**UNITED
STATES SECURITIES AND EXCHANGE COMMISSION**
 **WASHINGTON,
D. C. 20549**
 **_______________**
 
 **FORM
10-Q**
 
 
 **For
the quarterly period ended**
 
 **March
31, 2005**
 
 
 
 **Commission
File No. 1-2921**
 
 **_______________**
 
 
 **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 (Exact
name of registrant as specified in its charter)
 
 
 
 **Delaware**
    **44-0382470**(State
      or other jurisdiction of
    (I.R.S.
      Employerincorporation
      or organization)
    Identification
      No.)**5444
      Westheimer Road**
    **77056-5306****Houston,
      Texas**
    (Zip
      Code)(Address
      of principal executive offices)
 
 
 Registrant's
telephone number, including area code: **(713)
989-7000**
 
 Securities
Registered Pursuant to Section 12(b) of the Act:
 
 
 Title
      of each Class
    
    Name
      of each exchange in which registered4.80%
      Senior Notes due 2008, Series B
    
    New
      York Stock Exchange6.05%
      Senior Notes due 2013, Series B
    
    New
      York Stock Exchange
 
 
 Securities
Registered Pursuant to Section 12(g) of the Act: None
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes ü  No
___
 
 
 Indicate
by check mark whether the registrant is an Accelerated Filer (as defined in
Exchange Act Rule 12D-2).
 Yes  No  **ü**
  **
   
 
 ****PANHANDLE EASTERN PIPE LINE COMPANY, LP**
**FORM
10-Q**
**March
31, 2005**
**Index****
 
 PART
      I. FINANCIAL INFORMATION:
    Page(s)ITEM
      1. Financial Statements (Unaudited):Consolidated statement of operations- three months ended
      March 31, 2005 and 2004.
    2Consolidated balance sheet- March 31, 2005 and
      December 31, 2004.
    3-4Consolidated statement of cash flows- three months ended
      March 31, 2005 and 2004.
    5Consolidated statement of owners’ equity and comprehensive
      income-- three months ended March 31, 2005.
    6Notes to consolidated financial
    statements.
    7-20ITEM 2. Management's Discussion and Analysis of Results of
      Operations and Financial Condition.
    21-31ITEM 3. Quantitative and Qualitative Disclosures about
      Market Risk.
    31ITEM 4. Controls and Procedures.
    31**PART II. OTHER INFORMATION:**ITEM 1. Legal Proceedings.
    31ITEM 2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
    31ITEM 3. Defaults Upon Senior
    Securities.
    32ITEM 4. Submission of Matters to a Vote of Security
      Holders.
    32ITEM 5. Other Information.
    32ITEM 6. Exhibits.
    32SIGNATURES
    33
 
 
 
 
 
   1
 *Table of Contents*
   **PANHANDLE EASTERN PIPE LINE COMPANY, LP**
 
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 **(In
Thousands)**
 
 **Three
      Months**
    
    **Three
      Months****Ended
      March 31,**
    
    **Ended
      March 31,****2005**
    
    **2004****Operating
      revenue**Transportation
      and storage of natural gas
    
    $
    120,020
    
    $
    121,860LNG
      terminalling revenue
    
    
    13,208
    
    
    13,762Other
      revenue
    
    
    2,172
    
    
    2,547Total
      operating revenue
    
    
    135,400
    
    
    138,169**Operating
      expenses**Operation,
      maintenance and general
    
    
    50,183
    
    
    49,725Depreciation
      and amortization
    
    
    15,367
    
    
    15,147Taxes,
      other than on income
    
    
    7,336
    
    
    7,526Total
      operating expenses
    
    
    72,886
    
    
    72,398**Operating
      income**
    
    
    62,514
    
    
    65,771**Other
      income (expense)**Interest
      expense, net
    
    
    (11,848
    )
    
    (12,155
    )Other,
      net
    
    
    897
    
    
    714Total
      other income (expense)
    
    
    (10,951
    )
    
    (11,441
    )**Earnings
      before income taxes**
    
    
    51,563
    
    
    54,330**Income
      taxes**
    
    
    20,093
    
    
    21,273**Net
      earnings**
    
    $
    31,470
    
    $
    33,057
 
 
 
 
  
 See
accompanying notes.
 
   2
 *Table of Contents*
   **PANHANDLE EASTERNPIPE LINE COMPANY, LP**
 
 **CONSOLIDATED
BALANCE SHEETS**
 **(Unaudited)**
 **(In
Thousands)**
 
 **March
      31, 2005**
    
    **December
      31, 2004****Assets****Property,
      plant and equipment**Plant
      in service
    
    $
    1,956,366
    
    $
    1,947,524Construction
      work-in-progress
    
    
    235,387
    
    
    203,0942,191,753
    
    
    2,150,618Less
      accumulated depreciation and amortization
    
    
    102,180
    
    
    87,683Net
      property, plant and equipment
    
    
    2,089,573
    
    
    2,062,935**Investment
      in affiliate**
    
    
    1,290
    
    
    1,436**Current
      assets**Cash
      and cash equivalents
    
    
    17,256
    
    
    26,054Accounts
      receivable, less allowances of $1,289 and $1,289, respectively
    
    
    49,632
    
    
    48,085Accounts
      receivable - related parties
    
    
    7,801
    
    
    7,287Gas
      imbalances - receivable
    
    
    36,992
    
    
    36,122System
      gas and operating supplies
    
    
    119,391
    
    
    98,250Deferred
      income taxes, net
    
    
    10,409
    
    
    10,698Note
      receivable - Southern Union
    
    
    93,745
    
    
    90,745Other
    
    
    9,495
    
    
    11,646Total
      current assets
    
    
    344,721
    
    
    328,887Intangibles,
      net
    
    
    8,377
    
    
    8,496Restricted
      cash
    
    
    1,500
    
    
    1,500Debt
      issuance cost
    
    
    4,204
    
    
    4,471Non-current
      system gas
    
    
    30,033
    
    
    30,471Other
    
    
    3,094
    
    
    1,964**Total
      assets**
    
    $
    2,482,792
    
    $
    2,440,160
 
 
  
 
 
 See
accompanying notes.
   3
 *Table of Contents*
   **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 
 **CONSOLIDATED
BALANCE SHEETS**
 **(Unaudited)**
 **(In
Thousands)**
 
 **March
      31, 2005**
    
    **December
      31, 2004****Owners'
      equity**Partners'
      capital
    
    $
    833,876
    
    $
    802,406Accumulated
      other comprehensive income
    
    
    2,161
    
    
    1,231Tax
      sharing note receivable - Southern Union
    
    
    (57,679
    )
    
    (70,971
    )Total
      owners' equity
    
    
    778,358
    
    
    732,666Long-term
      debt
    
    
    1,181,064
    
    
    1,174,065Total
      capitalization
    
    
    1,959,422
    
    
    1,906,731**Current
      liabilities**Current
      portion of long-term debt
    
    
    -
    
    
    12,548Accounts
      payable
    
    
    2,588
    
    
    3,449Accounts
      payable - overdrafts
    
    
    3,111
    
    
    20,103Accounts
      payable - related parties
    
    
    5,468
    
    
    3,478Gas
      imbalances - payable
    
    
    117,928
    
    
    102,567Accrued
      taxes
    
    
    12,677
    
    
    10,750Accrued
      interest
    
    
    9,385
    
    
    19,119Other
    
    
    88,831
    
    
    85,239Total
      current liabilities
    
    
    239,988
    
    
    257,253Deferred
      income taxes, net
    
    
    179,331
    
    
    172,193Post-retirement
      benefits
    
    
    30,010
    
    
    30,449Other
    
    
    74,041
    
    
    73,534Commitments
      and contingencies**Total
      owners' equity and liabilities**
    
    $
    2,482,792
    
    $
    2,440,160
 
 
 
  
 
 
 See
accompanying notes.
   4
 *Table of Contents*
   **PANHANDLE EASTERN PIPE LINE COMPANY, LP**
 
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 **(In
Thousands)**
  **Three
      Months**
    
    **Three
      Months****Ended
      March 31,**
    
    **Ended
      March 31,****2005**
    
    **2004****Cash
      Flows From (Used In) Operating Activities**Net
      earnings
    
    $
    31,470
    
    $
    33,057Adjustments
      to reconcile net earnings to net cash from operating
      activities:Depreciation
      and amortization
    
    
    15,367
    
    
    15,147Deferred
      income taxes
    
    
    6,801
    
    
    6,661Debt
      premium and discount amortization, net
    
    
    (611
    )
    
    (2,254
    )Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    (2,061
    )
    
    4,918Inventory
    
    
    (21,141
    )
    
    13,371Gas
      imbalances - receivable
    
    
    (870
    )
    
    9,800Other
      assets
    
    
    1,872
    
    
    4,410Payables
    
    
    1,129
    
    
    (3,461
    )Accrued
      taxes
    
    
    15,219
    
    
    8,051Interest
      accrued
    
    
    (9,734
    )
    
    (11,878
    )Gas
      imbalances - payable
    
    
    15,361
    
    
    (25,177
    )Other
      liabilities
    
    
    (1,566
    )
    
    (2,013
    )Net
      cash flows from operating activities
    
    
    51,236
    
    
    50,632**Cash
      Flows Used In Investing Activities**Net
      increase in Note receivable - Southern Union
    
    
    (3,000
    )
    
    (24,900
    )Capital
      and investment expenditures
    
    
    (37,074
    )
    
    (21,262
    )Purchase
      of system gas,net
    
    
    -
    
    
    (42
    )Retirements
      and other
    
    
    (161
    )
    
    (406
    )Net
      cash flows used in investing activities
    
    
    (40,235
    )
    
    (46,610
    )**Cash
      Flows From (Used In) Financing Activities**Decrease
      in bank overdrafts
    
    
    (16,992
    )
    
    (3,351
    )Debt
      issuance
    
    
    -
    
    
    200,000Debt
      retirements
    
    
    (2,807
    )
    
    (149,035
    )Debt
      issuance costs
    
    
    -
    
    
    (862
    )Net
      cash flows from (used in) financing activities
    
    
    (19,799
    )
    
    46,752Net
      increase (decrease) in cash and cash equivalents
    
    
    (8,798
    )
    
    50,774**Cash
      and cash equivalents at beginning of period**
    
    
    26,054
    
    
    16,810**Cash
      and cash equivalents at end of period**
    
    $
    17,256
    
    $
    67,584**Supplemental
      disclosures of cash flow information****Cash
      paid during the period for:**Interest
      (net of interest rate swap and amounts capitalized)
    
    $
    26,270
    
    $
    29,234Income
      taxes (net of refunds)
    
    
    -
    
    
    (1
    )
 See
accompanying notes.
  5
 *Table of Contents*
   **PANHANDLE EASTERN PIPE LINE COMPANY, LP**
 
 **CONSOLIDATED
STATEMENTS OF OWNERS’ EQUITY AND COMPREHENSIVE INCOME**
 **(Unaudited)**
 **(In
Thousands)**
 
 Partners'
      Capital
    
    Accumulated
      Other Comprehensive Income
    
    Tax
      Sharing Note Receivable-Southern Union
    
    TotalBalance
      January 1, 2005
    
    $
    802,406
    
    $
    1,231
    
    $
    (70,971
    )
    $
    732,666Comprehensive
      income:Net
      earnings
    
