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 JUNE 30, 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 December 3,
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 June 30, 2004, and for the
quarters and six months ended June 30, 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 all periods presented have been
reclassified to reflect our Canadian and certain other international natural gas
and oil production operations as discontinued operations. Also, our results for
the quarter and six months ended June 30, 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.
Finally, 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. Under El Paso's cash
management program, we have historically and consistently borrowed cash.
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. For a further discussion of our participation in El
Paso's cash management program, see Note 11.

During 2004, El Paso restated its historical financial statements to
reflect the accounting impact of revisions to its natural gas and oil reserve
estimates and changes in the manner in which it accounted for certain derivative
contracts, primarily those related to the hedging of its natural gas production.
El Paso received several waivers based on its belief that the restatements would
cause a delay in filing its financial statements and would have constituted
various events of default under its then existing revolving credit facility and
various other financing transactions. El Paso subsequently filed its financial
statements within the time frames granted by these waivers. In November 2004, El
Paso entered into a new credit agreement with a group of lenders for an
aggregate of $3 billion in financings to replace its previous revolving credit
facility which was scheduled to mature in June 2005. Upon closing of the new
credit agreement, El Paso borrowed $1.25 billion and used approximately $1.2
billion of capacity to support existing letters of credit under its previous
revolving credit facility. Our subsidiaries, ANR Pipeline Company (ANR) and CIG,
continue to be eligible borrowers under the new credit agreement. Additionally,
our interests in ANR, CIG, Wyoming Interstate Gas Company (WIC), and ANR Storage
Company are pledged as collateral under the new credit agreement. For a further
discussion of El Paso's new credit agreement and other information regarding our
financing obligations, see Note 7.

Additionally, under several of our financing arrangements, we are required
to file financial statements in a timely manner. We have not yet filed our
financial statements for the third quarter of 2004; however, no notice

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has been given as to any violations under these financing arrangements for our
failure to file financial statements. We believe that we will file our financial
statements prior to any notice being given or within the allowed time frames
under these arrangements such that there will be no event of default.

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 Financial Accounting Standards Board (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 action 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 $11 million of third party
debt as of June 30, 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.
As of January 1, 2004, these entities consisted primarily of 10 equity
investments held in our Power segment that had interests in power generation and
transmission facilities with a total generating capacity of approximately 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 $801 million as of June 30, 2004) and our guarantees and other
agreements associated with these entities (a maximum of $44 million as of June
30, 2004).

7

Accounting for Asset Retirement Obligations

On January 1, 2003, we adopted Statement of Financial Accounting Standards
(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 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 Pronouncements Not Yet Adopted

Accounting for Natural Gas and Oil Producing Activities. 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 future cash outflows associated with settling
asset retirement liabilities from their full cost ceiling test calculation.
Finally, this standard will 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 first quarter of 2005 and
are currently evaluating its impact, if any, on our consolidated financial
statements.

Accounting for Inventory Costs. In November 2004, the FASB issued SFAS No.
151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This statement will
require expensing certain costs that have historically been capitalized as
inventory. The statement will also require the capitalization of certain fixed
overhead costs associated with operating facilities involved in inventory
management. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005, and will impact certain inventory costs we incur
after January 1, 2006. We are currently evaluating the impact, if any, of this
standard on our 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. 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) These sales were or will be completed after June 30, 2004.

(3) These sales were completed as of June 30, 2004.

(4) We also received property, plant and equipment of approximately $9 million
and issued other obligations totaling approximately $7 million associated
with these sales.

(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 $11 million for the six months
ended June 30, 2004.

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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 $8 million for the six months ended June 30,
2003.

See Notes 4 and 11 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
June 30, 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

International Natural Gas and Oil Operations. During 2004, our Canadian
and certain other international natural gas and oil production operations were
approved for sale. As of November 2004, we have completed the sale of all of our
Canadian operations and substantially all of our operations in Indonesia for
total proceeds of approximately $389 million. During the six months ended June
30, 2004, we recognized approximately $93 million in asset impairments based on
our decision to sell these assets and losses on completed asset sales. We expect
to complete the sale of the remainder of these properties in 2004 and early
2005.

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 approximately
$987 million during the second quarter of 2003 related to our petroleum and
chemical assets. Our second quarter 2003 charge was in addition to the $350
million pre-tax

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impairment charge recognized during the first quarter of 2003 when we announced
our intent to sell 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 $52 million in the first six months 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. 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.

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.

Our petroleum markets, coal mining and other international natural gas and
oil production operations discussed above 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 June 30, 2004. The
summarized financial results and financial position data of our discontinued
operations were as follows:

4. LOSS (GAIN) ON LONG-LIVED ASSETS

Our loss (gain) 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 intangible assets that are a part of our continuing operations. During
each of the periods ended June 30, our loss (gain) on long-lived assets was as
follows:

Our 2004 loss on long-lived assets occurred primarily in our Power segment,
which recognized an $89 million impairment in the first quarter of 2004 related
to the sale of our subsidiary, UCF, which owned a restructured power contract.
Our 2003 gain on long-lived assets was primarily related to a $19 million gain
recorded in the second quarter of 2003 on the sale of our Mid-Continent
midstream assets in our Field Services segment, a $6 million gain on the Table
Rock sulfur extraction facility in our Pipelines segment and a $5 million gain
on the sale of non-full cost pool assets in our Production segment.

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5. PRICE RISK MANAGEMENT ACTIVITIES

The following table summarizes the carrying value of the derivatives used
in our price risk management activities as of June 30, 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 subsidiaries that own these derivative contracts in 2004. See
Note 4 for a discussion of the net losses related to these sales.

