EL PASO CGP CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-7176

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EL PASO CGP COMPANY
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 74-1734212
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

EL PASO BUILDING
1001 LOUISIANA STREET 77002
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)

Telephone Number: (713) 420-2600
Internet Website: www.elpaso.com

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 [ ] No [X]

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

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Common stock, par value $3 per share. Shares outstanding on November 5,
2004: 1,000

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EL PASO CGP COMPANY

TABLE OF CONTENTS

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Below is a list of terms that are common to our industry and used
throughout this document:

/d = per day
Bbl = barrels
BBtu = billion British thermal units
Bcf = billion cubic feet
Bcfe = billion cubic feet of natural gas equivalents
MBbls = thousand barrels
Mcf = thousand cubic feet
Mcfe = thousand cubic feet of natural gas equivalents
MMBtu = million British thermal units
MMcf = million cubic feet
MMcfe = million cubic feet of natural gas equivalents
MW = megawatt

When we refer to natural gas and oil in "equivalents," we are doing so to
compare quantities of oil with quantities of natural gas or to express these
different commodities in a common unit. In calculating equivalents, we use a
generally recognized standard in which one Bbl of oil is equal to six Mcf of
natural gas. Oil includes natural gas liquids unless otherwise specified. Also,
when we refer to cubic feet measurements, all measurements are at a pressure of
14.73 pounds per square inch.

When we refer to "us", "we", "our", "ours", or "El Paso CGP", we are
describing El Paso CGP Company and/or our subsidiaries.

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EL PASO CGP COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)

See accompanying notes.

1

EL PASO CGP COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes.

2

EL PASO CGP COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes.

3

EL PASO CGP COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

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(1) Only individual line items in cash flows from operating activities have been
restated. Total cash flows from continuing operating, investing and
financing activities, as well as discontinued operations, were unaffected.

See accompanying notes.

4

EL PASO CGP COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
(UNAUDITED)

See accompanying notes.

5

EL PASO CGP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION AND LIQUIDITY UPDATE

Basis of Presentation

We prepared this Quarterly Report on Form 10-Q under the rules and
regulations of the U.S. Securities and Exchange Commission. Because this is an
interim period filing presented using a condensed format, it does not include
all of the disclosures required by generally accepted accounting principles. You
should read this Quarterly Report on Form 10-Q along with our 2003 Annual Report
on Form 10-K, which includes a summary of our significant accounting policies
and other disclosures. The financial statements as of March 31, 2004, and for
the quarters ended March 31, 2004 and 2003, are unaudited. We derived the
balance sheet as of December 31, 2003, from the audited balance sheet filed in
our 2003 Annual Report on Form 10-K. In our opinion, we have made all
adjustments which are of a normal, recurring nature to fairly present our
interim period results. Due to the seasonal nature of our businesses,
information for interim periods may not be indicative of the results of
operations for the entire year. Our results for the quarter ended March 31, 2003
have been restated to reflect the accounting impact of a reduction in our
historically reported proved natural gas and oil reserves as further discussed
in our 2003 Annual Report on Form 10-K. In addition, the prior period
information presented in these financial statements includes reclassifications
which were made to conform to the current period presentation. These
reclassifications had no effect on our previously reported net income or
stockholder's equity.

Liquidity Update

We rely on cash generated from our internal operations and loans from El
Paso Corporation (El Paso), our direct parent, through its cash management
program as our primary sources of liquidity, as well as proceeds from asset
sales and capital contributions from El Paso. We expect that our future funding
for working capital needs, capital expenditures and debt service will continue
to be provided from some or all of these sources. Each of these sources is
impacted by factors that influence the overall amount of cash generated by us
and the capital available to us. For example, cash generated by our business
operations may be impacted by changes in commodity prices or demands for our
commodities or services due to weather patterns, competition from other
providers or alternative energy sources. Cash generated by future asset sales
may depend on the overall economic conditions of the industries served by these
assets, the condition and location of the assets and the number of interested
buyers.

El Paso is a significant source of liquidity to us, and we participate in
its cash management program. Under this program, depending on whether we have
short-term cash requirements or surpluses, either El Paso provides cash to us or
we provide cash to El Paso. We have historically and consistently borrowed cash
from El Paso under this program. Currently, one of our subsidiaries, Colorado
Interstate Gas Company (CIG), is not advancing funds to El Paso via the cash
management program due to its anticipated cash needs. As of March 31, 2004, we
had a note payable to El Paso of $128 million related to this program. This note
is classified as a current liability in our balance sheet because it is due upon
demand. Our ability to rely on advances from El Paso can be impacted by its
credit standing, its requirement to repay debt and other financing obligations,
and the cash demands from other parts of its business. If El Paso were unable to
meet its liquidity needs, we would not have access to this source of liquidity.
Furthermore, we would be required to repay affiliated company payables, if
demanded. However, we do not anticipate that El Paso will require us to repay
these payables during 2004. For a further discussion of our participation in El
Paso's cash management program, see Note 12.

As discussed in our 2003 Annual Report on Form 10-K, in February 2004, El
Paso completed the December 31, 2003 reserve estimation process for its proved
natural gas and oil reserves, which included reserves in our Production segment.
As a result of this review, El Paso announced that it was significantly reducing
its proved natural gas and oil reserve estimates, including our reserve
estimates. After an
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investigation into this matter, El Paso concluded that a restatement of its
historical financial statements, as well as ours, was required. Additionally, El
Paso further restated its historical financial statements to revise the manner
in which it accounted for certain derivatives, which did not impact our
historical financial statements.

El Paso believes that the restatements of its historical financial
statements would have constituted events of default under its $3 billion
revolving credit facility and various other financing transactions; specifically
under the provisions of these arrangements related to representations and
warranties on the accuracy of its historical financial statements and on El
Paso's debt to capitalization ratio. During 2004, El Paso received several
waivers on its revolving credit facility and various other financing
transactions to address these issues. These waivers continue to be in effect. El
Paso also received an extension of time from various lenders until November 30,
2004 to file its second quarter 2004 Form 10-Q, which it expects to meet. If El
Paso is unable to file its second quarter 2004 Form 10-Q by that date and is not
able to negotiate an additional extension of the filing deadline, its revolving
credit facility and various other transactions could be accelerated. As part of
obtaining its waivers, El Paso also amended various provisions of the revolving
credit facility, including provisions related to events of default and
limitations on the ability of El Paso, as well as its subsidiaries, to prepay
indebtedness scheduled to mature after June 30, 2005. Although two of our
subsidiaries (ANR Pipeline Company (ANR) and CIG) are eligible to borrow under
El Paso's revolving credit facility, they do not have any borrowings or letters
of credit outstanding under that facility. Based upon a review of the provisions
of our indentures and financing agreements, we believe that a default on El
Paso's revolving credit facility would not result in an event of default under
our other debt agreements unless such default resulted in the acceleration of El
Paso's revolving credit facility or other transactions collateralized by the
same assets, and our subsidiaries failed to perform their obligations under
their guarantees of such debt. The acceleration of our debt or the debt of El
Paso would adversely affect our liquidity position, and in turn, our financial
condition.

Various other financing arrangements entered into by El Paso and its
subsidiaries, including us, include covenants that require us to file financial
statements within specified time periods. Non-compliance with such covenants
does not constitute an automatic event of default. Instead, such agreements are
subject to acceleration when the indenture trustee or the holders of at least 25
percent of the outstanding principal amount of any series of debt provides
notice to the issuer of non-compliance under the indenture. In that event, the
non-compliance can be cured by filing financial statements within specified
periods of time (between 30 and 90 days after receipt of notice depending on the
particular indenture) to avoid acceleration of repayment. The filing of El
Paso's second quarter 2004 Form 10-Q and the second quarter 2004 Forms 10-Q of
its subsidiaries, including us, will cure the events of non-compliance resulting
from the failure to file financial statements. In addition, we have not received
a notice of the default caused by our failure to file financial statements. In
the event of an acceleration, we may be unable to meet our payment obligations
with respect to the related indebtedness.

If, as a result of the events described above, El Paso were subject to
voluntary or involuntary bankruptcy proceedings, El Paso and its other
subsidiaries and their creditors could attempt to make claims against us,
including claims to substantively consolidate our assets and liabilities with
those of El Paso and its other subsidiaries. We believe that claims to
substantively consolidate us with El Paso and/or its other subsidiaries would be
without merit. However, there is no assurance that El Paso and/or its other
subsidiaries or their creditors would not advance such a claim in a bankruptcy
proceeding. If we were to be substantively consolidated in a bankruptcy
proceeding with El Paso and/or its other subsidiaries, it could have a material
adverse effect on our financial condition and our liquidity.

Some of our subsidiaries are subsidiary guarantors of El Paso's $3 billion
revolving credit facility and other financing transactions. In connection with
our subsidiaries' guarantees, El Paso pledged our ownership of ANR, ANR Storage
Company, CIG, and Wyoming Interstate Company (WIC) to collateralize the
revolving credit facility and other financing arrangements, including leases,
letters of credit and other facilities. Our ownership in the above mentioned
companies is subject to change if El Paso's lenders under these facilities
exercise their rights over the collateral. If this were to occur, it could have
a material adverse effect on our financial condition. In addition, one of our
subsidiaries has pledged as collateral a portion of its natural gas and

7

oil properties to support the obligations of some of our affiliates to make
payments in connection with the settlement of various lawsuits arising out of
the western energy crisis. If our affiliates fail to make those payments, the
properties that our subsidiary has pledged would be subject to foreclosure,
which could have a material adverse effect on our financial position, results of
operations and cash flows.

