COLORADO INTERSTATE GAS 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 SEPTEMBER 30, 2002

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 1-4874
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COLORADO INTERSTATE GAS COMPANY
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 84-0173305
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

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

Telephone Number: (713) 420-2600

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 [X] No [ ]

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 $1 per share. Shares outstanding on November 13,
2002: 1,000

COLORADO INTERSTATE GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COLORADO INTERSTATE GAS COMPANY

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

See accompanying notes.

1

COLORADO INTERSTATE GAS COMPANY

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

See accompanying notes.

2

COLORADO INTERSTATE GAS COMPANY

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

See accompanying notes.

3

COLORADO INTERSTATE GAS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

We prepared this Quarterly Report on Form 10-Q under the rules and
regulations of the United States 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 it along with our 2001 Annual Report on Form 10-K
which includes a summary of our significant accounting policies and other
disclosures. The financial statements as of September 30, 2002, and for the
quarters and nine months ended September 30, 2002 and 2001, are unaudited. We
derived the balance sheet as of December 31, 2001, from the audited balance
sheet filed in our Form 10-K. In our opinion, we have made all adjustments, all
of which are of a normal, recurring nature (except for the items discussed in
Note 3 below), to fairly present our interim period results. Due to the seasonal
nature of our businesses, information for interim periods may not indicate the
results of operations for the entire year. In addition, prior period information
presented in these financial statements includes reclassifications which were
made to conform to the current period presentation. These reclassifications have
no effect on our previously reported net income or stockholder's equity.

Our accounting policies are consistent with those discussed in our Form
10-K, except as discussed below:

Asset Impairments

On January 1, 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 changed the accounting requirements related to when an asset
qualifies as held for sale or as a discontinued operation and the way in which
we evaluate assets for impairment. It also changed accounting for discontinued
operations such that we can no longer accrue future operating losses in these
operations. We applied SFAS No. 144 in accounting for our Panhandle Field of
Texas, southeast Kansas and the Oklahoma Panhandle natural gas and oil
operations and a related gas gathering system, which met all of the requirements
to be treated as discontinued operations in 2002. See Note 2 for further
information.

2. DIVESTITURES

In April 2002, we executed an agreement to sell to Pioneer Natural
Resources USA, Inc. or its affiliate (Pioneer) all of our interests in natural
gas and oil production properties and related contracts located in Texas, Kansas
and Oklahoma. The sale was completed on July 1, 2002, and as part of the sale,
we assigned all our rights and obligations under the Amarillo "B" contract to
Pioneer. Net proceeds from the sale were approximately $112 million, and we
recognized a gain in the third quarter of 2002 of approximately $23 million, net
of an $8 million reserve for environmental contingencies and $13 million of
income taxes. We also executed an agreement to sell to Pioneer a federally
regulated natural gas gathering system located in the Panhandle Field of Texas
for its approximate net book value of $19 million. We have received proceeds
from Pioneer related to this transaction, which we have recorded as other
liabilities until we close this sale. The closing is subject to the receipt of a
certificate to abandon the facilities from the Federal Energy Regulatory
Commission (FERC). We filed an application to abandon these facilities on July
31, 2002. We anticipate closing this transaction late in 2002 or early 2003.

These assets and the related natural gas gathering system were historically
reported in our Pipeline segment, but have been reclassified as discontinued
operations in our financial statements for all periods presented. In addition,
we classified all of these assets and liabilities as other current assets and
liabilities since

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we have sold or are selling them within the next twelve months. The summarized
financial results of our discontinued operations are as follows:

In addition, during March 2002, we sold natural gas and oil production
properties located in south Texas, all of which were previously reported as part
of the Other segment, to El Paso CGP Company, our parent. Proceeds from this
sale were approximately $2 million. We did not recognize a gain or loss on the
properties sold.