    
    31,470
    
    
    -
    
    
    -
    
    
    31,470Unrealized
      gain related to interest rate swaps, net of tax
    
    
    -
    
    
    930
    
    
    -
    
    
    930Comprehensive
      income
    
    
    31,470
    
    
    930
    
    
    -
    
    
    32,400Tax
      sharing receivable - Southern Union
    
    
    -
    
    
    -
    
    
    13,292
    
    
    13,292Balance
      March 31, 2005
    
    $
    833,876
    
    $
    2,161
    
    $
    (57,679
    )
    $
    778,358
 
 
  
 See
accompanying notes.
   6
 *Table of Contents*
  **PANHANDLE EASTERNPIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  **ITEM
1. Financial Statements**
 The
accompanying unaudited interim consolidated financial statements of Panhandle
Eastern Pipe Line Company, LP, a Delaware limited partnership, including all of
its subsidiaries (collectively, *Panhandle* ) **** have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ( *SEC* ) for
quarterly reports on Form 10-Q. These statements do not include all of the
information and note disclosures required by generally accepted accounting
principles, and should be read in conjunction with Panhandle’s financial
statements and notes thereto for the twelve months ended December 31, 2004,
included in Panhandle’s Form
10-K filed with the SEC. The accompanying unaudited interim consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and reflect adjustments
(including both normal recurring as well as any non-recurring) which are, in the
opinion of management, necessary for a fair presentation of results for the
interim period. Because of the seasonal nature of Panhandle’s operations, the
results of operations and cash flows for any interim period are not necessarily
indicative of the results that may be expected for the full year. All dollar
amounts in the tables herein are stated in thousands unless otherwise indicated.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
 
 **I  
Corporate Structure**
 
 Panhandle Eastern
Pipe Line Company,
LP ( *Panhandle
Eastern Pipe Line* ) is an
indirect wholly-owned subsidiary of Southern Union Company ( *Southern
Union Company* and,
together with its subsidiaries, *Southern
Union* ).
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas and also provides liquefied natural gas ( *LNG* )
terminalling and regasification services. Panhandle is subject to the rules and
regulations of the Federal Energy Regulatory Commission ( *FERC* ). The
Panhandle entities include Panhandle Eastern Pipe Line, Trunkline Gas Company,
LLC ( *Trunkline* ), a
wholly-owned subsidiary of Panhandle Eastern Pipe Line, Sea Robin Pipeline
Company, LLC ( *Sea
Robin* ), an
indirect wholly-owned subsidiary of Panhandle Eastern Pipe Line, Trunkline LNG
Company, LLC ( *Trunkline
LNG* ), which
is a wholly-owned subsidiary of Trunkline LNG Holdings, LLC ( *LNG
Holdings* ), an
indirect wholly-owned subsidiary of Panhandle Eastern Pipe Line and Pan Gas
Storage, LLC (d.b.a. *Southwest
Gas Storage* ), a
wholly-owned subsidiary of Panhandle Eastern Pipe Line. Collectively, the
pipeline assets include more than 10,000 miles of interstate pipelines that
transport natural gas from the Gulf of Mexico, South Texas and the panhandle
regions of Texas and Oklahoma to major U.S. markets in the Midwest and Great
Lakes region. The pipelines have a combined peak day delivery capacity of 5.4
billion cubic feet ( *bcf* ) per day
and 72 bcf of owned underground storage capacity. Trunkline LNG, located on
Louisiana's Gulf Coast, operates one of the largest LNG import terminals in
North America, based on current send out capacity, and has 6.3 bcf of above
ground LNG storage capacity.
 
 Southern
Union Panhandle, LLC serves as the general partner of Panhandle Eastern Pipe
Line and owns a one percent general partner interest in Panhandle Eastern Pipe
Line. Southern Union Company owns a ninety-nine percent limited partner interest
in Panhandle Eastern Pipe Line.
 
 **II  
Summary of Significant Accounting Policies and Other
Matters**
 
 ***Principles
of Consolidation.*** The
unaudited interim consolidated financial statements include the accounts of all
majority-owned subsidiaries, after eliminating significant intercompany
transactions and balances. Investments in businesses not controlled by Panhandle
Eastern Pipe Line, but over which it may have significant influence, are
accounted for using the equity method. Investments that are variable interest
entities are consolidated if Panhandle is allocated a majority of the entity’s
gains and/or losses, including fees paid by the entity. All significant
intercompany accounts and transactions are eliminated in
consolidation.
 
 ***Asset
Impairment.*** Panhandle applies the provisions of Statement of Financial Accounting Standards
( *SFAS* ) No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to
account for impairments on long-lived assets. Impairment losses are recognized
for long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows are not sufficient to recover the
assets’ carrying value. The amount of impairment is measured by comparing the
fair value of the asset to its carrying amount.
  7
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***Revenues.*** Panhandle’s
revenues from transportation and storage of natural gas and LNG terminalling are
based on capacity reservation charges and commodity usage charges. Reservation
revenues are based on contracted rates and capacity reserved by the customers
and are recognized monthly. Revenues from commodity usage charges are also
recognized monthly, based on the volumes received from or delivered to the
customer, depending on the tariff of that particular Panhandle entity, with
any differences in received and delivered volumes resulting in an imbalance.
Volume imbalances are generally settled in-kind with no impact on revenues, with
the exception of Trunkline, which cashes out imbalances pursuant to its tariff,
and records gains and losses on such cashout sales as a component of revenue, to
the extent not owed back to customers.
 
 ***Significant
Customers and Credit Risk.*** Panhandle manages trade credit risks to minimize exposure to uncollectible trade
receivables. Prospective and existing customers are reviewed for
creditworthiness based upon pre-established standards. Customers that do not
meet minimum standards are required to provide additional credit support.
Panhandle utilizes the allowance method for recording its allowance for
uncollectible accounts which is primarily based on the application of historical
bad debt percentages applied against Panhandle’s aged accounts receivable.
Increases in the allowance are recorded as a component of operation expenses.
Reductions in the allowance are recorded when receivables are written off.
Panhandle has an allowance for doubtful accounts totaling $1,289,000 and
$1,289,000 at March 31, 2005 and December 31, 2004, respectively, relating to
its trade receivables.
 
 ***Accounting
for Retirement Benefits.*** **** To
account for other postretirement benefit costs, Panhandle follows SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits Other Than Pensions”, and
SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement
Benefits,” as amended. For defined benefit plans, under certain circumstances,
these statements require liabilities to be recorded on the balance sheet at the
present value of these future obligations to employees net of any plan assets.
The calculation of these liabilities and associated expenses requires the
expertise of actuaries and is subject to many assumptions, including life
expectancies, present value discount rates, expected long-term rate of return on
plan assets, rate of compensation increase and anticipated health care costs.
Any change in these assumptions can significantly change the liability and
associated expenses recognized in any given year.
 
 Panhandle
does not maintain or participate in a defined benefit retirement plan for its
employees, but instead provides benefits to substantially all employees under a
defined contribution 401(k) plan. Under the 401(k) plan, Panhandle provides a
matching contribution of 50 percent of the employee’s contribution to the 401(k)
plan that does not exceed 4 percent of the employee’s eligible pay. In addition,
Panhandle makes additional contributions to the 401(k) plan ranging from 4 to 6
percent of the employee’s eligible pay, depending on the employee’s age and
years of service under a Retirement Power Account benefit.
 
 Panhandle
provides certain postretirement health and life benefits to eligible, active
employees. The accumulated postretirement benefit obligation with respect to
such postretirement health and life benefits as of March 31, 2005 and December
31, 2004 was approximately $39,404,000 and $38,260,000, respectively. See *Note
VIII - Benefits* .
 
 ***Accounting
for Derivatives and Hedging Activities.*** Panhandle follows SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities *”,* as
amended, to accrue for derivative and hedging activities. See *Note
V - Accounting for Derivatives and Hedging Activities* .
 
 ***Accounting
for Taxes.*** For
federal and certain state income tax purposes, Panhandle’s subsidiaries are not
treated as separate taxpayers. Instead, their income is directly taxable to
Southern Union. Since its conversion to a limited partnership, Panhandle has
been treated as a disregarded entity for federal income tax purposes. Pursuant
to a tax sharing agreement with Southern Union, Panhandle will pay its share of
taxes based on its taxable income, which will generally equal the liability
which Panhandle would have incurred as a separate taxpayer. Panhandle will
receive credit under an intercompany note from Southern Union for differences in
tax depreciation resulting from the like-kind exchange over the taxable life of
the related assets.
 
  8
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets, such as net operating loss carryforwards, may be reduced by
a valuation allowance if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
 
 ***Commitments
and Contingencies.*** Panhandle is subject to proceedings, lawsuits and other claims related to
environmental and other matters. Accounting for contingencies requires
significant judgments by management regarding the estimated probabilities and
ranges of exposure to potential liability. See *Note
IX - Commitments and Contingencies* .
 
 **New
Accounting Standards**
 
 ***FSP
No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003”*** ***(the
Medicare Prescription Drug Act)*** ***:*** Issued
by the Financial Accounting Standards Board (*FASB*) in May 2004, FASB
Financial Staff Position (*FSP*) No. FAS 106-2 (*FSP FAS 106-2*)
requires entities to record the impact of the Medicare Drug Prescription Act as
an actuarial gain in the postretirement benefit obligation for postretirement
benefit plans that provide drug benefits covered by that legislation. Panhandle
adopted this FSP as of March 31, 2005, the effect of which was not material to
its consolidated financial statements. The effect of this FSP may vary as a
result of any future changes to Panhandle’s benefit plans.
 
 ***FASB
Statement No.123R, "Share-Based Payment (revised 2004)":*** ** Issued by
the FASB in December 2004, the statement revises FASB Statement No. 123,
“Accounting for Stock-Based Compensation,” supersedes the Accounting Principal
Board Opinion No. 25, “Accounting for Stock Issued to Employees” and amends the
FASB Statement No. 95, “Statement of Cash Flows.” The statement will be
effective for Southern Union, Panhandle’s parent company, in the first annual
reporting period beginning after June 15, 2005 and will require Southern Union
to measure all employee stock-based compensation awards using a fair value
method and record such expense in its consolidated financial statements.
Panhandle will be charged for its proportionate share of the expense recorded by
Southern Union. In addition, the adoption of the statement will require
additional accounting and disclosure related to the income tax and cash flow
effects resulting from share-based payment arrangements. Panhandle is currently
evaluating the impact of this statement on its consolidated financial position,
results of operations and cash flows.
 