We have cross-acceleration provisions in our long-term debt-agreements
which, if triggered, could result in the acceleration of our debt. The most
restrictive indenture has a cross-acceleration threshold of $5 million. The
acceleration of our long-term debt would adversely affect our liquidity position
and, in turn, our financial condition.

We believe we will be able to meet our ongoing liquidity and cash needs
through a combination of sources, including cash on hand, cash generated from
our operations, proceeds from asset sales, financing activities and advances
from El Paso. However, a number of factors could influence our liquidity
sources, as well as the timing and ultimate outcome of our ongoing efforts and
plans.

2. SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are discussed in our 2003 Annual Report
on Form 10-K. The information below provides updating information or required
interim disclosures with respect to those policies or disclosure where our
policies have changed.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued Financial Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
This interpretation defines a variable interest entity as a legal entity whose
equity owners do not have sufficient equity at risk or a controlling financial
interest in the entity. This standard requires a company to consolidate a
variable interest entity if it is allocated a majority of the entity's losses or
returns, including fees paid by the entity. In December 2003, the FASB issued
FIN No. 46-R, which amended FIN No. 46 to extend its effective date until the
first quarter of 2004 for all types of entities, except special purpose
entities. In addition, FIN No. 46-R limited the scope of FIN No. 46 to exclude
certain joint ventures or other entities that meet the characteristics of
businesses.

On January 1, 2004, we adopted this standard. Upon adoption, we
consolidated Blue Lake Gas Storage Company. The overall impact of this
consolidation is described in the following table:

Blue Lake Gas Storage owns and operates a 47 Bcf gas storage facility in
Michigan. One of our subsidiaries operates the natural gas storage facility and
we inject and withdraw all natural gas stored in the facility. We own a 75
percent equity interest in Blue Lake. This entity has $12 million of third party
debt as of March 31, 2004 that is non-recourse to us. We consolidated Blue Lake
because we are allocated a majority of Blue Lake's losses and returns through
our equity interest in Blue Lake.

We have significant interests in a number of other variable interest
entities. We were not required to consolidate these entities under FIN No. 46
and, as a result, our method for accounting for these entities did not change.
These entities consist primarily of 10 equity investments held in our Power
segment that have interests in power generation and transmission facilities with
a total generating capacity of approximately

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3,000 gross MW. We operate many of these facilities but do not supply a
significant portion of the fuel consumed or purchase a significant portion of
the power generated by these facilities. The long-term debt issued by these
entities is recourse only to the power project. As a result, our exposure to
these entities is limited to our equity investments in and advances to the
entities (approximately $800 million as of March 31, 2004) and our guarantees
and other agreements associated with these entities (a maximum of $43 million as
of March 31, 2004).

Accounting for Asset Retirement Obligations

On January 1, 2003, we adopted SFAS No. 143, Accounting for Asset
Retirement Obligations. This standard required that we record a liability for
retirement and removal costs of long-lived assets used in our businesses. In the
first quarter of 2003, we recorded a charge as a cumulative effect of accounting
change of approximately $12 million, net of income taxes related to its
adoption.

New Accounting Pronouncement Not Yet Adopted

In September 2004, the SEC issued Staff Accounting Bulletin No. 106. This
pronouncement will require companies that use the full cost method for
accounting for their oil and gas producing activities to include an estimate of
future asset retirement costs to be incurred as a result of future development
activities on proved reserves in their calculation of depreciation, depletion
and amortization. It will also require these companies to exclude any future
cash outflows associated with settling asset retirement liabilities from their
full cost ceiling test calculation. Finally, the standard will also require
disclosure of the impact of a company's asset retirement obligations on its oil
and gas producing activities, ceiling test calculations and depreciation,
depletion and amortization calculations. We will adopt the provisions of this
pronouncement in the fourth quarter of 2004 and are currently evaluating its
impact, if any, on our consolidated financial statements.

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3. DIVESTITURES

Sales of Assets and Investments

During 2004, we completed and announced the sale of a number of assets and
investments in each of our business segments. The following table summarizes the
proceeds from these sales:

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(1) Sales that have not been completed are estimates, subject to customary
regulatory approvals, final negotiations and other conditions.

(2) We sold all of our Canadian onshore natural gas and oil properties in the
first quarter of 2004. We sold our interests in Nova Scotia in the third
quarter of 2004.

(3) These sales were completed after March 31, 2004.

(4) These sales were completed as of March 31, 2004.

(5) Proceeds exclude returns of invested capital and cash transferred with the
assets sold and include costs incurred in preparing assets for disposal.
These items decreased our sales proceeds by $19 million for the quarter
ended March 31, 2004.

10

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(1) Proceeds exclude returns of invested capital and cash transferred with the
assets sold and include costs in preparing assets for disposal. These items
decreased our sales proceeds by $30 million for the quarter ended March 31,
2003.

See Note 4 for a discussion of gains, losses and asset impairments related
to the sales above.

Under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we classify assets being disposed of as held for sale or, if
appropriate, discontinued operations if they have received appropriate approvals
by El Paso's management or Board of Directors and have met other criteria. As of
March 31, 2004 and December 31, 2003, we had $7 million of current assets held
for sale in our balance sheets. Our assets held for sale related to domestic
power assets in our Power segment that were approved by El Paso's Board of
Directors for sale in 2003.

Discontinued Operations

Petroleum Markets. During the first quarter of 2003, El Paso's Board of
Directors approved the sales of our Eagle Point refinery, our asphalt business,
our Florida terminal, tug and barge business and our lease crude operations. In
June 2003, El Paso's Board of Directors authorized the sale of our remaining
petroleum markets operations, including our Aruba refinery, our Unilube blending
operations, our domestic and international terminalling facilities and our
petrochemical and chemical plants. Based on our intent to dispose of these
operations, we were required to adjust these assets to their estimated fair
value. As a result, we recognized a pre-tax impairment charge of $350 million
during the first quarter of 2003 related primarily to our Eagle Point refinery
and several of our chemical assets. These impairments were based on a comparison
of the carrying value of these assets to their estimated fair value, less
selling costs. We also recorded realized gains of approximately $55 million in
the first quarter of 2003 from the sale of our Corpus Christi refinery and
Florida terminalling and marine assets.

In the first and second quarters of 2004, we completed the sales of our
Aruba and Eagle Point refineries for $880 million and used a portion of the
proceeds to repay $370 million of debt associated with the Aruba refinery. We
expect to complete the sale of our remaining petroleum markets operations in
2004. In addition, in the first quarter of 2004, we reclassified our petroleum
ship charter operations from discontinued operations to continuing operations in
our financial statements based on our decision to retain these operations. Our
financial statements for all periods presented reflect this change.

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Coal Mining. In 2002, El Paso's Board of Directors authorized the sale of
our coal mining operations. These operations consisted of fifteen active
underground and two surface mines located in Kentucky, Virginia and West
Virginia. The sale of these operations was completed in 2003 for $92 million in
cash and $24 million in notes receivable, which were settled in the second
quarter of 2004. We did not record a significant gain or loss on these sales.

Other. In the second quarter of 2004, El Paso's Board of Directors
approved exiting our international natural gas and oil operations, excluding our
operations in Brazil. We will report these operations as discontinued operations
beginning in the second quarter of 2004, which will not have a material impact
to our balance sheet.

12

Our petroleum markets and coal mining operations are classified as
discontinued operations in our financial statements for all of the historical
periods presented. All of the assets and liabilities of these discontinued
businesses are classified as current assets and liabilities as of March 31,
2004. The summarized financial results and financial position data of our
discontinued operations were as follows:

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4. LOSS ON LONG-LIVED ASSETS

Our loss on long-lived assets consists of realized gains and losses on
sales of long-lived assets and impairments of long-lived assets, goodwill and
other intangibles that are a part of our continuing operations. During each of
the quarters ended March 31, our loss on long-lived assets was as follows:

Net Realized Loss

Our 2004 net realized loss was primarily related to an $85 million loss
associated with the sale of natural gas and oil properties in Canada in our
Production segment.

Asset Impairments

Our 2004 asset impairments primarily occurred in our Power segment, which
included an $89 million impairment related to the sale of our subsidiary, UCF,
which owns a restructured power contract. Our Production segment also incurred
an $8 million impairment in 2004 on a Canadian asset that was not part of our
full cost pool. Our 2003 impairment charges related to the sale of non-full cost
pool assets in Canada in our Production segment.

5. CEILING TEST CHARGES

Under the full cost method of accounting for natural gas and oil
properties, we perform quarterly ceiling tests to determine whether the carrying
value of natural gas and oil properties exceeds the present value of future net
revenues, discounted at 10 percent, plus the lower of cost or fair market value
of unproved properties, net of related income tax effects.

