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 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 1-4874

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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 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 $1 per share. Shares outstanding on May 14, 2004:
1,000

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COLORADO INTERSTATE GAS 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
BBtu = billion British thermal units
Tcfe = trillion cubic feet equivalent

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", or "ours", we are describing Colorado
Interstate Gas Company and/or our subsidiaries.

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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 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We are an indirect wholly owned subsidiary of El Paso Corporation (El
Paso). In January 2004, our parent, Noric Holdings III, L.L.C. was merged into
El Paso Noric Investments III, L.L.C. (Noric III), a wholly owned indirect
subsidiary of El Paso. 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 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
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 business, information for interim periods may not be
indicative of our results of operations for the entire year. 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.

Our accounting policies are consistent with those discussed in our 2003
Form 10-K.

2. LIQUIDITY

On May 3, 2004, El Paso announced that the results of its internal
investigation confirmed that its historical financial statements should be
restated to reflect its previously announced revisions to its natural gas and
oil reserve estimates. El Paso believes that a material restatement of its
financial statements would have constituted an event of default under its $3
billion revolving credit facility, under which we are eligible to borrow (see
Note 4), and various other financings; 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 total
capitalization ratio. El Paso has received waivers on its $3 billion revolving
credit facility and these other financing transactions to address these issues,
and these waivers continue to be effective. These waivers require that El Paso
issue its December 31, 2003 financial statements by June 15, 2004. Otherwise, El
Paso would need to obtain additional waivers to avoid an event of default. Based
upon a review of our financing transactions, we do not believe that a default on
El Paso's $3 billion revolving credit facility constitutes an event of default
on our debt agreements.

El Paso is a significant potential source of liquidity to us. We
participate in El Paso's cash management program. Under this program, depending
on whether we have short-term cash surpluses or requirements, we either provide
cash to El Paso or El Paso provides cash to us. We have historically and
consistently provided cash to El Paso under this program, and as of March 31,
2004, we had a cash advance receivable from El Paso of $604 million, classified
as a non-current asset in our balance sheet. If El Paso were unable to meet its
liquidity needs, we would not have access to this source of liquidity and there
is no assurance that El Paso could repay the entire amounts owed to us. In that
event, we could be required to write-off some amount of these advances, which
could have a material impact on our stockholder's equity. Furthermore, we would
still be required to repay affiliated company payables. Write-downs that cause
our debt to EBITDA (as defined in our agreements) ratio to exceed 5 to 1 could
prohibit us from incurring additional debt. However, this non-cash equity
reduction would not result in an event of default under our existing debt
securities. In addition, based on our current estimates of cash flows, we do not
believe we will need to seek repayment of all or part of these advances in the
next year.

El Paso's ownership in us serves as collateral under El Paso's revolving
credit facility and other of El Paso's financing transactions. If El Paso's
lenders under this facility or those financing transactions were to exercise
their rights to this collateral, our ownership could change. However, this
change of control would not

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constitute an event of default under our existing debt agreements. However, if
the rating of our debt were downgraded by the rating agencies by "one full
grade" within 60 days after a change of control, we would be required to give
some of our bondholders the option to tender their debt.

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.

Finally, we have cross-acceleration provisions in our long-term debt that
state that should we incur an event of default under which borrowings in excess
of $5 million are accelerated, our long-term debt could also be accelerated. The
acceleration of our long-term debt would adversely affect our liquidity position
and, in turn, our financial condition.

3. DISCONTINUED OPERATIONS

In 2003, we accounted for our production and midstream businesses as
discontinued operations. During 2003, we completed the sales of these
businesses. The summarized financial results of our discontinued operations are
as follows:

4. 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. The $3
billion revolving credit facility has a borrowing cost of LIBOR plus 350 basis
points, letter of credit fees of 350 basis points and a commitment fee of 75
basis points on the unused portion of the facility. We, along with El Paso and
our affiliates, ANR Pipeline Company, Tennessee Gas Pipeline Company and El Paso
Natural Gas Company, are borrowers under El Paso's $3 billion revolving credit
facility. We are only liable for amounts we directly borrow under the $3 billion
revolving credit facility. As of March 31, 2004, $600 million was outstanding
and $1.1 billion in letters of credit were issued under the $3 billion revolving
credit facility, none of which was borrowed by or issued on behalf of us. During
the fourth quarter of 2003 and the first quarter of 2004, El Paso liquidated a
portion of the collateral that supported the $3 billion revolving credit
facility, which reduced the borrowing availability by $42 million. See Note 2
for a discussion regarding El Paso's waivers on the $3 billion revolving credit
facility.