 ***FSP
No. 109-1, “Application of FASB Statement No. 109, ‘Accounting for Income
Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004”:*** On
October 22, 2004, the American Jobs Creation Act of 2004 ( *the
Act* ) was
signed. The Act raises a number of issues with respect to accounting for income
taxes. On December 21, 2004, the FASB issued a Staff Position regarding the
accounting implications of the Act related to the deduction for qualified
domestic production activities (*FSP FAS 109-1*) which is effective for
periods subsequent to December 31, 2004. The guidance in the FSP otherwise
applies to financial statements for periods ending after the date the Act was
enacted. In FSP FAS 109-1, “Application of FASB Statement No. 109, ‘Accounting
for Income Taxes,’ to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004,” the FASB decided that the
deduction for qualified domestic production activities should be accounted for
as a special deduction under Statement of Financial Accounting Standards No.
109, “Accounting for Income Taxes,” and rejected an alternative view to treat it
as a rate reduction. Accordingly, any benefit from the deduction should be
reported in the period in which the deduction is claimed on the tax return. In
most cases, a company’s existing deferred tax balances will not be impacted at
the date of enactment. For some companies, the deduction could have an impact on
their effective tax rate and, therefore, should be considered when determining
the estimated annual rate used for interim financial reporting. Panhandle is
currently evaluating the impact of this FSP but does not believe it will have a
significant impact on its consolidated financial position, results of operations
or cash flows.
 
  9
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***FSP
No. FIN 46R-5, “Implicit Variable Interests under FASB Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest Entities” (FSP FIN
No. 46R-5):*** Issued
by the FASB in March 2005, this staff position addresses whether a reporting
enterprise should consider whether it holds an implicit variable interest in a
variable interest entity ( *VIE* ) or
potential VIE when specific conditions exist. An implicit variable interest is
an implied pecuniary interest in an entity that indirectly changes with changes
in the fair value of the entity’s net assets exclusive of variable interests.
Implicit variable interests may arise from transactions with related parties, as
well as from transactions with unrelated parties. This FSP is effective, for
entities to which the interpretations of FIN 46(R) have been applied, in the
first reporting period beginning after March 31, 2005. Panhandle adopted this
FSP as of March 31, 2005, the effect of which had no impact on Panhandle’s consolidated
financial position, results of operations or cash flows .
 
 ***FIN
No. 47, “Accounting for Conditional Asset Retirement
Obligations.”*** Issued
by the FASB in March 2005, this interpretation clarifies that the term
“conditional asset retirement obligation” as used in SFAS No. 143, “Accounting
for Asset Retirement Obligations,” refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement are
conditioned on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of settlement. The
entity is required to recognize a liability for the fair value of a conditional
asset retirement obligation if the fair value can be reasonably estimated. This
statement is effective for the fiscal year ending after December 31, 2005.
Panhandle is currently evaluating the impact, if any, of this interpretation on
its consolidated financial position, results of operations or cash flows.
 
 ***FERC
Proposed Accounting Release:*** In
November 2004, the FERC issued an industry-wide Proposed Accounting Release
that, if enacted as written, would require pipeline companies to expense rather
than capitalize certain costs related to mandated pipeline integrity programs
(under the Pipeline Safety Improvement Act of 2002). The accounting release was
proposed to be effective January 1, 2005, following a period of public comment
on the release. Comments were filed on January 19, 2005, including pipeline
association comments suggesting that such costs be capitalized. Panhandle is
awaiting a final release and cannot, at this time, predict the final outcome. Panhandle
has currently budgeted in 2005 approximately $22 million of pipeline integrity
related costs, of which approximately $3 million of currently capitalized costs
would be required to be expensed pursuant to the release.
 
 **III  
Regulatory Matters**
 
 
 In
conjunction with a FERC Order issued in September 1997, certain natural gas
producers were required to refund to interstate natural gas pipelines, including
Panhandle Eastern Pipe Line, monies previously paid to producers as
reimbursement of the producers Kansas Ad Valorem tax obligations. The FERC order
required the affected pipelines to refund these amounts to their customers. In
June 2001, Panhandle Eastern Pipe Line filed a proposed settlement of these
proceedings which all the customers and most of the producers supported. The
settlement provided for the producers to refund and the customers to accept a
reduction from the amounts originally billed to the producers. In September
2001, the FERC approved the settlement without modification and the settlement
became effective on October 15, 2001. Settlements were reached with all of the
non-settling producers in November 2003, except for Pioneer Natural Resources,
Inc. ( *Pioneer* ) and
Burlington Resources Oil & Gas Company, LP ( *Burlington* ). On
January 29, 2004 and February 13, 2004, the Commission approved settlements with
these remaining non-settling producers. A FERC hearing to resolve the
outstanding issues with Pioneer was conducted on October 16, 2003. FERC orders
which established Pioneer’s refund amount were issued on June 2, 2004 and
October 12, 2004. As of December 31, 2004, all tax collections due from
producers had been received and distributed to Panhandle’s customers. One
producer, Burlington, is contesting the applicability of the FERC refund
requirement due to a prior gas purchase contract settlement with Panhandle
Eastern Pipe Line. On January 21, 2005, the United States Court of Appeals for
the District of Columbia Circuit remanded this case back to the FERC for further
explanation as to why Burlington should be required to make a refund to
Panhandle Eastern Pipe Line. Management believes that this matter will not have
a material adverse effect on Panhandle’s consolidated results of operations or
financial position. At December 31, 2004, other current liabilities included
$206,000 for tax collections due to customers.
  10
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  In
December 2002, FERC approved a Trunkline LNG certificate application to expand
the Lake Charles facility to approximately 1.2 bcf per day of sustainable send
out capacity versus the current sustainable send out capacity of .63 bcf per day
and increase terminal storage capacity to 9 bcf from the current 6.3 bcf. BG LNG
Services has contract rights for the .57 bcf per day of additional capacity.
Construction on the Trunkline LNG expansion project ( *Phase
I* )
commenced in September 2003 and is expected to be completed at an estimated cost
of $137 million, plus capitalized interest, by the end of 2005. On September 17,
2004, as modified on September 23, 2004, FERC approved Trunkline LNG’s further
incremental expansion project ( *Phase
II* ). Phase
II is estimated to cost approximately $77 million, plus capitalized interest,
and would increase the LNG terminal sustainable send out capacity to 1.8 bcf per
day. Phase II has an expected in-service date of mid-2006. BG LNG Services has
contracted for all the proposed additional capacity, subject to Trunkline LNG
achieving certain construction milestones at this facility. Approximately $150
million and $127 million of costs are included in the line item Construction
work-in-progress for the expansion projects at March 31, 2005 and December 31,
2004, respectively.
 
 In
February 2004, Trunkline filed an application with the FERC to request approval
of a 30-inch diameter, 23-mile natural gas pipeline loop from the LNG terminal.
Trunkline’s filing was approved on September 17, 2004, as modified on September
23, 2004. The pipeline creates additional transport capacity in association with
the Trunkline LNG expansion and also includes new and expanded delivery points
with major interstate pipelines. On November 5, 2004, Trunkline filed an amended
application with the FERC to change the size of the pipeline from 30-inch
diameter to 36-inch diameter to better position Trunkline to provide
transportation service for expected future LNG volumes and increase operational
flexibility. The amendment was approved by FERC on February 11, 2005. The
Trunkline natural gas pipeline loop project associated with the LNG terminal is
estimated to cost $50 million, plus capitalized interest. Approximately $23
million and $21 million of costs are included in the line item Construction
work-in-progress for this project at March 31, 2005 and December 31, 2004.
 
 **IV  
Related Party Transactions**
 
 Panhandle
Eastern Pipe Line receives transportation revenues from Missouri Gas Energy, a
Southern Union division, which account for less than one percent of annual
consolidated revenues. These deliveries are at contracted rates that pre-date
the acquisition
of Panhandle by Southern Union (*Panhandle Acquisition*).
 
 **Three
      Months**
    
    **Three
      Months****Ended
      March 31,**
    
    **Ended
      March 31,****Related
      Party Transactions**
    
    **2005**
    
    **2004**Transportation
      and storage of natural gas
    
    $
    895
    
    $
    977Operation
      and maintenance:Management
      & royalty fees
    
    
    3,386
    
    
    3,222Other
      expenses
    
    
    3,704
    
    
    4,472Interest
      income, net
    
    
    563
    
    
    279
 Pursuant
to a demand note with Southern Union under a cash management program, Panhandle
has loaned excess cash, net of repayments, totaling $93,745,000 to Southern
Union since the Panhandle Acquisition. Net loans of $3,000,000 were
recorded during the three month period ended March 31, 2005. Panhandle is
credited with interest on the note at a one month LIBOR rate. Interest income
associated with the Note receivable - Southern Union was $510,000 and $269,000
for the periods ended March 31, 2005 and March 31, 2004, respectively, and is
included in Other, net in the accompanying Consolidated Statements of
Operations. Panhandle expects to draw down on the note over the next twelve
months to fund capital expenditures in excess of operating cash flows and has
thus reflected the note receivable from Southern Union as a current asset.
 
 11
 *Table of Contents*
 **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 A summary
of certain balances due from or (due to) related parties included in the
Consolidated Balance Sheets for the periods presented is as
follows:
 
 **March
      31,**
    
    **December
      31,****Related
      Party Transactions**
    
    **2005**
    
    **2004**Note
      receivable - Southern Union
    
    $
    93,745
    
    $
    90,745Accounts
      receivable
    
    
    7,801
    
    
    7,287Accounts
      payable
    
    
    (5,468
    )
    
    (3,478
    )Owners'
      equity - Tax sharing note receivable - Southern Union
    
    
    57,679
    
    
    70,971
 Southern
Union structured the Panhandle Acquisition in a manner intended to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended. For tax purposes, the Panhandle assets that were part of
the exchange were recorded at the tax basis of the Southern Union assets for
which they were exchanged. The resulting transaction generated an estimated
deferred tax liability of approximately $91 million at the acquisition date and
a corresponding receivable from Southern Union reflected as a reduction to
owners’ equity on Panhandle’s Consolidated Balance Sheet. Repayment of the
receivable from Southern Union is limited to actual tax liabilities otherwise
payable by Panhandle pursuant to the tax sharing agreement with Southern Union. In March
2005 and December 2004, Panhandle recorded a $13,292,000 and a $7,720,000 income
tax liability settlement against the Tax sharing note receivable,
respectively. In the
fourth quarter of 2004, Panhandle recorded a $12,247,000 reduction in its
deferred tax liability and the corresponding Tax sharing note receivable from
Southern Union due to revised calculations in the amount of Panhandle’s tax
basis utilized by Southern Union in the like-kind exchange associated with the
Panhandle Acquisition.
 On
November 17, 2004, CCE Holdings, LLC ( *CCE* ), a
joint venture in which Southern Union owns a 50 percent interest, acquired 100
percent of the equity interests of CrossCountry Energy, LLC ( *CrossCountry* ) from
Enron Corp. and certain of its subsidiaries for approximately $2,450,000,000 in
cash, including the assumption of certain consolidated debt. On November 5,
2004, CCE entered into an Administrative Services Agreement ( *the
Management Agreement* ) with
Panhandle and SU Pipeline Management LP ( *Manager* ), a
Delaware limited partnership and a wholly owned subsidiary of Southern Union.
Under the terms of the Management Agreement, Panhandle covenants, to the extent
permitted by applicable law, to cause Manager to perform the duties and
obligations of Manager. Manager has assembled an integrated pipeline management
team, which includes employees of Panhandle and CrossCountry. Pursuant to the
Management Agreement, Manager is responsible for the operations and
administrative functions of the enterprise. CCE and Manager will share certain
operations of Manager and its affiliates, and CCE will be obligated to bear its
share of costs of the Manager and its affiliates, as well as certain transition
costs and, under certain conditions, pay annual management fees to Manager.
Transition costs are non-recurring costs of establishing the shared services,
including but not limited to severance costs, professional fees, certain
transaction costs, and the costs of relocating offices and personnel, pursuant
to the Management Agreement. At December 31, 2004, Panhandle recognized a
liability of approximately $6 million for severance related costs which is
reimbursable from CCE for which an offsetting amount is reflected in Accounts
receivable - related parties at March 31, 2005.
 