In November 2002, El Paso Corporation (El Paso) entered into an agreement
with Westport Resources Corporation to sell our Natural Buttes natural gas
gathering facilities. These assets include 225 miles of natural gas gathering
pipelines with approximately 160 million cubic feet per day (MMcf/d) of
capacity. The transaction is expected to close by year end.

3. MERGER-RELATED COSTS

During the nine months ended September 30, 2001, we incurred merger-related
costs of $31 million associated with El Paso's merger with our parent company,
The Coastal Corporation (now known as El Paso CGP Company), in January 2001.
These charges include employee costs of $13 million which consist of employee
severance, retention and transition costs for severed employees and early
retirees that occurred as a result of El Paso's merger-related workforce
reduction and consolidation, costs for pension and post-retirement benefits
settled and curtailed under existing benefit plans. Following the merger,
approximately 180 full-time positions were eliminated through a combination of
early retirement and terminations. The pension and post-retirement benefits were
accrued on the merger date and will be paid over the applicable benefit periods
of the terminated and retired employees. All other employee costs were expensed
as incurred and were paid in the first and second quarters of 2001. Also
included in merger-related costs were $18 million, primarily associated with a
$7 million write-off related to the valuation of natural gas imbalances to
conform our imbalance valuation methods to El Paso's, and $9 million related to
a disputed gas pricing claim. All charges

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were accrued as of the merger date with the exception of the gas pricing claim
which was expensed when incurred.

4. FINANCIAL INSTRUMENTS

As a result of the sale of most of our natural gas and oil properties, in
June 2002 we recognized a $2 million reduction in Comprehensive Income on
derivative positions that no longer qualified as cash flow hedges under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. We terminated
all of our derivative positions in 2002, and are no longer involved in hedging
activities.

5. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Grynberg. In 1997, we and a number of our affiliates were named defendants
in actions 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 of
natural gas produced from royalty properties 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). In May 2001, the court denied the
defendants' motion to dismiss.

Will Price (formerly Quinque). We and a number of our affiliates were named
defendants in Quinque Operating Company, et al v. Gas Pipelines and Their
Predecessors, et al, filed in 1999 in the District Court of Stevens County,
Kansas. Quinque has been dropped as a plaintiff and Will Price has been added.
This class action complaint alleges that the defendants mismeasured natural gas
volumes and heating content of natural gas on non-federal and non-Native
American lands. The plaintiff in this case seeks certification of a nationwide
class of gas working interest owners and gas royalty owners to recover royalties
that the plaintiff contends these owners 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, attorney's 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. Plaintiff's motion for class certification has been
filed and we have filed our response.

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.

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 of September 30, 2002, we had approximately $18 million accrued for all
outstanding legal matters.

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Environmental Matters

We are subject to extensive 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 September 30, 2002, we had accrued approximately $14 million for
expected remediation costs at sites that we operate, and associated onsite,
offsite and groundwater technical studies, which we anticipate incurring through
2027. Below is a reconciliation of our liability as of December 31, 2001 to our
environmental remediation liability as of September 30, 2002 (in millions):

Balance as of December 31, 2001............................. $ 7
Additions/adjustments for remediation activities............ 8
Payment for remediation activities.......................... (1)
---
Balance as of September 30, 2002............................ $14
===

In addition, we expect to make capital expenditures for environmental
matters of approximately $1 million in the aggregate for the years 2002 through
2007. These expenditures primarily relate to compliance with clean air
regulations.

Rates and Regulatory Matters

Rate Case. In March 2001, we filed a rate case with the FERC proposing
increased rates of $9 million annually and new and enhanced services for our
customers. We received an order from the FERC in late April 2001, which
suspended the rates until October 1, 2001, subject to refund, and subject to the
outcome of hearing. On September 26, 2001, the FERC rejected two firm services
proposed in our rate filing and required us to reallocate the costs allocated to
those two services to existing services. We complied with this order and
arranged with the affected customers to provide service under existing rate
schedules. We and our customers entered into a settlement agreement in May 2002
settling all issues in the case. The settlement, which contained a rate
increase, was approved by the FERC in August 2002, and became final in September
2002. The settlement obligates us to file a rate case to be effective no later
than October 1, 2006. We will pay approximately $12 million in refunds on
November 25, 2002. These refunds are included in accrued liabilities, and will
not have an adverse effect on our financial position or results of operations.