El Paso's equity in several of its subsidiaries, including its equity in
us, collateralizes the $3 billion revolving credit facility and other financing
arrangements including leases, letters of credit and other facilities.

Under the $3 billion revolving credit facility and other financing
agreements, we are subject to a number of restrictions and covenants. The most
restrictive of these include (i) limitations on the incurrence of additional
debt, based on a ratio of debt to EBITDA (as defined in the agreements), the
most restrictive of which shall not exceed 5 to 1; (ii) limitations on the use
of proceeds from borrowings; (iii) limitations, in some cases, on transactions
with our affiliates; (iv) limitations on the incurrence of liens; (v) potential

5

limitations on our ability to declare and pay dividends; and (vi) potential
limitations on our ability to participate in El Paso's cash management program
discussed in Note 7.

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
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.

Will Price (formerly Quinque). We and a number of our affiliates are named
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.

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 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 no accruals for our 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 $13 million for expected remediation costs
and associated onsite, offsite and

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groundwater technical studies. Our accrual at March 31, 2004, was based on the
most likely outcome that can be reasonably estimated. Below is a reconciliation
of our accrued liability as of March 31, 2004 (in millions):

Balance as of January 1, 2004............................... $14
Payments for remediation activities......................... (1)
---
Balance as of March 31, 2004................................ $13
===

For the remainder of 2004, we estimate that our total remediation
expenditures will be approximately $3 million, which primarily will be expended
under government directed clean-up plans. In addition, we expect to make capital
expenditures for environmental matters of approximately $1 million in the
aggregate for the years 2004 through 2008. These expenditures primarily relate
to compliance with clean air regulations.

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 reserves are
adequate.

Rates and Regulatory Matters

FERC Audit of Capacity Release Transactions. On December 1, 2003, the
Federal Energy Regulatory Commission (FERC's) Office of Market Oversight and
Investigations (OMOI) sent us a data request related to capacity release
transactions. We responded in January 2004. The FERC staff conducted an on-site
audit in March 2004. We expect to receive a draft report on the matter for our
review and comments within several months. Our costs and legal exposure, if any,
related to this matter are not currently determinable.

We have various 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.

While the outcome of our outstanding rates and regulatory matters cannot be
predicted with certainty, based on current information, 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. However, it is possible
that new information or future developments could require us to reassess our
potential exposure related to these matters, which could have a material effect
on our results of operations, our financial position, and on our cash flows.

Other Matters

CFTC Investigation. In April 2004, we 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, we provided information relating to storage
reports provided to the Energy Information Administration for the period October
2003 through December 2003.

While the outcome of this matter cannot be predicted with certainty, based
on current information, we do not expect the ultimate resolution to have a
material adverse effect on our financial position, operating results or cash
flows. However, it is possible that new information or future developments could
require us to reassess our potential exposure related to this matter, which
could have a material effect on our results of operations, our financial
position, and our cash flows.

7

6. RETIREMENT BENEFITS

Our postretirement benefit costs for the quarters ended March 31, 2004 and
2003 were less than $1 million.

7. TRANSACTIONS WITH AFFILIATES

We participate in El Paso's cash management program which matches
short-term cash surpluses and needs of participating affiliates, thus minimizing
total borrowings from outside sources. As of March 31, 2004 and December 31,
2003, we had advanced to El Paso $604 million and $563 million. The market rate
of interest at March 31, 2004 was 2.5% and at December 31, 2003 was 2.8%. These
receivables are due upon demand; however, as of March 31, 2004 and December 31,
2003, we have classified these advances as non-current notes receivable from
affiliates because we do not anticipate settlement within the next twelve
months. See Note 2 for a discussion regarding our participation in and the
collectibility of these receivables.

At March 31, 2004 and December 31, 2003, we had other current receivables
from affiliates of $3 million and $1 million. In addition, at March 31, 2004 and
December 31, 2003, we had a $6 million non-current note receivable from our
parent, Noric III. Accounts payable to affiliates were $11 million and $10
million at March 31, 2004 and December 31, 2003. These balances arose in the
normal course of our business.