 **V  
Accounting for Derivatives and Hedging Activities**
 
 Panhandle
follows SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities *”,* as
amended, to account for derivative and hedging activities. Panhandle utilizes
interest-rate related derivative instruments to manage its exposure on its debt
instruments and does not enter into derivative instruments for any purpose other
than hedging purposes. All derivatives are recognized on the balance sheet at
their fair value. On the date the derivative contract is entered into, Panhandle
designates the derivative as either: (i) a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment
( *fair
value hedge* ) or (ii)
a hedge of a forecasted transaction or the variability of cash flows to be
received or paid in conjunction with a recognized asset or liability
( *cash
flow hedge* ).
 
  12
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  Interest
rate swaps are used to reduce interest rate risks and to manage interest
expense. By entering into these agreements, Panhandle converts floating-rate
debt into fixed-rate debt or converts fixed-rate debt to floating. Interest
differentials paid or received under the swap agreements are reflected as an
adjustment to interest expense. These interest rate swaps are financial
derivative instruments that qualify for hedge treatment. For derivatives treated
as hedges of future cash flows, the effective portion of changes in fair value
is recorded in other comprehensive income until the related hedge items impact
earnings. Any ineffective portion of a hedge is reported in earnings
immediately. Upon termination of a cash flow hedge of the variability of cash
flows to be paid, the resulting gain or loss is amortized to income through the
maturity date of the original designated hedging relationship, unless it is
probable that the forecasted transaction will not occur during a specified time
period. For derivatives treated as a hedge of the fair value of a debt
instrument, the effective portion of changes in fair value are recorded as an
adjustment to the hedged debt. The ineffective portion of a fair value hedge is
recognized in earnings if the short cut method of assessing effectiveness is not
used. Upon termination of a fair value hedge of a debt instrument, the resulting
gain or loss is amortized to income through the maturity date of the debt
instrument.
 
 Panhandle’s
subsidiary LNG Holdings is party to interest rate swap agreements with an
aggregate notional amount of $191,722,000 as of March 31, 2005 that fix the
interest rate applicable to floating rate long-term debt and which qualify for
hedge accounting. For the three month period ended March 31, 2005, there was no
swap ineffectiveness. For the three month period ended March 31, 2004, the
amount of swap ineffectiveness was not significant. As of March 31, 2005,
floating rate LIBOR based interest payments were exchanged for weighted average
fixed rate interest payments of 6.09 percent. As such, payments, in excess of
the liability recorded, or receipts on interest rate swap agreements are
recognized as adjustments to interest expense. As of March 31, 2005 and December
31, 2004, the fair value liability position of the swaps was $7,486,000 and
$11,053,000, respectively. For the three month periods ended March 31, 2005 and
March 31, 2004, an unrealized gain of $1,556,000 ($930,000, net of tax) and an
unrealized loss of $3,765,000 ($2,252,000, net of tax), respectively, was
included in accumulated other comprehensive income related to these swaps.
Current market pricing models were used to estimate fair values of interest rate
swap agreements.
 
 On April
29, 2005, existing LNG Holdings bank loans due in 2007 were repaid in full using
the proceeds from a Credit Agreement entered into on April 26, 2005
( *the
Credit Agreement* ).
Interest rate swaps previously designated as cash flow hedges of the LNG
Holdings bank loans were terminated upon repayment of the loans (see *Note
VI - Debt* ). As a
result, a gain of $3,465,000 ($2,072,000, net of tax), will be
reflected in Accumulated other comprehensive income in the Consolidated Balance
Sheet and will
be amortized to interest expense through the maturity date of the original bank
loans in 2007.
 
 In March
2004, Panhandle entered into interest rate swaps to hedge the risk associated
with the fair value of its $200 million 2.75 percent Senior Notes. See *Note
VI - Debt* . These
swaps are designated as fair value hedges and qualify for the short cut method
under SFAS No. 133. As of March 31, 2005 and December 31, 2004 the fair value
position of the swaps was a liability of $6,067,000 and $3,936,000,
respectively, recorded as a reduction to long-term debt. Under the swap
agreements, Panhandle will receive fixed interest payments at a rate of 2.75
percent and will make floating interest payments based on the six-month LIBOR.
No ineffectiveness is assumed in the hedging relationship between the debt
instrument and the interest rate swap. As of March 31, 2005, these swaps have an
average interest rate of 3.12 percent.
 
 13
 *Table of Contents*
 
 **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 VI   Debt
 
 **March
      31,**
    
    **December
      31,****Long-term
      Debt**
    
    **Year
      Due**
    
    **2005**
    
    **2004**6.50%
      Senior Notes
    
    
    2009
    
    $
    60,623
    
    $
    60,6238.25%
      Senior Notes
    
    
    2010
    
    
    40,500
    
    
    40,5007.00%
      Senior Notes
    
    
    2029
    
    
    66,305
    
    
    66,3054.80%
      Senior Notes
    
    
    2008
    
    
    300,000
    
    
    300,0006.05%
      Senior Notes
    
    
    2013
    
    
    250,000
    
    
    250,0002.75%
      Senior Notes
    
    
    2007
    
    
    200,000
    
    
    200,000LNG
      Holdings bank loans (floating rate)
    
    
    2007
    
    
    255,626
    
    
    258,433Total
      debt outstanding
    
    
    
    
    
    1,173,054
    
    
    1,175,861Current
      portion of long-term debt
    
    
    
    
    
    -
    
    
    (12,548
    )Interest
      rate swaps (2.75% Senior Notes)
    
    
    
    
    
    (6,067
    )
    
    (3,936
    )Unamortized
      debt premium, net
    
    
    
    
    
    14,077
    
    
    14,688Total
      long-term debt
    
    
    
    
    $
    1,181,064
    
    $
    1,174,065
 
 Panhandle
has $1,181,064,000 of debt recorded at March 31, 2005. Debt of $925,438,000,
including net premiums of $14,077,000 and interest rate swaps of $6,067,000, is
at fixed rates ranging from 2.75 percent to 8.25 percent, with an average annual
interest rate of 5.12 percent excluding debt premium, discount and issuance cost
amortization. The $255,626,000 of variable rate bank loans had an average rate
of 4.15 percent for the three month period ended March 31, 2005. The assets of
Trunkline LNG are pledged as collateral for the variable rate loans. See *Note
V - Accounting for Derivatives and Hedging Activities* for
discussion of interest rate swap agreements associated with outstanding debt.
 
 Panhandle’s
notes are subject to certain requirements such as the maintenance of a fixed
charge coverage ratio and a leverage ratio which restrict certain payments if
not maintained, and limitations on liens. At March 31, 2005, Panhandle, based on
the currently most restrictive debt covenant requirements, was subject to a
$391,424,000 limitation on additional restricted payments including dividends
and loans to affiliates, and a limitation of $334,533,000 of additional secured
indebtedness or other defined liens based on a limitation on liens covenant. At
March 31, 2005, Panhandle was in compliance with all covenants.
 
 At March
31, 2005, Panhandle had no scheduled debt payments for the remainder of 2005 and
2006 and scheduled payments of $455,626,000, $300,000,000, $60,623,000 and
$356,805,000 for the years 2007 through 2009 and in total thereafter,
respectively.
 
 LNG
Holdings, as borrower, and Panhandle Eastern Pipe Line and Trunkline LNG, as
guarantors, entered into a Credit Agreement dated as of April 26, 2005, with a
consortium of banks for a senior term loan financing in the aggregate principal
amount of $255,626,000 which matures on March 15, 2007. The senior term loan
carries a floating interest rate tied to LIBOR or prime interest rates at
Panhandle’s option, in addition to a margin which is tied to the rating of
Panhandle’s unsecured senior funded debt. On April 29, 2005, the proceeds from
the Credit Agreement were used to repay all outstanding indebtedness under
existing LNG Holdings floating rate bank loans that were due in 2007. The senior
term loan requires maintenance of a fixed charge coverage ratio and a leverage
ratio which restrict certain payments if not maintained, and a limitation on
liens. If the senior term loan had been in effect at March 31, 2005, Panhandle
Eastern Pipe Line would have been subject to a more restrictive limitation of
$223,443,000 of additional secured or subsidiary level indebtedness. 
If
the senior term loan had been in effect at March 31, 2005, Panhandle would also
have been subject to a limitation of $264,458,000 of total additional
indebtedness.
 
  14
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  On March
12, 2004, Panhandle issued $200,000,000 of 2.75 percent Senior Notes due 2007,
Series A, in reliance on an exemption from the registration requirements of the
Securities Act of 1933 for offers and sales of securities not involving a public
offering or sale, in order to refinance Panhandle’s maturing debt. Panhandle
used a portion of the net proceeds to retire $146,080,000 of 6.125 percent
Senior Notes which matured on March 15, 2004, as well as for other general
corporate purposes. A portion of the remaining net proceeds was also used to pay
off the $52,455,000 of 7.875 percent Senior Notes which matured on August 15,
2004. Panhandle filed a registration statement on May 12, 2004 to initiate an
exchange of the unregistered 2.75 percent Senior Notes due 2007, Series A, for
substantially identical securities registered under the Securities Act of 1933.
Such exchange was completed June 25, 2004.
 
 **VII  
Comprehensive Income**
 
 The table
below provides an overview of comprehensive income for the periods
indicated.
 
 **Three
      Months**
    
    **Three
      Months****Ended
      March 31,**
    
    **Ended
      March 31,****2005**
    
    **2004**Net
      earnings
    
    $
    31,470
    
    $
    33,057Unrealized
      gain (loss) related to interest rate swaps,net
      of taxes of $1,412 and $(593), respectively
    
    
    2,160
    
    
    (822
    )Realized
      (gains) losses in net income,net
      of taxes of $(786) and $(920), respectively
    
    
    (1,230
    )
    
    (1,430
    )Total
      comprehensive income
    
    $
    32,400
    
    $
    30,805
 
 Accumulated
other comprehensive income reflected in the Consolidated Balance Sheet at March
31, 2005 and December 31, 2004 includes unrealized gains related to interest
rate swaps.
 