Marketing Affiliate NOPR. In September 2001, the FERC issued a Notice of
Proposed Rulemaking (NOPR). The NOPR proposes to apply the standards of conduct
governing the relationship between interstate pipelines and marketing affiliates
to all energy affiliates. The proposed regulations, if adopted by the FERC,
would dictate how we conduct business and interact with our energy affiliates.
In December 2001, we filed comments with the FERC addressing our concerns with
the proposed rules. A public hearing was held on May 21, 2002, providing an
opportunity to comment further on the NOPR. Following the conference, additional
comments were filed by El Paso's pipelines and others. At this time, we cannot
predict the outcome of the NOPR, but adoption of the regulations in their
proposed form would, at a minimum, place additional administrative and
operational burdens on us.

Negotiated Rate NOI. In July 2002, the FERC issued a Notice of Inquiry
(NOI) that seeks comments regarding its 1996 policy of permitting pipelines to
enter into negotiated rate transactions. We have entered into these transactions
over the years, and the FERC is now reviewing whether negotiated rates should be
capped, whether or not the "recourse rate" (a cost-of-service based rate)
continues to safeguard against a pipeline exercising market power, as well as
other issues related to negotiated rate programs. On September 25, 2002, El
Paso's pipelines and others filed comments. Reply comments were filed on October
25, 2002. At this time, we cannot predict the outcome of this NOI.

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Cash Management NOPR. On August 1, 2002, the FERC issued a NOPR requiring
that all cash management or money pool arrangements between a FERC regulated
subsidiary (like us) and a non-FERC regulated parent must be in writing, and set
forth: the duties and responsibilities of cash management participants and
administrators; the methods of calculating interest and for allocating interest
income and expenses; and the restrictions on deposits or borrowings by money
pool members. The NOPR also requires specified documentation for all deposits
into, borrowings from, interest income from, and interest expenses related to,
these arrangements. Finally, the NOPR proposed that as a condition of
participating in a cash management or money pool arrangement, the FERC regulated
entity maintain a minimum proprietary capital balance of 30 percent, and the
FERC regulated entity and its parent maintain investment grade credit ratings.
On August 28, 2002, comments were filed. The FERC held a public conference on
September 25, 2002 to discuss the issues raised in the comments. Representatives
of companies from the gas and electric industries participated on a panel and
uniformly agreed that the proposed regulations should be revised substantially
and that the proposed capital balance and investment grade credit rating
requirements would be excessive. At this time, we cannot predict the outcome of
this NOPR.

Also on August 1, 2002, the FERC's Chief Accountant issued an Accounting
Release, to be effective immediately, providing guidance on how companies should
account for money pool arrangements and the types of documentation that should
be maintained for these arrangements. However, the Accounting Release did not
address the proposed requirements that the FERC regulated entity maintain a
minimum proprietary capital balance of 30 percent and that the entity and its
parent have investment grade credit ratings. Requests for rehearing were filed
on August 30, 2002. The FERC has not yet acted on the rehearing requests.

While the outcome of our outstanding legal matters, environmental matters
and rates and regulatory matters cannot be predicted with certainty, based on
the information we know now and our existing accruals, we do not expect the
ultimate resolution of these matters to have a material adverse effect on our
financial position, operating results or cash flows. It is possible that new
information or future developments could require us to reassess our potential
exposure related to these matters. Further, for environmental matters, 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 new information
for our outstanding legal matters, environmental matters and rates and
regulatory matters becomes available, or relevant developments occur, we will
review our accruals and make any appropriate adjustments. The impact of these
changes may have a material effect on our results of operations and on our cash
flows in the period the event occurs.

