONS                2003      2004      2005      2006      2007    THEREAFTER
                         ---------   ----      ----      ----      ----    ----------
<S>                      <C>         <C>       <C>       <C>       <C>     <C>
Operating Leases (1)        $ 6       $12       $11       $10       $ 3       $ 4

Storage contracts (2)         6        10         9         9         9        64
                            ---       ---       ---       ---       ---       ---
Total                       $12       $22       $20       $19       $12       $68
                            ===       ===       ===       ===       ===       ===
</TABLE>

1)  Lease of various assets utilized for operations
2)  Charges for third party storage capacity


CASH MANAGEMENT

In June 2003, FERC issued an Interim Rule, effective in August 2003. Order No.
634 requires all FERC-regulated entities that participate in cash management
programs with corporate affiliates (1) to establish written cash management
procedures including specifications of duties and responsibilities of cash
management program participants and administrators, specification of the methods
for calculating interest and allocation of interest income and expenses, and
specification of any restrictions on deposits or borrowings by participants, and
(2) to document cash management activity in detail. FERC also has made new
proposals that would require FERC-regulated entities to file their written cash
management procedures with FERC for public review. Order No. 634 also requested
industry comments on whether a FERC-regulated entity should be required to
notify FERC within five days when its proprietary capital ratio falls below 30
percent or subsequently returns to or exceeds 30 percent.

NEW FERC REPORTING REQUIREMENTS

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


                                       39
<PAGE>
CONTROLLED GROUP PENSION LIABILITIES

Southern Union (including certain of its divisions) sponsors a number of defined
benefit pension plans arising from any of its (including any of its present or
former divisions) or a predecessor's business at some time before or when
Southern Union acquired us. Under applicable pension and tax laws, upon being
acquired by Southern Union, each of us and our subsidiaries became a member of
Southern Union's "controlled group" with respect to those plans, and, along with
Southern Union and any other members of that group, is jointly and severally
liable for any failure by Southern Union (along with any other persons that may
be or become a sponsor of any such plan) to fund any of these pension plans or
to pay any unfunded liabilities that these plans may have if they are ever
terminated. In addition, if any of the obligations of any of these pension plans
is not paid when due, a lien in favor of that plan or the Pension Benefit
Guaranty Corporation may be created against the assets of each member of
Southern Union's controlled group, including us and each of our subsidiaries. As
of March 31, 2002, the aggregate amount of the projected benefit obligations of
these pension plans was approximately $343 million and the estimated fair value
of all of the assets of these plans was approximately $317 million.



                                       40
<PAGE>
QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: PANHANDLE'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated by
reference herein.

CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply judgement in evaluating the cost-benefit relationship of
possible controls and procedures.

As required by SEC Rule 13a-15(b), an evaluation was performed under the
supervision and with the participation of Panhandle management, including our
principal executive officer and our principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of June 30, 2003, the end of the period covered by this
report. Based upon that evaluation, our management, including our principal
executive officer and our principal financial officer, concluded that the design
and operation of these disclosure controls and procedures were effective at a
level of reasonable assurance.

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

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in Panhandle's Form 10-K for the year ended December 31, 2002.
Reference is also made to the CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS, in particular Note 12 - Commitments and Contingencies for Panhandle,
included herein for additional information regarding various pending
administrative and judicial proceedings involving rate, operating, regulatory
and environmental matters.

ENVIRONMENTAL MATTERS

Panhandle and its subsidiaries and affiliates are subject to various federal,
state and local laws and regulations relating to the environment. Several of
these companies have been named parties to various actions involving
environmental issues. Based on its present knowledge and subject to future legal
and factual developments, Panhandle believes that it is unlikely that these
actions, individually or in total, will have a material adverse effect on its
financial condition. See Panhandle's MANAGEMENT'S DISCUSSION AND ANALYSIS; and
Panhandle's CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (A) LIST OF EXHIBITS

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

             3(b)             Certificate of Conversion from a Corporation
                              to a Limited Liability Company (Filed
                              herein).

             3(c)             Certificate of Amendment to Certificate of
                              Formation (Filed herein).

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


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

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

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

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

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

             31(c)            Section 1350 Certification (Joint)

         (B) REPORTS OF FORM 8-K

During 2nd Quarter 2003, Panhandle filed reports on Form 8-K on April 4, 2003
and May 8, 2003 covering matters pursuant to ITEM 5. OTHER EVENTS.


                                       41
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Panhandle Eastern Pipe Line Company, LLC has duly caused this
Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto
duly authorized, on the August 11, 2003.


                                     PANHANDLE EASTERN PIPE LINE COMPANY, LLC



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


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



                                       42
<PAGE>

                                INDEX TO EXHIBIT

<Table>
<Caption>

EXHIBIT       PREVIOUSLY FILED
NUMBER        WITH FILE NUMBER          DESCRIPTION
-------       ----------------          -----------
<S>           <C>                       <C>

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

3(b)                                Certificate of Conversion from a Corporation
                                    to a Limited Liability Company (Filed
                                    herein).

3(c)                                Certificate of Amendment to Certificate of
                                    Formation (Filed herein).

4(a)           1-2921               Indenture dated as of March 29, 1999, among
                                    CMS Panhandle Holding Company, Panhandle
                                    Eastern Pipe Line Company and NBD Bank, as
                                    Trustee (Filed as Exhibit 4(a) to the Form
                                    10-Q for the quarter ended March 31, 1999.


4(b)           1-2921               1st Supplemental Indenture dated as of March
                                    29, 1999, among CMS Panhandle Holding
                                    Company, Panhandle Eastern Pipe Line Company
                                    and NBD Bank, as Trustee, including a form
                                    of Guarantee by Panhandle Eastern Pipe Line
                                    Company of the obligations of CMS Panhandle
                                    Holding Company (Filed as Exhibit 4(b) to
                                    the Form 10-Q for the quarter ended March
                                    31, 1999).

4(c)           1-2921               2nd Supplemental Indenture dated as of
                                    March 27, 2000, between Panhandle, as Issuer
                                    and Bank One Trust Company, National
                                    Association, as Trustee (Filed as Exhibit
                                    4(e) to the Form S-4 filed on June 22,
                                    2000).

4(d)           1-2921               Indenture dated as of February 1, 1993,
                                    between Panhandle and Morgan Guaranty Trust
                                    Company effective January 1, 1982, as
                                    amended December 3, 1999 (Filed as Exhibit 4
                                    to the Form S-3 filed February 19, 1993).

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

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

31(c)                               Section 1350 Certification (Joint)
</Table>