 
 15
 *Table of Contents*
   **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  **VIII 
 Benefits**
 
 **Components
of Net Periodic Benefit Cost**
 
 Net
periodic benefit costs for the three months ended March 31, 2005 and 2004 for
postretirement benefit plans other than pensions (OPEB) includes the following
components:
 
 **Three
      Months**
    
    **Three
      Months****Ended
      March 31,**
    
    **Ended
      March 31,****OPEB**
    
    **2005**
    
    **2004**Service
      cost
    
    $
    740
    
    $
    645Interest
      cost
    
    
    900
    
    
    735Expected
      return on plan assets
    
    
    (230
    )
    
    (48
    )Amortization
      of prior service cost
    
    
    (55
    )
    
    -Amortization
      of transition obligation
    
    
    -
    
    
    -Recognized
      actuarial gain
    
    
    160
    
    
    -Settlement
      recognition
    
    
    -
    
    
    -Net
      periodic benefit cost
    
    $
    1,515
    
    $
    1,332
 
 For the
three months ended March 31, 2005, approximately $0.4 million in contributions
have been made to the OPEB plan. Panhandle expects to contribute an additional
$7.4 million to fund the OPEB plan in fiscal 2005 for a total of $7.8
million.
 
 Panhandle
does not have a pension plan but does make employer contributions to a qualified
defined contribution plan, which contributions range from four to six percent of
the participating employee’s salary based on the participating employee’s age
and years of service. During the quarters ended March 31, 2005 and 2004,
approximately $1 million and $1 million, respectively, was recorded as expense
associated with Panhandle contributions to the qualified defined contribution
plan.
 
 ***Stock
Based Compensation.*** Following
its acquisition by Southern Union on June 11, 2003 and in accordance with
Southern Union’s policy, Panhandle reports stock option grants using the
intrinsic-value method in accordance with APB Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related authoritative interpretations. Under the
intrinsic-value method, because the exercise price of the Southern Union
employee stock options is greater than or equal to the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
 
  16
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  The
following table illustrates the effect on net earnings and net earnings
available for equity holders if Panhandle had applied the fair value recognition
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as
amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and
Disclosure,” to stock-based employee compensation:
 
 **Three
      Months**
    
    **Three
      Months****Ended
      March 31,**
    
    **Ended
      March 31,****2005**
    
    **2004**Net
      earnings, as reported
    
    $
    31,470
    
    $
    33,057Deduct
      total stock-based employee compensationexpense
      determined under fair value based methodfor
      all awards, net of related taxes
    
    
    51
    
    
    207Pro
      forma net earnings
    
    $
    31,419
    
    $
    32,850
 
 ***Recently
Enacted Legislation.*** The
Medicare Prescription Drug Act was signed into law December 8, 2003. The Act
introduces a prescription drug benefit under Medicare (*Medicare Part D*)
as well as a federal subsidy to sponsors of retiree healthcare benefit plans
that provide a prescription drug benefit that is at least actuarially equivalent
to Medicare Part D. Issued by the FASB in May 2004, FASB Financial Staff
Position ( *FSP* ) No. FAS
106-2 ( *FSP
FAS 106-2* )
requires entities to record the impact of the Medicare Prescription Drug Act as
an actuarial gain in the postretirement benefit obligation for postretirement
benefit plans that provide drug benefits covered by that legislation. Panhandle
adopted this FSP as of March 31, 2005, the effect of which was not material to
its consolidated financial statements. The effect of this FSP may vary as a
result of any future changes to Panhandle's benefit plans.
 **IX  
Commitments and Contingencies**
 
 ***Litigation.*** **** Panhandle
is involved in legal, tax and regulatory proceedings before various courts,
regulatory bodies and governmental agencies regarding matters arising in the
ordinary course of business, some of which involve substantial amounts. Where
appropriate, Panhandle has made accruals in accordance with SFAS No. 5 in
order to provide for such matters. Management believes the final disposition of
these proceedings will not have a material adverse effect on Panhandle’s
consolidated results of operations or financial position.
 
 Hope Land
Mineral Corporation ( *Hope
Land* )
contends that it owns the storage rights to property that contains a portion of
Panhandle’s Howell storage field. During June 2003, the Michigan Court of
Appeals reversed the trial court’s previous order, which had granted summary
judgment in favor of Panhandle and dismissed the case. Panhandle filed an appeal
of the Court of Appeals order with the Michigan Supreme Court which was denied
in December of 2003. In April 2005, Hope Land filed trespass and unjust
enrichment complaints against Panhandle to prevent running of the statute of
limitations. Panhandle intends to file an action for condemnation to obtain the
storage rights from Hope Land. Panhandle does not believe the outcome of this
case will have a material adverse effect on Panhandle’s consolidated results of
operations or financial position.
 
 Jack
Grynberg, an individual, has filed actions against a number of companies,
including Panhandle, now transferred to the U.S. District Court for the District
of Wyoming, for damages for mis-measurement of gas volumes and Btu content,
resulting in lower royalties to mineral interest owners. A similar action has
also been filed against a number of companies, including Panhandle, in Kansas
District Court. Panhandle believes that its measurement practices conformed to
the terms of its FERC Gas Tariff, which was filed with and approved by FERC. As
a result, Panhandle believes that it has meritorious defenses to the complaint
(including FERC-related affirmative defenses, such as the filed rate/tariff
doctrine, the primary/exclusive jurisdiction of FERC, and the defense that
Panhandle complied with the terms of its tariff) and is defending the suit
vigorously.
  17
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***Environmental
Matters.*** **** Panhandle’s
gas transmission operations are subject to federal, state and local regulations
regarding water quality, hazardous and solid waste management, air quality
control and other environmental matters. Panhandle has previously identified
environmental contamination at certain sites on its gas transmission systems and
has undertaken cleanup programs at these sites. The contamination resulted from
the past use of lubricants containing polychlorinated bi-phenyls ( *PCBs* ) in
compressed air systems; the past use of paints containing PCBs; and the prior
use of wastewater collection facilities and other on-site disposal areas.
Panhandle has developed and is implementing a program to remediate such
contamination in accordance with federal, state and local regulations.
 
 As part
of the cleanup program resulting from contamination due to the use of lubricants
containing PCBs in compressed air systems, Panhandle Eastern Pipe Line and
Trunkline have identified PCB levels above acceptable levels inside the
auxiliary buildings that house the air compressor equipment at thirty-three
compressor station sites. Panhandle has developed and is implementing a United
States Environmental Protection Agency ( *EPA* )
approved process to remediate this PCB contamination in accordance with federal,
state and local regulations. Sixteen sites have been decontaminated per the EPA
approved process as prescribed in the EPA regulations.
 
 At some
locations, PCBs have been identified in paint that was applied many years ago.
In accordance with EPA regulations, Panhandle has implemented a program to
remediate sites where such issues are identified during painting activities. If
PCBs are identified above acceptable levels, the paint is removed and disposed
of in an EPA approved manner.
 
 The
Illinois Environmental Protection Agency ( *Illinois
EPA* )
notified Panhandle Eastern Pipe Line and Trunkline, together with other
non-affiliated parties, of contamination at three former waste oil disposal
sites in Illinois. Panhandle Eastern Pipe Line’s and Trunkline’s estimated share
for the costs of assessment and remediation of the sites, based on the volume of
waste sent to the facilities, is approximately seventeen percent. Panhandle and
twenty-one other non-affiliated parties conducted an initial voluntary
investigation of the Pierce Oil Springfield site, one of the three sites. In
addition, Illinois EPA has informally indicated that it has referred the Pierce
Oil Springfield site, to the EPA so that environmental contamination present at
the site can be addressed through the federal Superfund program. No formal
notice has yet been received from either agency concerning the referral.
However, the EPA is expected to issue special notice letters and has begun the
process of listing the site on the National Priority List. Panhandle and three
of the other non-affiliated parties associated with the Pierce Oil Springfield
site met with the EPA and Illinois EPA regarding this issue. Panhandle was given
no indication as to when the listing process was to be completed. Panhandle has
also submitted a Comprehensive
Environmental Response, Compensation, and Liability Act 104e
data request from the EPA Region V regarding the second Pierce Waste Oil site
known as the Dunavan site, located in Oakwood, Illinois. Panhandle’s response
showed that waste oil generated at Panhandle facilities was shipped to the
Dunavan Oil site in Oakwood, Illinois, resulting in Panhandle becoming a
potentially responsible party at such site.
 
 Panhandle
expects the cleanup programs for all of the above matters to continue for
several years and has estimated its share of remaining cleanup costs to range
from approximately $7 million to $16 million. At March 31, 2005, Panhandle has
related accruals totaling approximately $12,741,000, of which $2,858,000 is
included in Other current liabilities for the estimated current amounts and
$9,883,000 is included in Other non-current liabilities on the Consolidated
Balance Sheet. At December 31, 2004, Panhandle had related accruals totaling
approximately $12,912,000, of which $3,046,000 is included in Other current
liabilities for the estimated current amounts and $9,866,000 is included in
Other non-current liabilities on the Consolidated Balance Sheet. During the
first quarter of 2005, Panhandle spent $171,000 related to these cleanup
programs.
 
  18
 *Table of Contents*
  **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***Air
Quality Control.***  In 1998,
the EPA issued a final rule on regional ozone control that requires Panhandle to
place controls on engines in five midwestern states. The part of the rule that
affects Panhandle was challenged in court by various states, industry and other
interests, including the Interstate Natural Gas Association of America
( *INGAA* ), an
industry group to which Panhandle belongs. In March 2000, the court upheld most
aspects of the EPA’s rule, but agreed with INGAA’s position and remanded to the
EPA the sections of the rule that affected Panhandle. The final rule was
promulgated by the EPA in April 2004. The five midwestern states have not
promulgated state regulations to address the requirements of this rule. Based on
an EPA guidance document negotiated with gas industry representatives in 2002,
it is believed that Panhandle will be required under state rules to reduce
nitrogen oxide ( *NOx* )
emissions by eighty-two percent on the identified large internal combustion
engines and will be able to trade off engines within the company and within each
of the five Midwestern states affected by the rule in an effort to create a cost
effective NOx reduction solution. The final implementation date is May 2007. The
rule impacts twenty large internal combustion engines on the Panhandle system in
Illinois and Indiana at an approximate cost of $23 million for capital
improvements through 2007, based on current projections.
 
 In 2002,
the Texas Commission on Environmental Quality enacted the Houston/Galveston SIP
regulations requiring reductions in NOx emissions in an eight-county area
surrounding Houston. Trunkline’s Cypress compressor station is affected and
requires the installation of emission controls. New regulations also require
certain grandfathered facilities in Texas to enter into the new source permit
program which may require the installation of emission controls at one
additional facility owned and operated by Panhandle. These two rules affect two
company facilities in Texas at an estimated cost of approximately $14 million
for capital improvements through March 2007, based on current projections.
 