For the quarter ended March 31, 2004, we recorded ceiling test charges of
approximately $24 million and $4 million related to our Canadian and Indonesian
full cost pools. During the first quarter of 2004, we sold all of our Canadian
onshore natural gas and oil properties. The ceiling test charge in Canada
related to our remaining operations in Nova Scotia where, in the first quarter
of 2004, we drilled an exploratory well that was not commercially viable.

We use financial instruments to hedge against the volatility of natural gas
and oil prices. The impact of these hedges was considered in performing our
ceiling test calculations and will be factored into future ceiling test
calculations. The charges for our international full cost pools would not have
materially changed had the impact of our hedges not been included in calculating
our ceiling test charges since we do not significantly hedge our international
production activities.

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6. PRICE RISK MANAGEMENT ACTIVITIES

The following table summarizes the carrying value of the derivatives used
in our price risk management activities as of March 31, 2004 and December 31,
2003. In the table, derivatives designated as hedges primarily consist of
instruments used to hedge our natural gas and oil production. Derivatives from
power contract restructuring activities relate to power purchase and sale
agreements that arose from our activities in that business.

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(1) We sold our subsidiary that owns these derivative contracts in the second
quarter of 2004. See Note 4 for a discussion of the impairment related to
this sale.

(2) Amounts are included in current and non-current assets from price risk
management activities and in other current and non-current liabilities in
our balance sheet.

7. INVENTORY

We had $55 million and $58 million of inventory as of March 31, 2004 and
December 31, 2003, of which the majority was materials and supplies.

8. DEBT, OTHER FINANCING OBLIGATIONS AND OTHER CREDIT FACILITIES

We had the following long-term and short-term borrowings and other
financing obligations:

Long-Term Financing Obligations

From January 1, 2004 through the date of this filing, we had the following
changes in our long-term financing obligations:

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INTEREST NET CHANGE
COMPANY TYPE RATE PRINCIPAL IN DEBT DUE DATE
- ------------------------------- ---------------------------- ------------ --------- ------------- --------
(IN MILLIONS)

Other Changes in Debt
Blue Lake Gas Storage(1) Term loan LIBOR + 1.2% $ 14 $ 14 2006
Mohawk River Funding IV(2) Note 7.75% (72) (72) 2008
----- -----
Other changes through March 31, 2004....... (58) (58)
Utility Contract Funding(3) Non-recourse senior notes 7.944% (815) (815) 2016
----- -----
$(873) $(873)
===== =====

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(1) This debt was consolidated as a result of adopting FIN 46 (see Note 2).

(2) This non-recourse debt was eliminated when we sold our interest in Mohawk
River Funding IV.

(3) This non-recourse debt was eliminated when we sold our interests in UCF.

Credit Facilities

El Paso maintains a $3 billion revolving credit facility, with a $1.5
billion letter of credit sublimit, which matures on June 30, 2005. This credit
facility has a borrowing cost of LIBOR plus 350 basis points, letter of credit
fees of 350 basis points and commitment fees of 75 basis points on the unused
amounts of the facility. We are not a party to El Paso's revolving credit
facility, although our subsidiaries, ANR and CIG, are borrowers under the
facility. Additionally, our equity in ANR, ANR Storage Company, CIG and WIC
collateralize the revolving credit facility and other El Paso financing
arrangements. As of March 31, 2004, there were $600 million of borrowings
outstanding and approximately $1.1 billion of letters of credit issued under the
facility, none of which was borrowed or issued on our behalf. In September 2004,
El Paso repaid the remaining $600 million outstanding under this facility. As of
September 30, 2004, El Paso's borrowing availability under this facility was
$1.8 billion. In October 2004, the borrowing availability under the revolving
credit facility was reduced by $456 million due to the sale of a portion of the
collateral supporting this facility. El Paso is in the process of negotiating
the refinancing of this facility as the combination of a $1.75 billion three
year revolving credit facility and a five year term loan of up to $1.25 billion
and currently expects to be successful in this refinancing.

Restrictive Covenants

Our restrictive covenants are discussed in our 2003 Annual Report on Form
10-K. For an update of matters that have or could impact these covenants,
including the restatements of El Paso's and our historical financial statements
and associated waivers obtained, see Note 1, Liquidity Update of this Quarterly
Report on Form 10-Q.

9. COMMITMENTS AND CONTINGENCIES

Legal Proceedings and Government Investigations

Grynberg. A number of our subsidiaries were named defendants in actions
filed in 1997 brought by Jack Grynberg on behalf of the U.S. Government under
the False Claims Act. Generally, these complaints allege an industry-wide
conspiracy to underreport the heating value as well as the volumes of the
natural gas produced from federal and Native American lands, which deprived the
U.S. Government of royalties. The plaintiff in this case seeks royalties that he
contends the government should have received had the volume and heating value
been differently measured, analyzed, calculated and reported, together with
interest, treble damages, civil penalties, expenses and future injunctive relief
to require the defendants to adopt allegedly appropriate gas measurement
practices. No monetary relief has been specified in this case. These matters
have been consolidated for pretrial purposes (In re: Natural Gas Royalties Qui
Tam Litigation, U.S. District Court for the District of Wyoming, filed June
1997). Discovery is proceeding. Our costs and legal exposure related to these
lawsuits and claims are not currently determinable.

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Will Price (formerly Quinque). A number of our subsidiaries are named as
defendants in Will Price, et al. v. Gas Pipelines and Their Predecessors, et
al., filed in 1999 in the District Court of Stevens County, Kansas. Plaintiffs
allege that the defendants mismeasured natural gas volumes and heating content
of natural gas on non-federal and non-Native American lands and seek to recover
royalties that they contend they should have received had the volume and heating
value of natural gas produced from their properties been differently measured,
analyzed, calculated and reported, together with prejudgment and postjudgment
interest, punitive damages, treble damages, attorneys' fees, costs and expenses,
and future injunctive relief to require the defendants to adopt allegedly
appropriate gas measurement practices. No monetary relief has been specified in
this case. Plaintiffs' motion for class certification of a nationwide class of
natural gas working interest owners and natural gas royalty owners was denied on
April 10, 2003. Plaintiffs' were granted leave to file a Fourth Amended
Petition, which narrows the proposed class to royalty owners in wells in Kansas,
Wyoming and Colorado and removes claims as to heating content. A second class
action has since been filed as to the heating content claims. Our costs and
legal exposure related to these lawsuits and claims are not currently
determinable.

MTBE. In compliance with the 1990 amendments to the Clean Air Act, we used
the gasoline additive, methyl tertiary-butyl ether (MTBE), in some of our
gasoline. We have also produced, bought, sold and distributed MTBE. A number of
lawsuits have been filed throughout the U.S. regarding MTBE's potential impact
on water supplies. We and our subsidiaries are currently one of several
defendants in over 50 such lawsuits nationwide, which have been consolidated for
pre-trial purposes in multi-district litigation in the U.S. District Court for
the Southern District of New York. The plaintiffs generally seek remediation of
their groundwater, prevention of future contamination, a variety of compensatory
damages, punitive damages, attorney's fees, and court costs. Our costs and legal
exposure related to these lawsuits and claims are not currently determinable.

Reserves. We have been named as a defendant in a purported class action
claim styled, GlickenHaus & Co. et. al. v. El Paso Corporation, El Paso CGP
Company, et. al., filed in April 2004 in federal court in Houston. The
plaintiffs have additionally sued several individuals. The plaintiffs generally
allege that our reporting of oil and gas reserves was materially false and
misleading between February 2000 and February 2004. This lawsuit has been
consolidated with other purported securities class action lawsuits in Oscar S.
Wyatt et. al. v. El Paso Corporation et. al. pending in federal court in
Houston. Our costs and legal exposure related to this lawsuit and claims are not
currently determinable.

Governmental Investigations

Power Restructuring. In October 2003, El Paso announced that the SEC had
authorized the staff of the Fort Worth Regional Office to conduct an
investigation of certain aspects of our periodic reports filed with the SEC. The
investigation appears to be focused principally on our power plant contract
restructurings and the related disclosures and accounting treatment for the
restructured power contracts, including in particular the Eagle Point
restructuring transaction completed in 2002. We are cooperating with the SEC
investigation.

Reserve Revisions. In March 2004, El Paso received a subpoena from the SEC
requesting documents relating to its December 31, 2003 natural gas and oil
reserve revisions. El Paso and El Paso's Audit Committee have also received
federal grand jury subpoenas for documents with regard to those reserve
revisions. We are assisting El Paso and the Audit Committee in their efforts to
cooperate with the SEC's and the U.S. Attorney's investigations into the matter.

CFTC Investigation. In April 2004, our affiliates elected to voluntarily
cooperate with the Commodity Futures Trading Commission (CFTC) in connection
with the CFTC's industry-wide investigation of activities affecting the price of
natural gas in the fall of 2003. Specifically, our affiliates provided
information relating to storage reports provided to the Energy Information
Administration for the period of October 2003 through December 2003. On August
30, 2004, the CFTC announced they had completed the investigation and found no
evidence of wrongdoing.

Iraq Oil Sales. In September 2004, we received a subpoena from the grand
jury of the U.S. District Court for the Southern District of New York to produce
records regarding the United Nation's Oil for Food

17

Program governing sales of Iraqi oil. The subpoena seeks various records
relating to transactions in oil of Iraqi origin during the period from 1995 to
2003. Recent press reports indicate that other government entities, including
various Congressional committees, are investigating the Oil for Food Program. We
received inquiries from one of these committees.