6. SEGMENT INFORMATION

We segregate our business activities into two distinct operating segments:
Pipeline and Field Services. These segments are strategic business units that
provide a variety of energy products and services. They are managed separately
as each business unit requires different technology and marketing strategies.
During the second quarter, we reclassified the majority of our natural gas and
oil production activities from our Pipeline segment to discontinued operations
in our financial statements. All periods were restated to reflect this change.
We use earnings before interest and income taxes (EBIT) to assess the operating
results and effectiveness of our business segments. We define EBIT as operating
income, adjusted for gains and losses on sales of assets and other miscellaneous
non-operating items. Items that are not included in this measure are financing
costs, including interest and debt expense, income taxes and discontinued
operations. We believe this measurement is useful to our investors because it
allows them to evaluate the effectiveness of our businesses and operations and
our investments from an operational perspective, exclusive of the costs to
finance those activities and exclusive of income taxes, neither of which are
directly relevant to the efficiency of those operations. This measurement may
not be comparable to measurements used by other companies and should not be used
as a

8

substitute for net income or other performance measures such as operating cash
flow. The following are our segment results as of and for the periods ended
September 30:

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(1) Includes consolidating eliminations of less than $1 million in both of the
quarters ended September 30, 2002 and 2001, and $1 million in both the nine
month periods ended September 30, 2002 and 2001. It also includes our
remaining natural gas and oil developing and producing activities.

The reconciliations of EBIT to income from continuing operations and
segment assets to total assets are presented below:

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7. RELATED PARTY TRANSACTIONS

Cash Management Program

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. As of September 30, 2002 and
December 31, 2001, we had advanced $442 million and $232 million. The market
rate of interest at September 30, 2002 and December 31, 2001 was 1.8% and 2.1%.

At September 30, 2002 and December 31, 2001, we had accounts receivable
from related parties of $17 million and $48 million. In addition, we had
accounts payable to related parties of $30 million and $51 million at September
30, 2002 and December 31, 2001. These balances arose in the normal course of our
business.

Sale of Assets

During March 2002, we sold natural gas and oil production properties
located in south Texas, all of which were previously reported as part of the
Other segment, to El Paso CGP Company, our parent. Proceeds from this sale were
approximately $2 million, and we did not recognize a gain or loss on the
properties sold.

Accounts Receivable Sales Program

In September of 2002, we sold approximately $18 million of our trade
accounts receivable at a discount to El Paso Energy Finance Company, an
unconsolidated affiliate, as part of an accounts receivable sales program. El
Paso Finance Company, in turn, sold these receivables to a bank. The program was
initiated to accelerate the collection of funds for El Paso, and the proceeds we
received from the sale were advanced to our parent company through our cash
management program described above.

Investment in Unconsolidated Affiliate

During the second quarter of 2002, we increased our investment in El Paso
Oil and Gas Resources, L.P. (formerly Coastal Oil and Gas Resources, Inc.) by
approximately $12 million. As of September 30, 2002, our investment in El Paso
Oil and Gas Resources was $27 million and our ownership interest was
approximately 4 percent.

8. COMMON STOCK

On March 7, 2002, our Board of Directors approved and we filed an amended
and restated certificate of incorporation, changing our authorized shares of
stock to 1,000 shares of common stock, with a par value of $1 per share. As a
result, $28 million of common stock was reclassified to additional paid-in
capital on our balance sheet as of March 31, 2002. This action and the
reclassification did not impact our total equity. As of December 31, 2001, we
had 10,000 authorized shares and 10 shares issued and outstanding at stated
value.

9. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Accounting for Asset Retirement Obligations

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. This statement requires
companies to record a liability for the estimated retirement and removal costs
of assets used in their business. The liability is recorded at its fair value,
with a corresponding asset which is depreciated over the remaining useful life
of the long-lived asset to which the liability relates. An ongoing expense will
also be recognized for changes in the value of the liability as a result of the
passage of time. The provisions of SFAS No. 143 are effective for fiscal years
beginning after June 15, 2002. We are currently assessing and quantifying the
asset retirement obligations associated with our long-lived assets. We expect to
complete our assessment of these asset retirement obligations and be able to
estimate their effect on our financial statements in the fourth quarter of 2002.

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Accounting for Costs Associated with Exit or Disposal Activities

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement will require us to recognize
costs associated with exit or disposal activities when they are incurred rather
than when we commit to an exit or disposal plan. Examples of costs covered by
this guidance include lease termination costs, employee severance costs
associated with a restructuring, discontinued operations, plant closings or
other exit or disposal activities. This statement is effective for fiscal years
beginning after December 31, 2002, and will impact any exit or disposal
activities we initiate after January 1, 2003.

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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 2001 Annual Report on Form 10-K,
in addition to the financial statements and notes presented in Item 1, Financial
Statements, of this Quarterly Report on Form 10-Q. Throughout this Management's
Discussion and Analysis are terms that are common to our industry:

/d = per day MMBtu = million British thermal units
BBtu = billion British thermal units

RECENT DEVELOPMENTS

Since the fourth quarter of 2001, a number of recent developments in our
business and industry have impacted our operations and liquidity. These have
included:

- The bankruptcy of Enron Corp. and the resulting decline in the energy
trading industry, and

- The modification of credit standards by the rating agencies.

Credit rating agencies have recently re-evaluated the credit ratings of
companies involved in energy trading activities, which included our indirect
parent and our affiliates. The recent developments referenced above, as well as
the Administrative Law Judge's decision dated September 23, 2002 in the FERC
proceeding entitled Public Utilities Commission of the State of California v. El
Paso Natural Gas Company, et al., appear to have influenced both Moody's and
Standard & Poor's in downgrading our parent's credit rating, and it remains on
negative credit watch by both. Our senior unsecured debt was downgraded from
Baa1 to Baa2 by Moody's and from BBB+ to BBB by Standard & Poor's and we remain
on a negative credit watch by both rating agencies.

While these developments do not have an immediate impact on our financial
position or results of operations, a further downgrade of our debt securities
could result in higher cash requirements to conduct our operations (through cash
collateral requirements). If this were to occur, we would have less cash
available to use for capital expenditures and other purposes, although we do
believe we would have sufficient operating resources to fund our ongoing
operating activities.

In addition, as a result of the rating agencies' downgrading the credit
rating of several of our customers and placing them on negative credit watch,
the credit-worthiness of these companies has been questioned. We have taken
actions to mitigate our exposure by requesting these companies to provide us
with a letter of credit or prepayment as permitted by our tariff. Our tariff
permits us to request additional credit assurance from our shippers equal to the
cost of performing transportation services for a two month period. With respect
to new construction projects, we have requested credit assurance for longer
periods of time from shippers supporting those projects. If these companies file
for Chapter 11 bankruptcy protection and our contracts are not assumed by other
counterparties, or if the capacity is unavailable for resale, it could have a
material adverse effect on our financial position, operating results or cash
flows.

SEGMENT RESULTS

Our segments: Pipelines and Field Services are strategic business units
that offer a variety of different energy products and services; each requires
different technology and marketing strategies. 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 operating income,
adjusted for gains and losses on sales of assets and other miscellaneous
non-operating items. Items that are not included in this measure are financing
costs, including interest and debt expense, income taxes and discontinued
operations. We believe this measurement is useful to our investors because it
allows them to evaluate the effectiveness of our businesses and operations and
our investments from an operational perspective, exclusive of the costs to
finance those activities and exclusive of income taxes, neither of which are
directly relevant to the efficiency of those operations. This measurement may
not be comparable to measurements used by other companies and should not be used
as a substitute for net income or other performance measures such as operating
cash flow. For a further discussion