 The EPA
promulgated various Maximum Achievable Control Technology ( *MACT* ) rules
in February 2004. The rules require that Panhandle Eastern Pipe Line and
Trunkline control Hazardous Air Pollutants ( *HAPs* ) emitted
from certain internal combustion engines at major HAPs sources. Most of
Panhandle Eastern Pipe Line and Trunkline compressor stations are major HAPs
sources. The HAPs pollutant of concern for Panhandle Eastern Pipe Line and
Trunkline is formaldehyde. As promulgated, the rule seeks to reduce formaldehyde
emissions by seventy-six percent from these engines. Catalytic controls will be
required to reduce emissions under these rules with a final implementation date
of June 2007. Panhandle Eastern Pipe Line and Trunkline have over twenty
internal combustion engines subject to the rules. It is expected that compliance
with these regulations will cost an estimated $1 million for capital
improvements, based on current projections.
 ****
 ***Other
Commitments and Contingencies.*** In 1993,
the U.S. Department of the Interior announced its intention to seek, through its
Mineral Management Service ( *MMS* ),
additional royalties from gas producers as a result of payments received by such
producers in connection with past take-or-pay settlements and buyouts and
buydowns of gas sales contracts with natural gas pipelines. Panhandle Eastern
Pipe Line and Trunkline, with respect to certain producer contract settlements,
may be contractually required to reimburse or, in some instances, to indemnify
producers against such royalty claims. The potential liability of the producers
to the government and of the pipelines to the producers involves complex issues
of law and fact, which are likely to take substantial time to resolve. If
required to reimburse or indemnify the producers, Panhandle Eastern Pipe Line
and Trunkline may file with FERC to recover these costs from pipeline customers.
Management believes these commitments and contingencies will not have a material
adverse effect on Panhandle’s business, financial condition or results of
operations.
 
 In
conjunction with Southern Union’s investment in CCE and CCE’s acquisition of
CrossCountry from Enron Corp. and certain subsidiaries of Enron, Panhandle
initiated an additional workforce reduction plan designed to reduce the
workforce by approximately an additional six percent. Approximately $6 million
of the approximately $7.7 million of the resulting severance and related costs
are reimbursable by CCE pursuant to agreements between the parties involved.
 
 19
 *Table of Contents*
 
 **PANHANDLE
EASTERN PIPE LINE COMPANY, LP**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**


On September 10, 2003, Panhandle Eastern Pipe Line provided a
guarantee to CB&I Constructors, Inc. for the full performance by Trunkline
LNG, its subsidiary, of the engineering, procurement and construction contract
between Trunkline LNG and CB&I Constructors, Inc. The contract is for the
construction of the expansion of the Trunkline LNG Lake Charles facility, and
covers approximately $14 million of the remaining cost of the Phase I expansion
through December 2005 and approximately $49 million of the remaining cost of the
Phase II expansion through June 2006. Under the terms of the guarantee,
Panhandle Eastern Pipe Line would be required to perform should Trunkline LNG be
in default of its obligation, as it relates to services already rendered. There
are no amounts being carried as liabilities for Panhandle’s obligations under
these guarantees.

***Controlled
Group Pension Liabilities.***Southern
Union (including certain of its divisions) sponsors a number of defined benefit
pension plans for employees. Under applicable pension and tax laws, upon being
acquired by Southern Union, Panhandle became a member of Southern Union’s
“controlled group” with respect to those plans, and, along with Southern Union
and any other members of that group, is jointly and severally liable for any
failure by Southern Union (along with any other persons that may be or become a
sponsor of any such plan) to fund any of these pension plans or to pay any
unfunded liabilities that these plans may have if they are ever terminated. In
addition, if any of the obligations of any of these pension plans is not paid
when due, a lien in favor of that plan or the Pension Benefit Guaranty
Corporation may be created against the assets of each member of Southern Union’s
controlled group, including Panhandle and each of its subsidiaries. Based on the
latest actuarial information available as of December 31, 2004, the aggregate
amount of the projected benefit obligations of these pension plans was
approximately $398,516,000 and the estimated fair value of all of the assets of
these plans was approximately $276,836,000.


20
*Table of Contents*


**ITEM 2. Management'sDiscussion and Analysis of Results of
Operations and Financial Condition**

Management’s
Discussion and Analysis of Results of Operations and Financial Condition is
provided as a supplement to the accompanying unaudited interim consolidated
financial statements and footnotes to help provide an understanding of
Panhandle’s financial condition, results of operations and changes in financial
condition. The following section includes an overview of Panhandle’s business as
well as recent developments that Panhandle believes are important in
understanding its results of operations and in anticipating future trends in
those operations. Subsequent sections include an analysis of Panhandle’s results
of operations on a consolidated basis and information relating to Panhandle’s
liquidity and capital resources, quantitative and qualitative disclosures about
market risk, an outlook perspective for Panhandle, and other matters.

**Overview**

Panhandle
is primarily engaged in the interstate transportation and storage of natural gas
and also provides LNG terminalling and regasification services. The Panhandle
entities include Panhandle Eastern Pipe Line, Trunkline, Sea Robin, Trunkline
LNG and Southwest Gas Storage. Collectively, the pipeline assets include more
than 10,000 miles of interstate pipelines that transport natural gas from the
Gulf of Mexico, South Texas and the panhandle regions of Texas and Oklahoma to
major U.S. markets in the Midwest and Great Lakes region. The pipelines have a
combined peak day delivery capacity of 5.4 bcf per day, 72 bcf of owned
underground storage capacity and 6.3 bcf of above ground LNG storage capacity.
Trunkline LNG, located on Louisiana’s Gulf Coast, operates one of the largest
LNG import terminals in North America.

A
majority of Panhandle’s total operating revenue comes from long-term service
agreements with local distribution company customers and their affiliates.
Panhandle also provides firm transportation services under contract to gas
marketers, producers, other pipelines, electric power generators and a variety
of end-users. In addition, Panhandle’s pipelines offer both firm and
interruptible transportation to customers on a short-term or seasonal basis.
Demand for gas transmission on Panhandle’s pipeline systems is seasonal, with
the highest throughput and a higher portion of annual total operating revenues
and net earnings occurring in the traditional winter heating season in the first
and fourth calendar quarters. For the years 2000 to 2004, Panhandle’s combined
throughput was 1,374 trillion British thermal units (*TBtu*), 1,335
TBtu, 1,259 TBtu, 1,380 TBtu and 1,284 TBtu, respectively. For the three month
periods ended March 31, 2005 and March 31, 2004, Panhandle’s combined throughput
was 350 TBtu and 352 TBtu, respectively. Beginning in March 2000, the combined
throughput includes Sea Robin’s throughput.


21
*Table of Contents*


**Results
of Operations**

**Three
      Months**
    
    **Three
      Months****Ended
      March 31,**
    
    **Ended
      March 31,****2005**
    
    **2004**
    
    **Change**Operating
      revenue:Reservation
      revenue
    
    $
    100,587
    
    $
    101,212
    
    $
    (625
    )LNG
      terminalling revenue
    
    
    13,208
    
    
    13,762
    
    
    (554
    )Commodity
      revenue
    
    
    19,433
    
    
    20,648
    
    
    (1,215
    )Other
      revenue
    
    
    2,172
    
    
    2,547
    
    
    (375
    )Total
      operating revenue
    
    
    135,400
    
    
    138,169
    
    
    (2,769
    )Operating
      expenses:Operation,
      maintenance and general
    
    
    50,183
    
    
    49,725
    
    
    458Depreciation
      and amortization
    
    
    15,367
    
    
    15,147
    
    
    220Taxes,
      other than on income and revenues
    
    
    7,336
    
    
    7,526
    
    
    (190
    )Total
      operating expenses
    
    
    72,886
    
    
    72,398
    
    
    488Operating
      income
    
    
    62,514
    
    
    65,771
    
    
    (3,257
    )Other
      income (expense):Interest
      expense, net
    
    
    (11,848
    )
    
    (12,155
    )
    
    307Other,
      net
    
    
    897
    
    
    714
    
    
    183Total
      other expense, net
    
    
    (10,951
    )
    
    (11,441
    )
    
    490Earnings
      before income taxes
    
    
    51,563
    
    
    54,330
    
    
    (2,767
    )Income
      taxes
    
    
    20,093
    
    
    21,273
    
    
    (1,180
    )Net
      earnings
    
    $
    31,470
    
    $
    33,057
    
    $
    (1,587
    )
***Operating
Revenue.***For the
three months ended March 31, 2005, operating revenue decreased $2,769,000 versus
the same time period during 2004. The decrease was a result of lower commodity
revenues of $1,215,000 due to a reduction in commodity throughput volumes of one
percent, associated with a two percent decrease of heating degree days, as well
as a lower market value for interruptible service, partially offset by higher
parking revenue activity. Commodity revenues are dependent upon a number of
variable factors, including weather, storage levels, and customer demand for
firm, interruptible and parking services. In addition, reservation revenue
decreased $625,000 primarily due to certain contract expirations on Trunkline
during the latter part of 2004 and the replacement thereof at lower average
reservation rates. LNG terminalling revenue decreased $554,000 primarily due to
reduced LNG volumes received in 2005.

***Operating
Expenses.***Operating expenses for the three months ended March 31, 2005 increased $488,000
versus 2004, primarily due to an increase in operation, maintenance and general
expenses of $458,000. Such increase was due to the recovery of previously
underrecovered fuel, net of $1,103,000 in 2004 and higher pipeline
transportation expenses of $408,000 primarily due to a new contract, partially
offset by reduced administrative expenses of $589,000 primarily associated with
the workforce reduction in 2004, reduced contract storage expenses of $239,000
due to a reduction in contracted storage capacity beginning March 2004, and a
decrease in power costs of $200,000 due to lower LNG volumes received in
2005.

***Interest
Expense, Net.***Interest
expense, net, for the three months ended March 31, 2005, versus the same time
period during 2004, was reduced by $307,000 primarily due to an increase in
capitalized interest due to the LNG expansion and the refinancing of the debt
that matured in March and August of 2004, partially offset by an increase in the
variable interest rate of the LNG Holdings bank loans. For further discussion of
Panhandle’s long-term debt, see*Note
VI - Debt*.

22
*Table of Contents*

***Other,
Net.*******Other
income, net, for the three months ended March 31, 2005 increased $183,000 versus
the same time period during 2004, primarily due to higher related party interest
income caused by increases in the underlying LIBOR-based rates in 2005. For
further discussion of Panhandle’s related party interest income, see*Note
IV - Related Party Transactions*.

***Income
Taxes.***Income
taxes during the three months ended March 31, 2005, versus the same time period
during 2004, decreased $1,180,000 due to lower pretax income.

**Liquidity
and Capital Resources**

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

***Operating
Activities.***Cash
flows from operating activities for the three months ended March 31, 2005 and
March 31, 2004 were $51 million. Changes in operating assets and liabilities
used cash of $15 million for the three months ended March 31, 2005 and $2
million for the same time period during 2004. The decrease in cash flows from
operating activities for the three months ended March 31, 2005 versus the same
time period during 2004 was primarily attributable to the timing of payments and
cash receipts related to Panhandle’s working capital accounts.

***Investing
Activities.***Historically, Panhandle’s capital requirements have generally been satisfied
through operating cash flow, except that Panhandle may utilize access to capital
markets for extraordinary capital expenditures. Panhandle estimates remaining
expenditures associated with Phase I and Phase II LNG terminal expansion and the
Trunkline 36-inch diameter, 23-mile natural gas pipeline loop from the LNG
terminal to be approximately $81 million for the remainder of 2005 and
approximately $10 million in 2006. These estimates were developed for budget
planning purposes and are subject to revision.