On September 30, 2004, the Special Advisor to the Director of Central
Intelligence issued a report on the Iraqi regime, including the Oil for Food
Program. In part, the report found that the Iraqi regime earned kick backs or
surcharges associated with the Oil for Food program. The report did not name US
companies or individuals for privacy reasons, but according to various news
reports congressional sources have identified The Coastal Corporation and the
former chairman and CEO of Coastal, among others, as having purchased Iraqi
crude during the period when allegedly improper surcharges were assessed by
Iraq.

We are continuing in the process of collecting and reviewing documents
responsive to the subpoena.

In addition to the above matters, we and our subsidiaries and affiliates
are named defendants in numerous lawsuits and governmental proceedings that
arise in the ordinary course of our business. There are also other regulatory
rules and orders in various stages of adoption, review and/or implementation,
none of which we believe will have a material impact on us.

For each of our outstanding legal matters, we evaluate the merits of the
case, our exposure to the matter, possible legal or settlement strategies and
the likelihood of an unfavorable outcome. If we determine that an unfavorable
outcome is probable and can be estimated, we establish the necessary accruals.
As this information becomes available, or other relevant developments occur, we
will adjust our accrual amounts accordingly. While there are still uncertainties
related to the ultimate costs we may incur, based upon our evaluation and
experience to date, we believe our current reserves are adequate. As of March
31, 2004, we had approximately $28 million accrued for all outstanding legal
matters.

Environmental Matters

We are subject to federal, state and local laws and regulations governing
environmental quality and pollution control. These laws and regulations require
us to remove or remedy the effect on the environment of the disposal or release
of specified substances at current and former operating sites. As of March 31,
2004, we had accrued approximately $130 million, including approximately $128
million for expected remediation costs at current and former operated sites and
associated onsite, offsite and groundwater technical studies and approximately
$2 million for related environmental legal costs, which we anticipate incurring
through 2027. Of the $130 million accrual, $95 million was reserved for
facilities we currently operate, and $35 million was reserved for non-operating
sites (facilities that are shut down or have been sold) including Superfund
sites.

Our reserve estimates range from approximately $130 million to
approximately $220 million. Our accrual represents a combination of two
estimation methodologies. First, where the most likely outcome can be reasonably
estimated, that cost has been accrued ($48 million). Second, where the most
likely outcome cannot be estimated, a range of costs is established ($82 million
to $172 million) and if no one amount in that range is more likely than any
other, the lower end of the range has been accrued. By type of site, our
reserves are based on the following estimates of reasonably possible outcomes.

18

Below is a reconciliation of our accrued liability from January 1, 2004 to
March 31, 2004 (in millions):

Balance as of January 1, 2004............................... $131
Payments for remediation activities......................... (4)
Other charges, net.......................................... 3
----
Balance as of March 31, 2004................................ $130
====

For 2004, we estimate that our total remediation expenditures will be
approximately $35 million. In addition, we expect to make capital expenditures
for environmental matters of approximately $29 million in the aggregate for the
years 2004 through 2008. These expenditures primarily relate to compliance with
clean air regulations.

CERCLA Matters. We have received notice that we could be designated, or
have been asked for information to determine whether we could be designated, as
a Potentially Responsible Party (PRP) with respect to 26 active sites under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or
state equivalents. We have sought to resolve our liability as a PRP at these
sites through indemnification by third-parties and settlements which provide for
payment of our allocable share of remediation costs. As of March 31, 2004, we
have estimated our share of the remediation costs at these sites to be between
$5 million and $8 million. Since the clean-up costs are estimates and are
subject to revision as more information becomes available about the extent of
remediation required, and because in some cases we have asserted a defense to
any liability, our estimates could change. Moreover, liability under the federal
CERCLA statute is joint and several, meaning that we could be required to pay in
excess of our pro rata share of remediation costs. Our understanding of the
financial strength of other PRPs has been considered, where appropriate, in
estimating our liabilities. Accruals for these issues are included in the
previously indicated estimates for Superfund sites.

It is possible that new information or future developments could require us
to reassess our potential exposure related to environmental matters. We may
incur significant costs and liabilities in order to comply with existing
environmental laws and regulations. It is also possible that other developments,
such as increasingly strict environmental laws and regulations and claims for
damages to property, employees, other persons and the environment resulting from
our current or past operations, could result in substantial costs and
liabilities in the future. As this information becomes available, or other
relevant developments occur, we will adjust our accrual amounts accordingly.
While there are still uncertainties relating to the ultimate costs we may incur,
based upon our evaluation and experience to date, we believe our current
reserves are adequate.

While the outcome of these matters cannot be predicted with certainty, we
believe we have established appropriate reserves for these matters. However, it
is possible that new information or future developments could require us to
reassess our potential exposure related to these matters and adjust our accruals
accordingly. The impact of these changes may have a material effect on our
results of operations, our financial position and our cash flows in the periods
these events occur.

Guarantees

We are involved in various joint ventures and other ownership arrangements
that sometimes require additional financial support that results in the issuance
of financial and performance guarantees. See our 2003 Annual Report on Form 10-K
for a description of each type of guarantee. As of March 31, 2004, we had
approximately $17 million of both financial and performance guarantees not
otherwise reflected in our financial statements.

19

10. RETIREMENT BENEFITS

The components of net benefit cost (income) for our pension and
postretirement benefit plans for the quarters ended March 31 are as follows:

We made $5 million and $4 million of cash contributions to our other
postretirement plans during the quarters ended March 31, 2004 and 2003. We
expect to contribute an additional $9 million to our other postretirement plans
in 2004. We do not anticipate making any contributions to our pension plans in
2004. We are currently evaluating the impact of the Pension Funding Equity Act
enacted in 2004 on our projected funding.

On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was signed into law. Benefit obligations and costs
reported that are related to prescription drug coverage do not reflect the
impact of this legislation. In addition, we are currently evaluating new
accounting standards that become effective in the third quarter of 2004 that may
require changes to previously reported benefit information and to our net
benefit cost for the year ended December 31, 2004.

11. SEGMENT INFORMATION

During 2004, El Paso reorganized its business structure into two primary
business lines, regulated and unregulated. Historically, our operating segments
included Pipelines, Production, Merchant Energy and Field Services. As a result
of El Paso's reorganization, we renamed our Merchant Energy segment as a Power
segment. All periods presented reflect this change. Our regulated business
consists of our Pipelines segment, while our unregulated businesses consist of
our Production, Power and Field Services segments. Our segments are strategic
business units that provide a variety of energy products and services. They are
managed separately as each segment requires different technology and marketing
strategies. Our corporate activities include our general and administrative
functions. Corporate also includes other unregulated operations, including our
petroleum ship charter operations and various other contracts and assets, all of
which are immaterial to our results in 2004 and do not constitute separate
operating segments. During the first quarter of 2004, we reclassified our
petroleum ship charter operations from discontinued operations to our continuing
corporate activities based on our intent to retain these operations. Our
operating results for all periods presented reflect this change.

We use earnings before interest expense and income taxes (EBIT) to assess
the operating results and effectiveness of our business segments. We define EBIT
as net income (loss) adjusted for (i) items that do not impact our income (loss)
from continuing operations, such as extraordinary items, discontinued operations
and the impact of accounting changes, (ii) income taxes, (iii) interest and debt
expense and (iv) distributions on preferred interests of consolidated
subsidiaries. Our business operations consist of both consolidated businesses as
well as substantial investments in unconsolidated affiliates. We believe EBIT is
useful to our investors because it allows them to more effectively evaluate the
performance of all of our businesses and investments. Also, we exclude interest
and debt expense and distributions on preferred interests of consolidated
subsidiaries so that investors may evaluate our operating results without regard
to our financing methods or capital structure. EBIT may not be comparable to
measures used by other companies. Additionally, EBIT should be considered in
conjunction with net income and other performance measures

20

such as operating income or operating cash flow. Below is a reconciliation of
our EBIT to our loss from continuing operations for the quarters ended March 31:

The following tables reflect our segment results as of and for the quarters
ended March 31:

- ---------------

(1) Includes our Corporate activities, petroleum ship charter operations,
various other contracts and assets and eliminations of intercompany
transactions. Our intersegment revenues, along with our intersegment
operating expenses, were incurred in the normal course of business between
our operating segments. We record an intersegment revenue elimination, which
is the only elimination included in the "Corporate" column, to remove
intersegment transactions.

(2) Revenues from external customers include gains and losses related to our
hedging of price risk associated with our natural gas and oil production.

(3) Relates to intercompany activities between our continuing operations and our
discontinued petroleum markets operations.

21

Total assets by segment are presented below:

12. INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS

We hold investments in various unconsolidated affiliates which are
accounted for using the equity method of accounting. The summarized financial
information below includes our proportionate share of the operating results of
our unconsolidated affiliates, including those affiliates in which we hold a
less than 50 percent interest as well as those in which we hold a greater than
50 percent interest.