The following table shows revenues and charges from our affiliates for the
quarters ended March 31:

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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 should be read in
conjunction with, the information disclosed in our 2003 Form 10-K and the
financial statements and notes presented in Item 1 of this Form 10-Q.

RESULTS OF OPERATIONS

Our management, as well as El Paso's management, uses earnings before
interest expense and income taxes (EBIT) to assess the operating results and
effectiveness of our business. We define EBIT as net income adjusted for (i)
items that do not impact our income from continuing operations, such as the
impact of accounting changes, (ii) income taxes, (iii) interest and debt expense
and (iv) affiliated interest income. We exclude interest and debt expense from
this measure so that our management can evaluate our operating results without
regard to our financing methods. We believe the discussion of our results of
operations based on EBIT is useful to our investors because it allows them to
more effectively evaluate the operating performance of our business using the
same performance measure analyzed internally by our management. EBIT may not be
comparable to measurements 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.

The following is a reconciliation of our operating income to our EBIT and
our EBIT to our net income for the quarters ended March 31:

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(1) During 2003, we reclassified our field services business as discontinued
operations. We completed the sale of the remaining assets of this business
in June 2003.

(2) Throughput volumes include billable transportation throughput volume for
storage activities.

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OPERATING RESULTS (EBIT)

The following factors contributed to our overall EBIT reduction to $39
million for the three months ended March 31, 2004 from $54 million for the three
months ended March 31, 2003:

In December 2003, we re-applied the provisions of Statements of Financial
Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types
of Regulation. At that time, and consistent with our regulated accounting
requirements, we also adopted the composite method of depreciation. Overall, we
anticipate higher depreciation of approximately $9 million annually. The impact
of the re-application of SFAS No. 71 will continue to impact our EBIT during the
remainder of 2004.

AFFILIATED INTEREST INCOME, NET

Affiliated interest income, net for the quarter ended March 31, 2004, was
$2 million higher than the same period in 2003 due to higher interest rates and
higher average advances to El Paso under its cash management program. The
average short-term interest rate for the first quarter increased from 1.4% in
2003 to 2.7% during the same period in 2004. The average advance balance for the
first quarter of 2003 was $441 million and increased to $569 million during the
same period in 2004.

INCOME TAXES

Our effective tax rates were different than the statutory rate of 35
percent, primarily due to the effect of state income taxes.

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LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Our liquidity needs have historically been provided through cash flows from
operating activities and the use of El Paso's cash management program. Under El
Paso's cash management program, depending on whether we have short-term cash
surpluses or requirements, we either provide cash to El Paso or El Paso provides
cash to us. We have historically provided cash advances to El Paso, and we
reflect these net advances as investing activities in our statement of cash
flows. As of March 31, 2004, we had receivables from El Paso of $604 million as
a result of this program. These receivables are due upon demand; however, we do
not anticipate settlement within the next twelve months. As of March 31, 2004,
these receivables were classified as non-current notes receivable from
affiliates in our balance sheet. We also had $6 million in other notes
receivable from our parent, Noric III. We believe that cash flows from operating
activities will be adequate to meet our short-term capital and debt service
requirements for our existing operations. However, as a result of announcements
by El Paso related to the restatement of its natural gas and oil reserves, our
ability to recover the amounts advanced under El Paso's cash management program
could be impacted.

If El Paso were unable to meet its liquidity needs, we would not have
access to this source of liquidity and there is no assurance that El Paso could
repay the entire amounts owed to us. In that event, we could be required to
write-off some amount of these advances, which could have a material impact on
our stockholder's equity. Furthermore, we would still be required to repay
affiliated company payables. Write-downs that cause our debt to EBITDA (as
defined in our agreements) ratio to exceed 5 to 1 could prohibit us from
incurring additional debt. However, this non-cash equity reduction would not
result in a default under our existing debt agreements. In addition, based on
our current estimates of cash flows, we do not believe we will need to seek
repayment of all or part of these advances in the next year.