Cash
flows used in investing activities for the three months ended March 31, 2005
decreased by approximately $6 million versus the same time period in 2004
primarily due to a decrease in net loans made to Southern Union of approximately
$22 million, partially offset by an increase in capital expenditures associated
with the LNG expansion projects of $16 million.

***Financing
Activities.*********As of
March 31, 2005, Panhandle’s debt is rated BBB by Fitch Ratings, Inc. and
Standard & Poor’s and Baa3 by Moody’s. Panhandle’s note provisions are
subject to the maintenance of a fixed charge coverage ratio and a leverage ratio
which restrict certain payments if not maintained, and limitations on liens. At
March 31, 2005, Panhandle was subject to a $391,424,000 limitation on additional
restricted payments, including dividends and loans to affiliates, based on the
current most restrictive covenant, and a limitation of $334,533,000 of
additional secured indebtedness based on a limitation on liens covenant. If
Panhandle’s debt ratings were to fall below Baa3 by Moody’s and below BBB- by
Standard and Poor’s, then the allowable restricted payments would be reduced to
$341,350,000. At March 31, 2005, Panhandle was in compliance with all
covenants.

At March
31, 2005, Panhandle had no scheduled debt principal payments for the remainder
of 2005 and 2006 and scheduled payments of $455,626,000, $300,000,000,
$60,623,000 and $356,805,000 for the years 2007 through 2009 and in total
thereafter, respectively.

LNG
Holdings, as borrower, and Panhandle Eastern Pipe Line and Trunkline LNG, as
guarantors, entered into a Credit Agreement dated as of April 26, 2005, with a
consortium of banks for a senior term loan financing in the aggregate principal
amount of $255,626,000 which matures on March 15, 2007. The senior term loan
carries a floating interest rate tied to LIBOR or prime interest rates at
Panhandle’s option, in addition to a margin which is tied to the rating of
Panhandle’s unsecured senior funded debt. On April 29, 2005, the proceeds from
the Credit Agreement were used to repay all outstanding indebtedness under
existing LNG Holdings floating rate bank loans that were due in 2007. The senior
term loan requires maintenance of a fixed charge coverage ratio and a leverage
ratio which restrict certain payments if not maintained, and a limitation on
liens. If the senior term loan had been in effect at March 31, 2005, Panhandle
Eastern Pipe Line would have been subject to a more restrictive limitation of
$223,443,000 of additional secured or subsidiary level indebtedness.  If the
senior term loan had been in effect at March 31, 2005, Panhandle would also have
been subject to a limitation of $264,458,000 of total additional
indebtedness.

23
*Table of Contents*

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

Cash
flows from financing activities for the three months ended March 31, 2005
decreased by approximately $67 million versus the same period in 2004 primarily
due to net debt issuances of approximately $51 million in 2004 versus
approximately $3 million in debt retirements in 2005. In addition, bank
overdrafts decreased by approximately $14 million.

**Outlook**

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

Trunkline
LNG entered into a 22-year contract with BG LNG Services beginning January 2002,
for all the uncommitted capacity at the Lake Charles, Louisiana facility.
Trunkline LNG announced the planned expansion of the Lake Charles facility to
approximately 1.2 bcf per day of send out capacity, up from its current send out
capacity of .63 bcf per day and in December 2002 FERC approved the expansion of
the LNG regasification terminal. The expanded facility is currently expected to
be in operation by the end of 2005. In September 2004, FERC approved Trunkline
LNG’s further incremental LNG expansion project. This expansion will increase
the LNG terminal’s sustainable send out capacity to 1.8 bcf per day by mid-2006.
BG LNG Services has contracted for all the proposed additional capacity subject
to Trunkline LNG achieving certain construction milestones in the expansion of
this facility.

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


24
*Table of Contents*

**Other
Matters**

***Customer
Concentration.*******Panhandle
provides LNG terminalling and regasification services and a comprehensive array
of transportation and storage services to approximately five hundred customers.
Such customers are principally located in the midwest and southwest regions of
the United States. The following is a comparison of the percent of operating
revenue by customer for the three month periods ended March 31, 2005 and
2004.

**Percent
of Operating Revenue for**
**Three
Months Ended**
**March
      31,**
    
    **March
      31,****Customer**
    
    **2005**
    
    **2004**ProLiance
    
    
    18
    
    
    18BG
      LNG Services
    
    
    13
    
    
    13Ameren
    
    
    13
    
    
    9CMS
      Energy subsidiaries (1)
    
    
    8
    
    
    10Other
      Top 10 customers
    
    
    16
    
    
    20Remaining
      customers
    
    
    32
    
    
    30Total
      percentage
    
    
    100
    %
    
    100
    %(1)
      Primarily Consumers Energy
******
***Regulation.*******Panhandle
is subject to regulation by various federal, state and local governmental
agencies, including those specifically described below.

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

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

The
Secretary of Energy regulates the importation and exportation of natural gas and
has delegated various aspects of this jurisdiction to FERC and the Department of
Energy's Office of Fossil Fuels.

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

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

25
*Table of Contents*

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

In
November 2004, the FERC issued an industry-wide Proposed Accounting Release
that, if enacted as written, would require pipeline companies to expense rather
than capitalize certain costs related to mandated pipeline integrity programs
(under the Pipeline Safety Improvement Act of 2002). The accounting release was
proposed to be effective January 1, 2005, following a period of public comment
on the release. Comments were filed on January 19, 2005, including pipeline
association comments suggesting that such costs be capitalized. Panhandle is
awaiting a final release and cannot, at this time, predict the final outcome.
Panhandle has currently budgeted in 2005 approximately $22 million of pipeline
integrity program costs, of which approximately $3 million of currently
capitalized costs would be required to be expensed pursuant to the
release.

***Environmental
Matters.***Panhandle's
gas transmission operations are subject to federal, state and local regulations
regarding water quality, hazardous and solid waste management, air quality
control and other environmental matters. Panhandle has previously identified
environmental contamination at certain sites on its gas transmission systems and
has undertaken cleanup programs at these sites. The contamination resulted from
the past use of lubricants containing PCBs in compressed air systems; the past
use of paints containing PCBs; and the prior use of wastewater collection
facilities and other on-site disposal areas. Panhandle has developed and
implemented a program to remediate such contamination in accordance with
federal, state and local regulations. Air quality control regulations include
rules relating to regional ozone control and hazardous air pollutants. The
regional ozone control rules, known as SIP Call, are designed to control the
release of NOx compounds. The rules related to hazardous air pollutants, known
as MACT rules, are the result of the 1990 Clean Air Act amendments that regulate
the emission of hazardous air pollutants from internal combustion engines and
turbines.

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

*Air
Quality Control --*****In 1998,
the EPA issued a final rule on regional ozone control that requires revised SIPs
for twenty-two states, including five states in which Panhandle operates.
Panhandle will have completed installation of NOx controls on fourteen engines
by the end of 2005 and anticipates placing NOx controls on engines at a total of
six compressor station locations. This program is expected to be completed by
May 2007.

In 2004,
final rules were promulgated by the EPA regarding control of hazardous air
pollutants. Over twenty Panhandle engines require controls. MACT controls must
be installed by June 2007. In 2002, the Texas Commission on Environmental
Quality enacted the Houston/Galveston SIP regulations requiring reductions in
NOx emissions in an eight-county area surrounding Houston. Trunkline’s Cypress
compressor station is affected and requires the installation of emission
controls. New regulations also require certain grandfathered facilities to enter
into the new source permit program which may require the installation of
emission controls at five additional facilities. The rule affects one company
facility owned and operated by Panhandle. Panhandle expects controls to be
installed by March 2007. For further information, see*Note
IX - Commitments and Contingencies - Environmental Matters*.

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

26
*Table of Contents*

***Contractual
Commitments.***Panhandle has contractual obligations with regard to future payments of
operating leases, debt and natural gas storage service. The following table
summarizes Panhandle’s expected contractual obligations and commitments at March
31, 2005.

**Remainder**
    
    
    
    
    
    
    
    
    
    
    
    
    
    **In
      Total****2005**
    
    
    
    **2006**
    
    
    
    **2007**
    
    **2008**
    
    **2009**
    
    **Thereafter**Operating
      Leases (1)
    
    $
    10,176
    
    
    
    
    $
    13,837
    
    
    
    
    $
    11,435
    
    $
    7,349
    
    $
    6,109
    
    $
    22,559Total
      long term debt (2)
    
    
    -
    
    
    
    
    
    -
    
    
    
    
    
    455,626
    
    
    300,000
    
    
    60,623
    
    
    356,805Interest
      payments on debt (3)
    
    
    42,232
    
    
    
    
    
    56,253
    
    
    
    
    
    44,532
    
    
    36,048
    
    
    25,242
    
    
    146,363Firm
      capacity payments (4)
    
    
    8,612
    
    
    
    
    
    10,633
    
    
    
    
    
    8,841
    
    
    7,396
    
    
    7,127
    
    
    31,084OPEB
      funding (5)
    
    
    7,442
    
    
    
    
    
    7,812
    
    
    
    
    
    7,812
    
    
    7,812
    
    
    7,812
    
    
    -Total
    
    $
    68,462
    
    
    
    
    $
    88,535
    
    
    
    
    $
    528,246
    
    $
    358,605
    
    $
    106,913
    
    $
    556,811

(1) 
Lease of various assets utilized for operations
(2) 
Debt of principal obligations (includes April 2005 LNG Holdings bank loan
refinancing impact)
(3)  Interest payments at stated rate for Senior
Notes and assumed variable rate of approximately 3.6 percent for LNG Holdings
bank loans (includes April 2005
LNG Holdingsbank loan
refinancing impact)
(4)  Lease of third party storage
capacity
(5)  Panhandle is committed to the funding
levels of $7.8 million per year until modified by future rate proceedings, the
timing of which is uncertain


***Capital
Expenditures.*** Panhandle estimates expenditures associated
with Phase I and Phase II LNG terminal expansion and the Trunkline 36-inch
diameter, 23-mile natural gas pipeline loop from the LNG terminal to be
approximately $81 million for the remainder of 2005 and approximately $10
million in 2006, plus capitalized interest. These estimates were developed for
budget planning purposes and are subject to revision.

***Controlled
Group Pension Liabilities.*******Southern
Union (including certain of its divisions) sponsors a number of defined benefit
pension plans arising from its (including any of its present or former
divisions) or its predecessor’s businesses when Southern Union acquired
Panhandle. Under applicable pension and tax laws, upon being acquired by
Southern Union, Panhandle became a member of Southern Union’s “controlled group”
with respect to those plans, and, along with Southern Union and any other
members of that group, is jointly and severally liable for any failure by
Southern Union (along with any other persons that may be or become a sponsor of
any such plan) to fund any of these pension plans or to pay any unfunded
liabilities that these plans may have if they are ever terminated. In addition,
if any of the obligations of any of these pension plans is not paid when due, a
lien in favor of that plan or the Pension Benefit Guaranty Corporation may be
created against the assets of each member of Southern Union’s controlled group,
including Panhandle. Based on the latest actuarial information available as of
December 31, 2004, the aggregate amount of the projected benefit obligations of
these pension plans was approximately $398,516,000 and the estimated fair value
of all of the assets of these plans was approximately $276,836,000.