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of our individual segments, see Item 1, Financial Statements, Note 6, as well as
our 2001 Annual Report on Form 10-K. The segment EBIT results for the periods
presented below include the charges discussed above:

PIPELINE

Our Pipeline segment includes our interstate natural gas transmission and
gas storage businesses. Our interstate natural gas transmission system faces
varying degrees of competition from other pipelines, as well as alternate energy
sources, such as electricity, hydroelectric power, coal and fuel oil. We are
regulated by the Federal Energy Regulatory Commission. The FERC sets the rates
we can recover from our customers. These rates are generally a function of our
costs of providing service to our customers, as well as a return on our invested
capital. As a result, our results have historically been relatively stable.
However, they can be subject to volatility due to factors such as weather,
changes in natural gas prices, regulatory actions and the credit-worthiness of
our customers. In addition, our ability to extend our existing contracts or
re-market expiring capacity is dependent on competitive alternatives, the
regulatory environment and supply and demand factors at the relevant extension
or expiration dates. While we make every attempt to negotiate contract terms at
fully-subscribed quantities and at maximum rates allowed under our tariffs, we
must, in many cases, discount our rates to remain competitive.

Results of our Pipeline segment were as follows for the periods ended
September 30:

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(1) Throughput volumes exclude those related to discontinued operations.

Third Quarter 2002 Compared to Third Quarter 2001

Operating revenues for the quarter ended September 30, 2002, were $5
million higher than the same period in 2001. The increase was primarily due to
higher reservation revenues of $8 million, partially offset by reduced
throughput-based revenues of $1 million. The increase in reservation rates is
due to completed system expansions in 2001 as well as a change in our tariff
structure that was effective on October 1, 2001. The new rates provide for a
higher portion of our revenues to be collected through reservation charges
instead of through throughput-based rates and also provide for a larger portion
of our gas storage revenues to be collected in the summer and fall months. Also
offsetting the increases discussed above were lower liquids sales in 2002 of $1
million.

Operating expenses for the quarter ended September 30, 2002, were $13
million lower than the same period in 2001. Of the decrease, $4 million was due
to lower gas costs for our system supply purchases to meet

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our operating needs. Also contributing to the decrease were lower ad valorem
taxes of $4 million and lower corporate overhead allocations of $4 million in
the third quarter of 2002.

Nine Months Ended 2002 Compared to Nine Months Ended 2001

Operating revenues for the nine months ended September 30, 2002, were $6
million lower than the same period in 2001. A decrease of $10 million occurred
due to lower prices and volumes on our liquids sales. Also contributing to the
decrease was a $7 million decrease from reduced throughput-based revenues and $3
million due to lower fuel recoveries from our customers. These decreases were
partially offset by a $13 million increase in reservation revenues due to
completed system expansion in 2001 as well as changes in our tariff rates that
provide for a higher portion of our revenues to now be collected through
reservation charges instead of through throughput-based rates and also provide
for a larger portion of our gas storage revenues to be collected in the summer
and fall months.

Operating expenses for the nine months ended September 30, 2002, were $75
million lower than the same period in 2001. A decrease of $31 million was due to
merger-related costs incurred as part of El Paso's merger with our parent
company, The Coastal Corporation (now known as El Paso CGP Company), in January
2001. For a discussion of these costs, see Item 1, Financial Statements, Note 3.
Also contributing to the decrease were $29 million due to lower gas costs for
our system supply purchases to meet our operating needs during 2002, lower
corporate overhead allocations of $10 million in 2002 and lower ad valorem taxes
of $3 million in 2002.