El Paso's ownership in us serves as collateral under El Paso's revolving
credit facility and other of El Paso's financing transactions. If El Paso's
lenders under this facility or those financing transactions were to exercise
their rights to this collateral, our ownership could change. However, this
change of control would not constitute an event of default under our existing
debt agreements. However, if the rating of our debt were downgraded by the
rating agencies by "one full grade" within 60 days after a change of control, we
would be required to give some of our bondholders the option to tender their
debt.

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.

Finally, we have cross-acceleration provisions in our long-term debt that
state that should we incur an event of default under which borrowings in excess
of $5 million are accelerated, our long-term debt could also be accelerated. The
acceleration of our long-term debt would adversely affect our liquidity position
and, in turn, our financial condition.

Our cash flows from continuing operations for the quarters ended March 31
were as follows:

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Cash Flows from Operating Activities

Net cash provided by operating activities was $44 million for the first
three months of 2004 versus $34 million in the same period of 2003. This
increase is primarily due to changes in assets and liabilities of $22 million,
offset by $6 million lower natural gas recoveries and $2 million lower gas sales
in 2004.

Cash Flows from Investing Activities

Net cash used in investing activities was $48 million for the first three
months of 2004 and consisted primarily of a $41 million increase in advances to
El Paso under its cash management program.

CAPITAL EXPENDITURES

Our capital expenditures for the quarter ended March 31, 2004, were
approximately $8 million. Under our current plan, we expect to spend
approximately $80 million during 2004 for capital expenditures, consisting of
approximately $25 million to expand the capacity on our system and $55 million
for maintenance capital. We expect to fund our maintenance and expansion capital
expenditures through a combination of internally generated funds and/or by
recovering amounts advanced to El Paso under its cash management program,
subject to the factors discussed above.

COMMITMENTS AND CONTINGENCIES

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

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RISK FACTORS AND CAUTIONARY STATEMENTS 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.

With this in mind, you should consider the risks discussed elsewhere in
this report and other documents we file with the Securities and Exchange
Commission, from time to time, and the following important factors that could
cause actual results to differ materially from those expressed in any
forward-looking statement made by us or on our behalf.

OUR RELATIONSHIP WITH EL PASO AND ITS FINANCIAL CONDITION SUBJECTS US TO
POTENTIAL RISKS THAT ARE BEYOND OUR CONTROL.

Due to our relationship with El Paso, adverse developments or announcements
concerning El Paso could adversely affect our financial condition, even if we
have not suffered any similar development. The senior unsecured indebtedness of
El Paso is currently rated Caa1 by Moody's (with a negative outlook and under
review for a possible downgrade) and CCC+ by Standard & Poor's (with a negative
outlook), which are below investment grade ratings. Our senior unsecured
indebtedness is currently rated B1 by Moody's (with a negative outlook and under
review for a possible downgrade) and B- by Standard & Poor's (with a negative
outlook). These debt ratings will increase our cost of capital and collateral
requirements, and could impede our access to capital markets. As a result of its
downgrades over the last two years, El Paso has realized substantial demands on
its liquidity. These downgrades are a result, at least in part, of the outlook
generally for the consolidated businesses of El Paso and its needs for
liquidity.

El Paso has a long-range plan that, among other things, defines its future
businesses, targets significant debt reduction and establishes financial goals.
An inability to meet these objectives could adversely affect El Paso's liquidity
position, and in turn affect our financial condition.

Pursuant to El Paso's cash management program, surplus cash is made
available to El Paso in exchange for an affiliated receivable. In addition, we
conduct commercial transactions with some of our affiliates. As of March 31,
2004, we have net receivables of approximately $602 million from El Paso and its
affiliates. El Paso provides cash management and other corporate services to us.
If El Paso is unable to meet its liquidity needs, there can be no assurance that
we will be able to access cash under the cash management program, or that our
affiliates would pay their obligations to us. However, we would still be
required to satisfy affiliated company payables. Our inability to recover any
intercompany receivables owed to us could adversely affect our ability to repay
our outstanding indebtedness. For a further discussion of these matters, see
Item 1, Financial Statements Note 7.