27
*Table of Contents*

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

***Critical
Accounting Policies.*******Panhandle’s
unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and related 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. Estimates and assumptions about future
events and their effects cannot be perceived with certainty. On an ongoing
basis, Panhandle evaluates its estimates based on historical experience, current
market conditions and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Nevertheless, actual results may differ
from these estimates under different assumptions or conditions. The following is
a summary of Panhandle’s most critical accounting policies, which are defined as
those policies whereby judgments or uncertainties could affect the application
of those policies and materially different amounts could be reported under
different conditions or using different assumptions.

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

*Asset
Impairment*--
Long-lived assets, including property, plant and equipment and intangibles
comprise a significant amount of Panhandle’s total assets. Panhandle makes
judgments and estimates about the carrying value of these assets, including
amounts to be capitalized, depreciation methods and useful lives. Panhandle also
reviews these assets for impairment on a periodic basis or whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable. The impairment test consists of a comparison of an asset’s fair
value with its carrying value; if the carrying value of the asset exceeds its
fair value, an impairment loss is recognized in the Consolidated Statement of
Operations in an amount equal to that excess.

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

28
*Table of Contents*

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

*Accounting
for Retirement Benefits*--Panhandle
follows SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other
Than Pensions”, and SFAS No. 132R, “Employers’ Disclosures about Pensions and
Other Postretirement Benefits,” as amended, 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.

Panhandle
does not maintain or participate in a defined benefit retirement plan for its
employees, but instead provides benefits to substantially all employees under a
defined contribution 401(k) plan. Under the 401(k) plan, Panhandle provides a
matching contribution of 50 percent of the employee’s contribution to the 401(k)
plan that does not exceed 4 percent of the employee’s eligible pay. In addition,
Panhandle makes additional contributions to the 401(k) plan ranging from 4 to 6
percent of the employee’s eligible pay, depending on the employee’s age and
years of service under a Retirement Power Account benefit.

Panhandle
provides certain postretirement health and life benefits to eligible, active
employees. The accumulated postretirement benefit obligation with respect to
such postretirement health and life benefits as of March 31, 2005 and December
31, 2004 was approximately $39,404,000 and $38,260,000, respectively. See*Note
VIII - Benefits*.

*Accounting
for Derivatives and Hedging Activities*--
Panhandle follows SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”, as amended, to accrue for derivative and hedging
activities. Panhandle utilizes interest-rate related derivative instruments to
manage its exposure on its debt instruments and does not enter into derivative
instruments for any purpose other than hedging purposes. All derivatives are
recognized on the balance sheet at their fair value. On the date the derivative
contract is entered into, Panhandle designates the derivative as either: (i) a
hedge of the fair value of a recognized asset or liability or of an unrecognized
firm commitment (fair value hedge) or (ii) a hedge of a forecasted transaction
or the variability of cash flows to be received or paid in conjunction with a
recognized asset or liability (cash flow hedge). For derivatives treated as a
hedge of the fair value of a debt instrument, the effective portion of changes
in fair value are recorded as an adjustment to the hedged debt. The ineffective
portion of a fair value hedge is recognized in earnings if the short cut method
of assessing effectiveness is not used. Upon termination of a fair value hedge
of a debt instrument, the resulting gain or loss is amortized to income through
the maturity date of the debt instrument. For derivatives treated as hedges of
future cash flows, the effective portion of changes in fair value is recorded in
other comprehensive income until the related hedge items impact earnings. Any
ineffective portion of a hedge is reported in earnings immediately. Upon
termination of a cash flow hedge of the variability of cash flows to be paid,
the resulting gain or loss is amortized to income through the maturity date of
the original designated hedging relationship, unless it is probable that the
forecasted transaction will not occur during a specified time period.

Panhandle
formally assesses, both at the hedge’s inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions have been highly
effective in offsetting changes in the fair value or cash flows of hedged items
and whether those derivatives may be expected to remain highly effective in
future periods. Panhandle discontinues hedge accounting when: (i) it determines
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of a hedged item; (ii) the derivative expires or is sold,
terminated, or exercised; (iii) it is no longer probable that the forecasted
transaction will occur; or (iv) management determines that designating the
derivative as a hedging instrument is no longer appropriate. In all situations
in which hedge accounting is discontinued and the derivative remains
outstanding, Panhandle will carry the derivative at its fair value on the
balance sheet, recognizing changes in the fair value in current-period earnings.
See*Note
V - Accounting for Derivatives and Hedging Activities*.

29
*Table of Contents*

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

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

*Commitments
and Contingencies*--
Panhandle is subject to proceedings, lawsuits and other claims related to
environmental and other matters. Accounting for contingencies requires
significant judgments by management regarding the estimated probabilities and
ranges of exposure to potential liability. See*Note
IX - Commitments and Contingencies*.

***Cautionary
Statement Regarding Forward-Looking Information.***The
Management’s Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Form 10-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 of Panhandle’s control. Therefore, actual results, performance and
achievements may differ materially from what is expressed or forecasted in such
forward-looking statements. Prospective investors may review Panhandle Eastern
Pipe Line’s reports filed in the future with the Commission for more current
descriptions of developments that could cause actual results to differ
materially from such forward-looking statements. However, prospective investors
should not place undue reliance on forward-looking statements, which speak only
as of the date of this Form 10-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:
customer growth; gas throughput volumes and available sources of natural gas;
discounting of transportation rates due to competition, abnormal weather
conditions in Panhandle’s service territories; new legislation and government
regulations affecting or involving Panhandle; Panhandle’s ability to comply with
or to challenge successfully existing or new environmental regulations; the
outcome of pending and future litigation; the impact of relations with labor
unions of bargaining-unit union employees; the impact of future rate cases or
regulatory rulings; Panhandle’s ability to control costs successfully and
achieve operating efficiencies, including the purchase and implementation of new
technologies for achieving such efficiencies; the nature and impact of any
extraordinary transactions, such as any acquisition or divestiture of a business
unit or any assets; the economic climate and growth in Panhandle’s industry and
service territories and competitive conditions of energy markets in general;
inflationary trends; changes in gas or other energy market commodity prices and
interest rates; the current market conditions causing more customer contracts to
be of shorter duration, which may increase revenue volatility; exposure to
customer concentration with a significant portion of revenues realized from a
relatively small number of customers and any credit risks associated with the
financial position of those customers; Panhandle or its parent’s debt securities
ratings; factors affecting operations such as maintenance or repairs,
environmental incidents or gas pipeline system constraints; the possibility of
war or terrorist attacks; and other risks and unforeseen events.

In light
of these risks, uncertainties and assumptions, the results reflected in the
forward-looking statements contained or incorporated by reference in this Form
10-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.

30
*Table of Contents*

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

**ITEM 3. Quantitativeand Qualitative Disclosures About Market
Risks**

There are
no material changes in market risks faced by Panhandle from those reported in
Panhandle’s Annual Report on Form 10-K for the year ended December 31,
2004.

The
information in Item 3 updates, and should be read in conjunction with,
information set forth in Part II, Item 7 and Item 7A in Panhandle’s Annual
Report on Form 10-K for the year ended December 31, 2004, in addition to the
interim consolidated financial statements, accompanying notes, and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
presented in Items 1 and 2 of Part I of this Quarterly Report on Form
10-Q.

**ITEM 4. Controls and Procedures**

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

Panhandle
performed an evaluation under the supervision and with the participation of its
management, including its Chief Executive Officer (*CEO*) and
Chief Financial Officer (*CFO*), and
with the participation of personnel from its Legal, Internal Audit and Financial
Reporting Departments, of the effectiveness of the design and operation of
Panhandle’s disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of the end of the period covered
by this report. Based on that evaluation, Panhandle’s CEO and CFO concluded that
its disclosure controls and procedures were effective as of March 31, 2005 and
have communicated that determination to the Board of Managers and Southern
Union’s Audit Committee, which also serves as our Audit Committee.

***Changes
in Internal Controls***

Management
is not aware of any change in Panhandle’s internal control over financial
reporting that occurred during the quarter ended March 31, 2005 that has
materially affected or is reasonably likely to materially affect Panhandle’s
internal controls over financial reporting.

**PART II.OTHER INFORMATION**

**ITEM 1. LegalProceedings**

Panhandle
and certain of its affiliates are occasionally parties to lawsuits and
administrative proceedings incidental to their businesses involving, for
example, claims for personal injury and property damage, contractual matters,
various tax matters, and rates and licensing. Reference is made to*ITEM
1. Financial Statements, Note IX -- Commitments and Contingencies - Litigation,
Environmental Matters, and Air Quality Control*, as well
as to*ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations*included
in*Part
I. Financial Information*for
additional information regarding various pending administrative and judicial
proceedings involving regulatory, environmental and other legal
matters.

***Environmental
Matters -***Panhandle and its affiliates are subject to various federal, state and local
laws and regulations relating to the environment. Several of these companies
have been named parties to various actions involving environmental issues. Based
on our present knowledge and subject to future legal and factual developments,
Panhandle’s management believes that it is unlikely that these actions,
individually or in the aggregate, will have a material adverse effect on its
financial condition.*See
ITEM 1. Financial Statements, Note IX - Commitments and Contingencies -
Environmental Matters and Air Quality Control*and*ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations*included
in*Part
I. Financial Information*.

**ITEM 2. Unregistered Sales of Equity Securities and Use of
Proceeds**

N/A

31
*Table of Contents*

**ITEM 3. DefaultsUpon Senior Securities**

N/A

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

N/A

**ITEM 5. OtherInformation**

N/A

**ITEM 6. Exhibits**
****
**Exhibit
No.****Description**
31.1
    Certificate
      by Chief Executive Officer pursuant to Rule 13a - 14(a) or 15d - 14(a)
      promulgated under the Securities Exchange Act of 1934, as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    Certificate
      by Chief Financial Officer pursuant to Rule 13a - 14(a) or 15d - 14(a)
      promulgated under the Securities Exchange Act of 1934, as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    Certificate
      by Chief Executive Officer pursuant to Rule 13a - 14(b) or 15d - 14(b)
      promulgated under the Securities Exchange Act of 1934 and Section 906 of
      the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.32.2
    Certificate
      by Chief Financial Officer pursuant to Rule 13a - 14(b) or 15d - 14(b)
      promulgated under the Securities Exchange Act of 1934 and Section 906 of
      the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.

32
*Table of Contents*



**SIGNATURES**



Pursuant
to the requirements of the Securities Exchange Act of 1934, Panhandle Eastern
Pipe Line Company, LP has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.




PANHANDLE
      EASTERN PIPE LINE COMPANY, LPDate
      : May 10, 2005
    By:/s/THOMAS
      F. KARAMThomas
      F. KaramChief
      Executive Officer
****
33