FIELD SERVICES

The Field Services segment provides midstream services in the Rockies and
Mid-Continent regions, including gathering and processing of natural gas. The
gathering operations earn margins substantially from fixed-fee-based services;
however, some of these operations earn margins from market-based rates.
Processing operations earn a margin based on make-whole contracts which allow us
to retain the extracted liquid products and return to the producer a British
thermal units equivalent amount of natural gas. Under market-based rates and
make-whole contracts, Field Services may have more sensitivity to price changes
during periods when natural gas and natural gas liquids prices are volatile.

In November 2002, we entered into an agreement to sell our Natural Buttes
natural gas gathering facilities to Westport Resources Corporation. These assets
generated EBIT of $6 million during the year ended December 31, 2001.

Results of our Field Services segment operations were as follows for the
periods ended September 30:

Third Quarter 2002 Compared to Third Quarter 2001

Total gross margins for the quarter ended September 30, 2002, were $8
million lower than the same period in 2001. The decrease was primarily due to
lower gathering volumes and lower realized natural gas prices in 2002. Volumes
were lower due to natural declines in natural gas production in our operating
regions.

14

Nine Months Ended 2002 Compared to Nine Months Ended 2001

Total gross margins for the nine months ended September 30, 2002, were $12
million lower than the same period in 2001. The decrease was due to lower
gathering volumes and lower realized natural gas prices in 2002. Volumes were
lower due to natural declines in natural gas production in our operating
regions.

AFFILIATED INTEREST INCOME, NET

Affiliated interest income, net for the quarter ended September 30, 2002,
was $1 million, or $2 million lower than the same period in 2001, due to lower
short-term interest rates and lower average advances to El Paso under our cash
management program. The average short-term interest rates for the third quarter
decreased from 3.8% in 2001 to 1.8% in 2002.

Affiliated interest income, net, for the nine months ended September 30,
2002, was $2 million, or $10 million lower than the same period in 2001 due to
lower short-term interest rates and a decrease in average advances to El Paso
under our cash management program. The average short-term interest rates for the
nine months decreased from 4.9% in 2001 to 1.9% in 2002.

INCOME TAXES

Income tax expense for the quarters ended September 30, 2002 and 2001, was
$11 million and $9 million, resulting in effective tax rates of 38 percent and
43 percent. Income tax expense for the nine months ended September 30, 2002 and
2001, was $34 million and $19 million, resulting in effective tax rates of 37
percent and 40 percent. Our effective tax rates were different than the
statutory rate of 35 percent in all periods primarily due to state income taxes.

COMMITMENTS AND CONTINGENCIES

See Item 1, Financial Statements, Note 5, which is incorporated herein by
reference.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

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

15

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information updates, and you should read it in conjunction with,
information disclosed in Part II, Item 7A in our Annual Report on Form 10-K for
the year ended December 31, 2001, 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 Annual Report on Form
10-K for the year ended December 31, 2001.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of
1934 (the "Exchange Act"). Based on that evaluation, our principal executive
officer and principal financial officer have concluded that these controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.

Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified under the
Exchange Act. 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 under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.

The principal executive officer and principal financial officer
certifications required under Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 have been included herein, or as Exhibits to this Quarterly Report on Form
10-Q, as appropriate.

16

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, Financial Statements, Note 5, which is incorporated
herein by reference.

ITEM 2. CHANGES IN 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 AND REPORTS ON FORM 8-K

a. 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 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.

b. Reports on Form 8-K

None.

17

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.

COLORADO INTERSTATE GAS COMPANY

Date: November 13, 2002 /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)

Date: November 13, 2002 /s/ GREG G. GRUBER
------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)

18

CERTIFICATION

I, John W. Somerhalder II, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Colorado
Interstate Gas Company;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/ JOHN W. SOMERHALDER II
--------------------------------------
John W. Somerhalder II
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Colorado Interstate Gas Company

19

CERTIFICATION

I, Greg G. Gruber, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Colorado
Interstate Gas Company;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/ GREG G. GRUBER
--------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Colorado Interstate Gas Company

20

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.