- ---------------

(1)Includes net income of $8 million and $7 million for the quarters ended March
31, 2004 and 2003 related to our proportionate share of affiliates in which
we hold a greater than 50 percent interest.

Our income statement reflects our share of net earnings from unconsolidated
affiliates, which includes income or losses directly attributable to the net
income or loss of our equity investments as well as other adjustments. These
adjustments totaled $5 million for each of the quarters ended March 31, 2004 and
2003.

We received distributions and dividends of $24 million and $20 million for
the quarters ended March 31, 2004 and 2003 from our investments. In January
2004, we also received $54 million of non-cash assets and liabilities as a
liquidating distribution of our equity investment in Noric Holdings I, LLC. We
did not recognize a gain or loss on this distribution.

Related Party Transactions

We enter into a number of transactions with our unconsolidated affiliates
in the ordinary course of conducting our business. The following table shows the
income statement impact of transactions with our affiliates for the quarters
ended March 31:

22

We are a party to a master hedging contract with El Paso Merchant Energy
L.P., (El Paso Merchant Energy), a wholly-owned subsidiary of El Paso. Pursuant
to that agreement, we hedge a portion of our natural gas production with El Paso
Merchant Energy. Realized gains and losses on these hedges are included in
operating revenues.

Affiliated Receivables and Payables. We participate in El Paso's cash
management program, which matches short-term cash surpluses and needs of its
participating affiliates, thus minimizing total borrowing from outside sources.
We have historically and consistently borrowed cash from El Paso under this
program. As of March 31, 2004, and December 31, 2003, we had borrowed $128
million and $906 million. The market rate of interest as of March 31, 2004, and
December 31, 2003, was 2.5% and 2.8%. In addition, we had a demand note
receivable with El Paso of $324 million and $275 million at March 31, 2004 and
December 31, 2003. The interest rate for this demand note receivable was 1.6% at
March 31, 2004 and 1.7% at December 31, 2003.

At March 31, 2004, and December 31, 2003, we had current accounts and notes
receivable from related parties of $73 million and $167 million. These balances
were incurred in the normal course of our business. In addition, we had a
non-current note receivable from a related party of $116 million and $127
million included in other non-current assets at March 31, 2004 and at December
31, 2003.

At March 31, 2004, and December 31, 2003, we had other accounts payable to
related parties of $75 million and $110 million. These balances were incurred in
the normal course of business.

Other. During the first quarter of 2004, Coastal Stock Company, our
wholly-owned subsidiary, issued 68,000 shares of its Class A Preferred Stock to
a subsidiary of El Paso for $71 million. We have reflected the issuance of these
shares as securities of subsidiaries in our balance sheet as of March 31, 2004.

23

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information contained in Item 2 updates, and you should read it in
conjunction with, information disclosed in our Annual Report on 2003 Form 10-K,
and the financial statements and notes presented in Item 1 of this Quarterly
Report on Form 10-Q.

Our results for the quarter ended March 31, 2003 have been restated to
reflect the accounting impact of a reduction in our historically reported proved
natural gas and oil reserves as further discussed in our 2003 Annual Report on
Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

We rely on cash generated from our internal operations and loans from El
Paso through its cash management program as our primary sources of liquidity, as
well as proceeds from asset sales and capital contributions from El Paso. We
expect that our future funding for working capital needs, capital expenditures
and debt service will continue to be provided from some or all of these sources.
Each of these sources is impacted by factors that influence the overall amount
of cash generated by us and the capital available to us. For example, cash
generated by our business operations may be impacted by changes in commodity
prices or demands for our commodities or services due to weather patterns,
competition from other providers or alternative energy sources. Cash generated
by future asset sales may depend on the overall economic conditions of the
industries served by these assets, the condition and location of the assets and
the number of interested buyers. For a discussion of risks that may impact our
business, see our 2003 Annual Report on Form 10-K.

Under El Paso's cash management program, depending on whether we have
short-term cash requirements or surpluses, either El Paso provides cash to us or
we provide cash to El Paso. We have historically and consistently borrowed cash
from El Paso under this program. Currently, one of our subsidiaries, CIG, is not
advancing funds to El Paso via the cash management program due to its
anticipated cash needs. As of March 31, 2004, we had a note payable to El Paso
of $128 million related to this program. This note is classified as a current
liability in our balance sheet because it is due upon demand. Our ability to
rely on advances from El Paso can be impacted by its credit standing, its
requirement to repay debt and other financing obligations, and the cash demands
from other parts of its business. If El Paso were unable to meet its liquidity
needs, we would not have access to this source of liquidity. Furthermore, we
would be required to repay affiliated company payables, if demanded. However, we
do not anticipate that El Paso will require us to repay these payables during
2004.

As discussed in our 2003 Annual Report on Form 10-K, in February 2004, El
Paso completed the December 31, 2003 reserve estimation process for its proved
natural gas and oil reserves which included reserves in our Production segment.
As a result of this review, El Paso announced that it was significantly reducing
its proved natural gas and oil reserve estimates, including our reserve
estimates. After an investigation into this matter, El Paso concluded that a
restatement of its historical financial statements, as well as ours, was
required. Additionally, El Paso further restated its historical financial
statements to revise the manner in which it accounted for certain derivatives,
which did not impact our historical financial statements.

El Paso believes that the restatements of its historical financial
statements would have constituted events of default under its $3 billion
revolving credit facility and various other financing transactions; specifically
under the provisions of these arrangements related to representations and
warranties on the accuracy of its historical financial statements and on El
Paso's debt to capitalization ratio. During 2004, El Paso received several
waivers on its revolving credit facility and various other financing transaction
to address these issues. These waivers continue to be in effect. El Paso also
received an extension of time from various lenders until November 30, 2004 to
file its second quarter 2004 Form 10-Q, which it expects to meet. If El Paso is
unable to file its second quarter 2004 Form 10-Q by that date and is not able to
negotiate an additional extension of the

24

filing deadline, its revolving credit facility and various other transactions
could be accelerated. As part of obtaining its waivers, El Paso also amended
various provisions of the revolving credit facility, including provisions
related to events of default and limitations on the ability of El Paso, as well
as that of its subsidiaries, to prepay indebtedness scheduled to mature after
June 30, 2005. Although two of our subsidiaries (ANR and CIG) are eligible to
borrow under El Paso's revolving credit facility, they do not have any
borrowings or letters of credit outstanding under that facility. Based upon a
review of the provisions of our indentures and financing agreements, we believe
that a default on El Paso's revolving credit facility would not result in an
event of default under our other debt agreements unless such default resulted in
the acceleration of El Paso's revolving credit facility or other transactions
collateralized by the same assets, and our subsidiaries failed to perform their
obligations under their guarantees of such debt. The acceleration of our debt or
the debt of El Paso would adversely affect our liquidity position, and in turn,
our financial condition.

Various other financing arrangements entered into by El Paso and its
subsidiaries, including us, include covenants that require us to file financial
statements within specified time periods. Non-compliance with such covenants
does not constitute an automatic event of default. Instead, such agreements are
subject to acceleration when the indenture trustee or the holders of at least 25
percent of the outstanding principal amount of any series of debt provides
notice to the issuer of non-compliance under the indenture. In that event, the
non-compliance can be cured by filing financial statements within specified
periods of time (between 30 and 90 days after receipt of notice depending on the
particular indenture) to avoid acceleration of repayment. The filing of El
Paso's second quarter 2004 Form 10-Q and the second quarter 2004 Forms 10-Q of
its subsidiaries, including us, will cure the events of non-compliance resulting
from the failure to file financial statements. In addition, we have not received
a notice of the default caused by our failure to file financial statements. In
the event of an acceleration, we may be unable to meet our payment obligations
with respect to the related indebtedness.

If, as a result of the events described above, El Paso were subject to
voluntary or involuntary bankruptcy proceedings, El Paso and its other
subsidiaries and their creditors could attempt to make claims against us,
including claims to substantively consolidate our assets and liabilities with
those of El Paso and its other subsidiaries. We believe that claims to
substantively consolidate us with El Paso and/or its other subsidiaries would be
without merit. However, there is no assurance that El Paso and/or its other
subsidiaries or their creditors would not advance such a claim in a bankruptcy
proceeding. If we were to be substantively consolidated in a bankruptcy
proceeding with El Paso and/or its other subsidiaries, there could be a material
adverse effect on our financial condition and our liquidity.

Some of our subsidiaries are subsidiary guarantors of El Paso's $3 billion
revolving credit facility and other financing transactions. In connection with
our subsidiaries' guarantees, El Paso pledged our ownership of ANR, ANR Storage
Company, CIG, and WIC to collateralize the revolving credit facility and other
financing arrangements, including leases, letters of credit and other
facilities. Our ownership in the above mentioned companies is subject to change
if El Paso's lenders under these facilities exercise their rights over the
collateral. If this were to occur, it could have a material adverse effect on
our financial condition. In addition, one of our subsidiaries has pledged as
collateral a portion of its natural gas and oil properties to support the
obligations of some of our affiliates to make payments in connection with the
settlement of various lawsuits arising out of the western energy crisis. If our
affiliates fail to make those payments, the properties that our subsidiary has
pledged would be subject to foreclosure, which could have a material adverse
effect on our financial position, results of operations and cash flows.