In May 2004, El Paso announced that the results of its internal review of
its natural gas and oil reserves confirmed its previous assessment that the
financial statements for El Paso and its subsidiaries, El Paso CGP Company
(EPCGP) and El Paso Production Holding Company (EPPH), should be restated. At
this time, these restated financial statements have not been filed. Also, as a
result of its reduction in reserve estimates, several class action lawsuits have
been filed against El Paso and several of its subsidiaries, but not against us.
The reduction in reserve estimates has also become the subject of an SEC
investigation and may become the subject of separate inquiries by other
governmental regulatory agencies. These investigations and lawsuits may further
negatively impact El Paso's credit ratings and place further demands on its
liquidity. See Item 1, Financial Statements, Note 2 for a further discussion of
these matters.

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A DEFAULT UNDER EL PASO'S $3 BILLION REVOLVING CREDIT FACILITY BY ANY PARTY
COULD ACCELERATE OUR FUTURE BORROWINGS, IF ANY, UNDER THE FACILITY AND OUR
LONG-TERM DEBT, WHICH COULD ADVERSELY AFFECT OUR LIQUIDITY POSITION.

We are a party to El Paso's $3 billion revolving credit facility. We are
only liable, however, for our borrowings under the $3 billion revolving credit
facility, which were zero as of March 31, 2004. Under the $3 billion revolving
credit facility, a default by El Paso, or any other party, could result in the
acceleration of all outstanding borrowings under the facility, including the
borrowings of any non-defaulting party, and could preclude us from borrowing
under the facility in the future. We believe El Paso's announced restatement of
its prior period financial statements would have constituted an event of default
under the $3 billion credit facility; however, El Paso received waivers of the
potential defaults on its $3 billion credit facility, which continue to be
effective. See Item 1, Financial Statements, Note 2, for additional information
regarding these matters. The acceleration of our future borrowings, if any,
under the $3 billion revolving credit facility, or the inability to borrow under
the $3 billion revolving credit facility, could adversely affect our liquidity
position and, in turn, our financial condition.

Furthermore, any indentures governing our long-term debt include
cross-acceleration provisions. Therefore, if we borrow $5 million or more under
the credit facility and such borrowings are accelerated for any reason,
including the default of another party, our long-term debt could also be
accelerated. The acceleration of our long-term debt could also adversely affect
our liquidity position and, in turn, our financial condition.

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, 2003, 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, 2003.

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
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures and the internal controls over financial reporting as of
the end of the period covered by this Quarterly Report pursuant to Rules 13a-15
and 15d-15 under the Securities Exchange Act of 1934 (Exchange Act).

We strive to maintain disclosure controls and procedures and internal
controls over financial reporting that are designed to ensure that the
information required to be disclosed in our Exchange Act filings is recorded,
processed, summarized and reported within the required time frames, and that
this information is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate,
to allow for timely decisions regarding required disclosure. In doing so, we
recognize that the effectiveness of our or any system of controls and procedures
is subject to limitations, including the exercise of judgment in the design,
implementation and evaluation of controls and procedures, the assumptions used
in identifying future events and the ability to completely eliminate misconduct.
As a result, there is no assurance that our or any controls and procedures will
prevent all errors and all fraud. By their nature, controls and procedures can
provide only reasonable assurance regarding our control objectives.

Based on the controls evaluation, our principal executive officer and
principal financial officer have concluded that the disclosure controls are
effective. We are currently documenting and reviewing our internal controls to
ensure compliance with Section 404 of the Sarbanes Oxley Act of 2002 by December
31, 2004. While we are not aware of any items at this time that constitute
material weaknesses, as that term is defined in Auditing Standards (AU) Section
325, we are identifying areas where our processes can be improved, and are
actively working to implement those improvements. Furthermore, as we continue
our compliance review, we

14

may identify additional matters which may need to be reported or which may
constitute material weaknesses in our internal controls over financial
reporting. Although we have identified deficiencies in our system of internal
controls over financial reporting, we do not believe these deficiencies have
had, or are reasonably likely to have, a material impact on our financial
statements. In addition, there have been no changes during the period in our
internal controls over financial reporting that would adversely affect our
ability to provide, with reasonable assurance, reliable information required in
our reports submitted under the Securities Exchange Act of 1934.

15

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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES

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.

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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: May 14, 2004 /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board and Director
(Principal Executive Officer)

Date: May 14, 2004 /s/ GREG G. GRUBER
------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer, Treasurer
and Director
(Principal Financial and Accounting
Officer)

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COLORADO INTERSTATE GAS COMPANY

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.