We have cross-acceleration provisions in our long-term debt-agreements
which, if triggered, could result in the acceleration of our debt. The most
restrictive indenture has a cross-acceleration threshold of $5 million. The
acceleration of our long-term debt would adversely affect our liquidity position
and, in turn, our financial condition.

We believe we will be able to meet our ongoing liquidity and cash needs
through a combination of sources, including cash on hand, cash generated from
our operations, proceeds from asset sales, financing activities and advances
from El Paso. However, a number of factors could influence our liquidity
sources, as

25

well as the timing and ultimate outcome of our ongoing efforts and plans, which
are discussed in our 2003 Annual Report on Form 10-K.

OVERVIEW OF CASH FLOW ACTIVITIES FOR THE QUARTERS ENDED MARCH 31, 2004 AND 2003

For the quarters ended March 31, 2004 and 2003, our cash flows from
continuing operating are summarized as follows:

Cash from Continuing Operating Activities

Net cash generated from our continuing operating activities was $336
million in the first quarter of 2004 versus $513 million during the same period
in 2003. In our operating activities, we experienced a $177 million decline in
2004 in cash generated from our operations primarily as a result of sales of
operating assets during both 2003 and 2004 and the effects of lower capital
spending in our Production segment.

Cash from Continuing Investing Activities

Net cash provided by our continuing investing activities was $111 million
for the quarter ended March 31, 2004. Cash received primarily consisted of $336
million of proceeds from the sale of assets and investments, primarily natural
gas and oil properties, which were partially offset by $168 million in capital
expenditures. Our capital expenditures for the quarter ended March 31, 2004
included the following (in millions):

Through September 30, 2004, our capital expenditures were approximately
$360 million for our Pipeline segment and approximately $240 million for our
Production segment.

Cash from Continuing Financing Activities

Net cash used in our continuing financing activities for the quarter ended
March 31, 2004 primarily consisted of payments on affiliated notes payable of
$800 million and payments to retire long-term debt and other financing
obligations of $252 million. Offsetting this use of cash was $558 million of
cash contributed by our discontinued operations and $73 million of proceeds
received from El Paso primarily from the issuance of the preferred stock of
Coastal Stock Company, our wholly-owned subsidiary.

Cash from Discontinued Operations

During the first quarter of 2004, our discontinued operations contributed
$558 million of cash. We received proceeds from asset sales of $780 million and
our assets from discontinued operations generated $170 million of cash during
the period. Partially offsetting these sources of cash were payments of
long-term debt of $365 million.

26

SEGMENT RESULTS

Below are our results of operations (as measured by EBIT) by segment.
During 2004, El Paso reorganized its business structure into two primary
business lines, regulated and unregulated. Historically, our operating segments
included Pipelines, Production, Merchant Energy and Field Services. As a result
of El Paso's reorganization, we renamed our Merchant Energy segment as our Power
segment. All periods presented reflect this change. Our regulated business
consists of our Pipelines segment, while our unregulated businesses consist of
our Production, Power and Field Services segments. Our segments are strategic
business units that provide a variety of energy products and services. They are
managed separately as each segment requires different technology and marketing
strategies. Our corporate activities include our general and administrative
functions. Corporate also includes other unregulated activities, including our
petroleum ship charter operations and various other contracts and assets, all of
which are immaterial to our results in 2004 and do not constitute separate
operating segments. During the first quarter of 2004, we reclassified our
petroleum ship charter operations from discontinued operations to our continuing
corporate activities based on our intent to retain these operations. Our
operating results for all periods presented reflect this change.

We use earnings before interest expense and income taxes (EBIT) to assess
the operating results and effectiveness of our business segments. We define EBIT
as net income (loss) adjusted for (i) items that do not impact our income (loss)
from continuing operations, such as extraordinary items, discontinued operations
and the impact of accounting changes, (ii) income taxes, (iii) interest and debt
expense and (iv) distributions on preferred interests of consolidated
subsidiaries. Our business operations consist of both consolidated businesses as
well as substantial investments in unconsolidated affiliates. We believe EBIT is
useful to our investors because it allows them to more effectively evaluate the
performance of all of our businesses and investments. Also, we exclude interest
and debt expense and distributions on preferred interests of consolidated
subsidiaries so that investors may evaluate our operating results without regard
to our financing methods or capital structure. EBIT may not be comparable to
measures used by other companies. Additionally, EBIT should be considered in
conjunction with net income and other performance measures such as operating
income or operating cash flow. Below is a reconciliation of our consolidated
EBIT to our consolidated net loss for the quarters ended March 31:

The following is a discussion of the year over year results of each of our
business segments as well as results in our corporate activities, interest and
debt expense, affiliated interest expense, net, distributions on preferred
interests of consolidated subsidiaries, income taxes and the results of our
discontinued petroleum markets and coal operations.
27

REGULATED BUSINESSES -- PIPELINES SEGMENT

Our Pipelines segment owns and operates our interstate natural gas
transmission businesses. For a further discussion of the business activities of
our Pipelines segment, see our 2003 Annual Report on Form 10-K. Below are the
operating results and analysis of these results for our Pipelines segment for
the quarters ended March 31:

- ---------------

(1) Throughput volumes exclude intrasegment activities.

Operating Results (EBIT)

The following factors contributed to our overall EBIT decrease of $41
million for the quarter ended March 31, 2004 as compared to the quarter ended
March 31, 2003:

The renegotiation or restructuring of several contracts on our pipeline
systems will continue to unfavorably impact our operating results and EBIT for
the remainder of 2004. Guardian Pipeline, which is owned in part by We Energies,
is currently providing a portion of its firm transportation requirements and
directly competes with ANR for a portion of the markets in Wisconsin.
Additionally, ANR will continue to experience lower operating revenues and lower
operating expenses for the remainder of 2004 based on the termination of the
Dakota contract on its system. However, the termination of this contract will
not have a significant overall impact on operating income and EBIT. Finally, ANR
has entered into an agreement with a shipper to restructure another of its
transportation contracts on its Southeast Leg as well as a related gathering
contract. We anticipate this restructuring will be completed in March 2005 upon
which ANR will receive approximately $26 million.

28

UNREGULATED BUSINESSES -- PRODUCTION SEGMENT

Our Production segment conducts our natural gas and oil exploration and
production activities. Our operating results are impacted by a variety of
factors including the ability to locate and develop economic natural gas and oil
reserves, extract those reserves with minimal production costs and sell the
products at attractive prices.

Operational Update

Our long-term strategy includes developing our production opportunities
primarily in the U.S. and Brazil, while prudently divesting of our production
properties outside of these areas. In the second quarter of 2004, El Paso's
Board of Directors approved exiting our international natural gas and oil
operations, excluding our operations in Brazil. As a result, we will report our
Canadian and other international operations as discontinued operations beginning
in the second quarter of 2004. As of September 2004, we have sold substantially
all of our Indonesian operations and all of our Canadian operations, which
included activities in Nova Scotia where, in the first quarter of 2004, we
drilled an exploratory well that was not commercially viable and therefore
recorded a $24 million ceiling test charge.

Through September 2004, we have spent approximately $240 million in capital
expenditures for acquisition, exploration, and development activities. Based on
the finding and development costs experienced in our 2004 drilling program, we
expect our domestic unit of production depletion rate to increase from $2.26 per
Mcfe during the first quarter 2004 to $2.32 per Mcfe for the second quarter of
2004 and to $2.48 per Mcfe for the third quarter of 2004.

For the first quarter of 2004, our total equivalent production declined
approximately 16 Bcfe or 30 percent as compared to the same period in 2003. This
decline was caused by normal production declines, asset sales in 2003 primarily
in western Canada, New Mexico and the Gulf of Mexico and disappointing drilling
results. For the first nine months of 2004, our production averaged
approximately 362 MMcfe/d; however, for the month of September 2004, daily
production averaged approximately 325 MMcfe/d. At the end of the first quarter
of 2004, we sold our production operations in western Canada, which had an
average daily production of approximately 50 MMcfe/d. Our production levels are
dependent upon the amount of capital allocated to our Production segment, the
level of success in our drilling programs and any future asset sales or
acquisitions.

Earlier this year, we completed a restatement of our historical financial
statements to reflect significant revisions of our proved natural gas and oil
reserves. The impact of this restatement on our Production segment in 2004 was
lower depreciation expense due to higher ceiling test charges in the restated
periods.

Production Hedging

We primarily conduct our hedging activities with El Paso Merchant Energy,
our affiliate, through natural gas and oil derivatives on our natural gas and
oil production to stabilize cash flows and reduce the risk of downward commodity
price movements on our sales. Because this hedging strategy only partially
reduces our exposure to downward movements in commodity prices, our reported
results of operations, financial position and cash flows can be impacted
significantly by movements in commodity prices from period to period. For a
further discussion of our hedging program, refer to our 2003 Annual Report on
Form 10-K.

29

Operating Results

Below are the operating results and analysis for our Production segment for
the quarters ended March 31:

- ---------------
(1) Production costs include lease operating costs and production related taxes
(including ad valorem and severance taxes).

(2) Transportation costs are included in operating expenses on our consolidated
statements of income.

(3) Prices are stated before transportation costs.

Quarter Ended March 31, 2004 Compared to Quarter Ended March 31, 2003

For the quarter ended March 31, 2004, EBIT was $175 million lower than the
same period in 2003. The decrease is primarily due to higher losses on
long-lived assets and ceiling test charges in 2004 primarily

30

associated with our Canadian operations. Also contributing to lower EBIT were
lower revenues resulting from lower production volumes due to normal production
declines, asset sales and disappointing drilling results.

Operating Revenues. The following table describes the variance in revenue
between the quarters ended March 31, 2004 and 2003 due to: (i) changes in
average realized market prices excluding hedges, (ii) changes in production
volumes, and (iii) the effects of hedges on our revenues.

For the quarter ended March 31, 2004, operating revenues were $83 million
lower than the same period in 2003 due primarily to lower production volumes.
The decline in production volumes was primarily due to normal production
declines, the sale of properties in 2003 in western Canada, New Mexico and
offshore Gulf of Mexico and disappointing drilling results.

Average realized natural gas prices for the first quarter of 2004,
excluding hedges, were $1.03 per Mcf lower than the same period in 2003, a
decrease of 16 percent. However, more than offsetting the decrease in revenues
due to lower natural gas prices were $14 million of hedging losses in 2004 as
compared to $56 million of hedging losses in 2003 relating to our natural gas
hedge positions. We expect to continue to incur hedging losses in 2004.

Operating Expenses. Total operating expenses were $92 million higher for
the first quarter of 2004 as compared to the first quarter of 2003 primarily due
to higher losses on long-lived assets and ceiling test charges in 2004,
partially offset by lower depreciation, depletion, and amortization expenses,
lower production costs, and lower general and administrative expenses.

Losses on long-lived assets and ceiling test charges were higher by $111
million in 2004. During 2004, we incurred an $85 million loss associated with
the sale of our Canadian operations, a $24 million impairment related to an
exploratory well drilled in Nova Scotia that was not commercially viable and an
$8 million impairment related to a non-full cost pool asset in Canada.

Total depreciation, depletion, and amortization expense decreased by $6
million in the first quarter of 2004 as compared to the same period in 2003.
Lower production volumes in 2004 due to the asset sales and other production
declines discussed above resulted in a decrease of $25 million. Partially
offsetting this decrease were higher depletion rates due to higher finding and
development costs and a lower reserve base, which contributed an increase of $20
million in our depreciation, depletion, and amortization expense.

Production costs decreased by $8 million in the first quarter of 2004 as
compared to the first quarter of 2003 primarily due to a decrease in production
taxes resulting from high cost gas well tax credits in the first quarter of 2004
and to lower commodity prices in the first quarter 2004 compared to the same
period in 2003. Production taxes decreased $0.27 per Mcfe in 2004. This was
offset by an increase of $0.28 per Mcfe in average lease operating costs
primarily due to lower production volumes discussed above.

General and administrative expenses decreased by $4 million, but increased
$0.06 per Mcfe, in the first quarter of 2004 as compared to the same period in
2003. The total dollar decrease was primarily due to lower allocated expenses,
while the increase on a per unit basis was due to lower production volumes.

31

UNREGULATED BUSINESSES -- POWER SEGMENT

Our Power segment includes the ownership and operation of domestic and
international power generation facilities as well as the management of
restructured power contracts. Below are the operating results and an analysis of
these results for our Power segment for the quarters ended March 31:

- ---------------

(1) Gross margin for our Power segment consists of revenues from our power
plants and the initial net gains and losses incurred in connection with the
restructuring of power contracts, as well as the subsequent revenues, cost
of electricity purchases and changes in fair value of those contracts. The
cost of fuel used in the power generation process is included in operating
expenses.

Quarter Ended March 31, 2004 Compared to Quarter Ended March 31, 2003

For the quarter ended March 31, 2004, EBIT was $95 million lower than the
same period in 2003. The decrease was due primarily to the announced sale of
Utility Contract Funding and its restructured power contract and related debt,
which resulted in an $89 million impairment loss during the first quarter of
2004 included in operating expenses. Contributing to EBIT for the quarters ended
March 31, 2004 and 2003 was an increase of $18 million and $20 million in the
fair value of our restructured power contracts included in gross margin.

Our other domestic and international power plant operations generated EBIT
of $8 million for the quarter ended March 31, 2004 compared to $12 million for
the same period in 2003. This $4 million decrease was due primarily to a $6
million decline in equity earnings from our investment in Midland Cogeneration
Venture in the first quarter of 2004 compared to the same period in 2003.

We currently anticipate selling a number of our power assets, both
domestically and internationally. As these sales occur or as agreements are
negotiated, we may incur future losses if the sales proceeds are less than the
carrying value of the assets, and these losses may be significant.

UNREGULATED BUSINESSES -- FIELD SERVICES SEGMENT

Our Field Services segment conducts our midstream activities which include
gathering and processing of natural gas. Our assets principally consist of our
processing plants in south Louisiana. Below are the operating results and
analysis of these results for our Field Services segment for the quarters ended
March 31:

- ---------------

(1) Gross margins consist of operating revenues less cost of products sold. We
believe this measurement is more meaningful for understanding and analyzing
our Field Services operating results because commodity costs play such a
significant role in the determination of profit from our midstream
activities.

Quarter Ended March 31, 2004 Compared to Quarter Ended March 31, 2003

For the quarter ended March 31, 2004, EBIT was $3 million higher than the
same period in 2003. We experienced higher non-operating income of $4 million
due to higher equity earnings from our investment in Javelina, which experienced
higher margins resulting from higher natural gas liquids prices. We also
experienced a $1 million net decrease in EBIT due to the sales of our Wyoming
gathering assets in January 2003 and our Mid-Continent gathering and processing
assets in June 2003, which resulted in a $5 million decrease in gross margins
and a $4 million decline in operating expenses.

CORPORATE, NET

Our Corporate activities include our general and administrative functions.
Corporate also includes other unregulated activities, including our petroleum
ship charter operations and various other contracts and assets, all of which are
immaterial to our results in 2004 and do not constitute separate operating
segments. During the first quarter of 2004, we reclassified our petroleum ship
charter operations from discontinued operations to our continuing corporate
activities. Our operating results for all periods presented reflect this change.
Below are the operating results and analysis of these results for our Corporate
activities for the quarters ended March 31:

CORPORATE RESULTS

Quarter Ended March 31, 2004 Compared to Quarter Ended March 31, 2003

For the quarter ended March 31, 2004, our EBIT increased by $9 million
compared to the same period in 2003. This was primarily due to a $7 million
increase in the EBIT earned on our petroleum ship charters in 2004 that resulted
from increased demand for these charter services. Our general and administrative
expenses remained relatively consistent with the same period in 2003.

33

INTEREST AND DEBT EXPENSE

Interest and debt expense for the quarter ended March 31, 2004, was $1
million higher than the same period in 2003. Below is an analysis of our
interest expense for the quarters ended March 31:

Interest expense on long-term debt for the quarter ended March 31, 2004,
was $4 million higher than the same period in 2003. The increase was primarily
due to the reclassification of our Coastal Finance I mandatorily redeemable
preferred securities to long-term debt as a result of the adoption of SFAS No.
150 in 2003. Based on this reclassification, we began recording the preferred
returns on these securities as interest expense rather than as distributions on
preferred interests, which were $6 million for the quarter ended March 31, 2004.
This increase was partially offset by lower average debt balances from
retirements in 2003 and 2004, net of debt issuances during 2003 and 2004.

Other interest for the quarter ended March 31, 2004, was $3 million lower
than the same period in 2003. The decrease was primarily due to the retirement
of other financing obligations.

AFFILIATED INTEREST EXPENSE, NET

Affiliated interest expense, net for the quarter ended March 31, 2004, was
$7 million higher than the same period in 2003 primarily due to higher average
advances payable to El Paso under its cash management program and higher average
short-term interest rates in 2004. The average advances payable balance
increased from $2,026 million in 2003 to $2,033 million in 2004 and average
short-term interest rates for the first quarter increased from 1.4% in 2003 to
2.7% in 2004.

DISTRIBUTIONS ON PREFERRED INTERESTS OF CONSOLIDATED SUBSIDIARIES

Distributions on preferred interests of consolidated subsidiaries for the
quarter ended March 31, 2004, were $7 million lower than the same period in 2003
primarily due to the reclassification of our Coastal Finance I mandatorily
redeemable preferred securities to long-term financing obligations as a result
of the adoption of SFAS No. 150 in 2003. Based on this reclassification, we
began recording the preferred returns on these securities as interest expense
rather than as distributions on preferred interests. Also contributing to the
decrease was the redemption of the preferred stock of Coastal Securities Company
Limited.

INCOME TAXES

Income tax expense (benefit) from continuing operations and our effective
tax rates for the quarters ended March 31 were as follows:

Our effective tax rates were different than the statutory tax rate of 35
percent primarily due to:

- state income taxes, net of federal income tax benefits;

- foreign income taxed at different rates; and

- sale of a foreign investment in 2004.

34

DISCONTINUED OPERATIONS

For the quarter ended March 31, 2004, our after-tax loss from our
discontinued operations was $55 million. The loss was primarily due to losses of
$40 million from the sale of our Eagle Point and Aruba refineries and $8 million
of severance costs for work force reductions as assets are sold.

For the quarter ended March 31, 2003, our after-tax loss from discontinued
operations was $222 million. The loss was primarily due to impairments of $350
million on our Eagle Point refinery and several of our chemical assets. The loss
was partially offset by operating income from our Eagle Point and Aruba
refineries of $79 million and gains of $55 million from the sale of our Corpus
Christi refinery and the Florida terminalling and marine assets.

In the second quarter of 2004, El Paso's Board of Directors approved
exiting our international natural gas and oil operations, excluding our
operations in Brazil. We will report these operations as discontinued operations
beginning in the second quarter of 2004.

COMMITMENTS AND CONTINGENCIES

See Item 1, Financial Statements, Note 9, which is incorporated herein by
reference.

35

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

We have made statements in this document that constitute forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. Forward-looking statements include information concerning possible
or assumed future results of operations. The words "believe," "expect,"
"estimate," "anticipate" and similar expressions will generally identify
forward-looking statements. These statements may relate to information or
assumptions about:

- capital and other expenditures;

- dividends;

- financing plans;

- capital structure;

- liquidity and cash flow;

- credit ratings;

- pending legal proceedings, claims and governmental proceedings, including
environmental matters;

- future economic performance;

- operating income;

- management's plans; and

- goals and objectives for future operations.

Forward-looking statements are subject to risks and uncertainties. While we
believe the assumptions or bases underlying the forward-looking statements are
reasonable and are made in good faith, we caution that assumed facts or bases
almost always vary from actual results, and these variances can be material,
depending upon the circumstances. We cannot assure you that the statements of
expectation or belief contained in the forward-looking statements will result or
be achieved or accomplished. Important factors that could cause actual results
to differ materially from estimates or projections contained in forward-looking
statements are described in our 2003 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on October 12, 2004.

36

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information updates, and you should read it in conjunction with,
information disclosed in our 2003 Annual Report on Form 10-K, in addition to the
information presented in Items 1 and 2 of this Quarterly Report on Form 10-Q.

There are no material changes in our quantitative and qualitative
disclosures about market risks from those reported in our 2003 Annual Report on
Form 10-K, except as discussed below.

INTEREST RATE RISK

As of March 31, 2004, we had one third party long-term power purchase
contract and one power supply derivative contract. In the second quarter of
2004, we sold these contracts, which eliminated our exposure to interest rate
risk related to these contracts.

37

ITEM 4. CONTROLS AND PROCEDURES

During 2003, we initiated a project to ensure compliance with Section 404
of the Sarbanes-Oxley Act of 2002 (SOX), which will apply to us at December 31,
2005. This project entailed a detailed review and documentation of the processes
that impact the preparation of our financial statements, an assessment of the
risks that could adversely affect the accurate and timely preparation of those
financial statements, and the identification of the controls in place to
mitigate the risks of untimely or inaccurate preparation of those financial
statements. Following the documentation of these processes, which was
substantially concluded by December 2003, we initiated an internal review or
"walk-through" of these financial processes by the financial management
responsible for those processes to evaluate the design effectiveness of the
controls identified to mitigate the risk of material misstatements occurring in
our financial statements. We also initiated a detailed process to evaluate the
operating effectiveness of our controls over financial reporting. This process
involves testing the controls for effectiveness, including a review and
inspection of the documentary evidence supporting the operation of the controls
on which we are placing reliance.

In September 2004, we completed an investigation surrounding matters that
gave rise to a restatement of our historical financial statements for the period
from 1999 to 2002 and the first nine months of 2003. This investigation
identified a number of internal control weaknesses which we reported as material
control weaknesses in our 2003 Annual Report on Form 10-K.

The following are the internal control deficiencies identified as a result
of our SOX implementation and from the independent review that led to the
restatement of our historical financial statements, which we have previously
disclosed:

- A weak control environment surrounding the booking of our proved natural
gas and oil reserves in the Production segment;

- Inadequate controls over access to our proved natural gas and oil reserve
system;

- Inadequate documentation of policies and procedures related to proved
natural gas and oil reserves booking;

- Ineffective monitoring activities to ensure compliance with existing
policies, procedures and accounting conclusions;

- Lack of formal evidence to substantiate monitoring activities were
adequately performed (e.g., monitoring activities, such as meetings and
report reviews, were not always documented in a way to objectively
confirm the monitoring activities occurred);

- Inadequate change management and security access to our information
systems (e.g., program developers were allowed to migrate system changes
into production and passwords for some of our applications did not adhere
to the corporate policy for effective passwords);

- Lack of proper segregation of duties related to manual journal entry
preparation and procurement activities (e.g., our financial accounting
system was not designed to prevent the same person from posting an entry
that prepared the entry and a buyer of goods could also receive for the
goods); and

- Untimely preparation and review of volume and account reconciliations.

We have communicated to El Paso's Audit Committee and to our external
auditors the deficiencies identified to date in our internal controls over
financial reporting as well as the remediation efforts that we have underway. We
are committed to effectively remediate known deficiencies as expeditiously as
possible and continue our extensive efforts to comply with Section 404 of SOX by
December 31, 2005. Consequently, we have made the following changes to our
internal controls:

- Added members to El Paso's Board of Directors, including its Audit
Committee and its executive management team with extensive experience in
the natural gas and oil industry;

38

- Formed a committee to provide oversight of the proved natural gas and oil
reserve estimation process, which is staffed with appropriate technical,
financial reporting and legal expertise;

- Continued use of an independent third-party reserve engineering firm,
selected by and reporting annually to the Audit Committee of El Paso's
Board of Directors, to perform an independent assessment of our proved
natural gas and oil reserves;

- Formed a centralized proved natural gas and oil reserve evaluation and
reporting function, staffed primarily with newly hired personnel that
have extensive industry experience, that is separate from the operating
divisions and reports to the president of Production and Non-regulated
Operations;

- Restricted security access to the proved natural gas and oil reserve
system to the centralized reserve reporting staff;

- Revised our documentation of procedures and controls for estimating
proved natural gas and oil reserves;

- Enhanced internal audit reviews to monitor booking of proved natural gas
and oil reserves;

- Implemented standard information system policies and procedures to
enforce change management and segregation of responsibilities when
migrating programming changes to production and strengthened security
policies and procedures around passwords for applications and databases;

- Modified systems and procedures to ensure appropriate segregation of
responsibilities for manual journal entry preparation and procurement
activities;

- Formalized our account reconciliation policy and timely completed all
material account reconciliations; and

- Developed and implemented formal training to educate company personnel on
management's responsibilities mandated by SOX Section 404, the components
of the internal control framework on which we rely and the relationship
to our company values including accountability, stewardship, integrity
and excellence.

We are in the process of implementing the following changes to our internal
controls and expect to have them implemented by December 31, 2004:

- Improved training regarding SEC guidelines for booking proved natural gas
and oil reserves;

- Formal communication of procedures for documenting accounting conclusions
involving interpretation of complex accounting standards, including
identification of critical factors that support the basis for our
conclusion;

- Evaluation, formalization and communication of required policies and
procedures;

- Improved monitoring activities to ensure compliance with policies,
procedures and accounting conclusions; and

- Review the adequacy, proficiency and training of our finance and
accounting staff.

Many of the deficiencies in our internal controls that we have identified
are likely the result of significant changes the company has undergone during
the past five years as a result of major acquisitions and reorganizations. As we
continue our SOX Section 404 compliance efforts, including the testing of the
effectiveness of our internal controls, we may identify additional deficiencies
in our system of internal controls that either individually or in the aggregate
may represent a material weakness requiring additional remediation efforts.

We did not make any changes to our internal controls over financial
reporting during the quarter ended March 31, 2004, that have had a material
adverse affect or are reasonably likely to have a material adverse affect on our
internal controls over financial reporting. However, we have made significant
changes to improve our internal controls during the quarter ended March 31,
2004, and subsequent to that date.

39

We also undertook a review of our overall disclosure controls and
procedures. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.

As a result of the deficiencies described above, we concluded that our
disclosure controls and procedures were not effective at March 31, 2004.
However, to address the deficiencies in our internal controls, we expanded our
disclosure controls and procedures to include additional analysis and other
post-closing procedures to ensure our disclosure controls and procedures were
effective over the preparation of these financial statements. Consequently, we
concluded that our disclosure controls and procedures over the preparation of
these financial statements were effective.

40

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, Note 9, which is incorporated herein by reference.
Additional information about our legal proceedings can be found in Part I, Item
3 of our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on October 12, 2004.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*". All
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.

Undertaking

We hereby undertake, pursuant to Regulation S-K, Item 601(b),
paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of our long-term debt not filed herewith for the reason that the
total amount of securities authorized under any of such instruments does
not exceed 10 percent of our total consolidated assets.

41

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

EL PASO CORPORATION

Date: November 5, 2004 /s/ D. Dwight Scott
------------------------------------
D. Dwight Scott
Executive Vice President,
Chief Financial Officer, and
Director
(Principal Financial Officer)

Date: November 5, 2004 /s/ Jeffrey I. Beason
------------------------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Principal Accounting Officer)

42

EXHIBIT INDEX

Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*". All
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.