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

6. INVENTORY

We had $49 million and $55 million of inventory as of June 30, 2004 and
December 31, 2003, of which the majority was materials and supplies.

7. DEBT, OTHER FINANCING OBLIGATIONS AND OTHER CREDIT FACILITIES

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

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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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(1) This debt was consolidated as a result of adopting FIN No. 46 (see Note 2).

(2) This debt was eliminated when we sold our interests in Mohawk River Funding
IV and UCF.

Credit Facilities

In November 2004, El Paso entered into a new credit agreement with a group
of lenders for an aggregate of $3 billion in financings. This new credit
agreement replaced El Paso's previous revolving credit facility. The new credit
agreement is comprised of a $1.25 billion five-year term loan, a $1 billion
three-year revolving credit facility under which El Paso and participating
subsidiaries can issue letters of credit, and a $750 million five-year funded
letter of credit facility. The $750 million letter of credit facility will
provide the ability to issue letters of credit or borrow any unused capacity as
a term loan. Upon closing of the new credit agreement, El Paso borrowed $1.25
billion under the term loan and used its $750 million letter of credit facility
and approximately $0.4 billion of the $1 billion revolving credit facility to
support then existing letters of credit of approximately $1.2 billion. Our
subsidiaries, ANR and CIG, continue to be eligible borrowers under the new
credit agreement. Additionally, our interests in ANR, CIG, WIC, and ANR Storage
Company are pledged as collateral under the new credit agreement.

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.

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8. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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.

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, with the exception of two
lawsuits recently filed in a California state court, 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.

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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 of this 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. In August
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 Nations' Oil for Food Program governing sales of
Iraqi oil. The subpoena seeks various records relating to transactions in oil of
Iraqi originating during the period from 1995 to 2003. In November 2004, we
received an order from the SEC to provide a written statement and to produce
certain documents in connection with the Oil for Food Program. We have also
received an inquiry from the United States Senate's Permanent Subcommittee of
Investigations related to a specific transaction in 2000.

In September 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
U.S. 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 cooperating with the U.S. Attorney's and Senate Subcommittee's
investigations of this matter.

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 June 30,
2004, we had approximately $29 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 June 30,
2004, we had accrued approximately $130 million, including approximately $129
million for expected remediation costs and associated onsite, offsite and
groundwater technical studies and approximately $1 million for related
environmental legal costs, which we anticipate incurring through 2027. Of the
$130 million accrual, $87 million was reserved for facilities we currently
operate, and $43 million was reserved for non-operating sites (facilities that
are shut down or have been sold) and Superfund sites.

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Our reserve estimates range from approximately $130 million to
approximately $212 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 ($35 million). Second, where the most
likely outcome cannot be estimated, a range of costs is established ($95 million
to $177 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.

Below is a reconciliation of our accrued liability from January 1, 2004 to
June 30, 2004 (in millions):

Balance as of January 1, 2004............................... $131
Additional/adjustments for remediation activities........... 2
Payments for remediation activities......................... (8)
Other charges, net.......................................... 5
----
Balance as of June 30, 2004................................. $130
====

For the remainder of 2004, we estimate that our total remediation
expenditures will be approximately $22 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 27 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 June 30, 2004, we
have estimated our share of the remediation costs at these sites to be between
$4 million and $7 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.

Rates and Regulatory Matters

In November 2004, the FERC issued an industry-wide Proposed Accounting
Release that, if enacted as written, will disallow the capitalization of certain
costs that are part of our pipeline integrity program. The

18

accounting release is proposed to be effective January 2005 following a period
of public comment on the release. We are currently reviewing the release and
have not determined what impact, if any, this release will have on our
consolidated financial statements.

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 June 30, 2004, we had
approximately $14 million of both financial and performance guarantees not
otherwise reflected in our financial statements.

9. RETIREMENT BENEFITS

The components of net benefit cost (income) for our pension and
postretirement benefit plans for the periods ended June 30 are as follows:

We made $2 million and $4 million of cash contributions to our other
postretirement plans during the six months ended June 30, 2004 and 2003. We
expect to contribute an additional $7 million to our other postretirement plans
in 2004. We do not anticipate making any other contributions to our other
retirement benefit 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.

10. 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 our Power
segment. All periods presented reflect this change in segments. 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.

19

They are managed separately as each segment requires different technology and
marketing strategies. Our corporate operations 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 continuing
corporate operations. During the second quarter of 2004, we reclassified our
Canadian and certain other international natural gas and oil production
operations from our Production segment to discontinued operations in our
financial statements. Our operating results for all periods presented reflect
these changes.

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 EBIT to our
income from continuing operations for the periods ended June 30:

The following tables reflect our segment results as of and for the periods
ended June 30:

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

(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 operations.

21

Total assets by segment are presented below:

11. 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 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 $7 million and $2 million for the quarters ended June
30, 2004 and 2003, and $15 million and $9 million for the six months ended
June 30, 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 (losses) from
unconsolidated affiliates, which includes income or losses directly attributable
to the net income or loss of our equity investments as well as impairments and
other adjustments. The table below reflects our earnings (losses) from
unconsolidated affiliates for the periods ended June 30:

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

(1) This impairment resulted from the anticipated sales of these investments,
which were completed in the third quarter of 2004.

22

We received distributions and dividends from our investments of $23 million
and $11 million for the quarters ended June 30, 2004 and 2003, and $47 million
and $31 million for the six months ended June 30, 2004 and 2003. 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 any 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 periods
ended June 30:

We are a party to a master hedging contract with El Paso Marketing, L.P.,
(EPM), a wholly-owned subsidiary of El Paso, which was formerly known as El Paso
Merchant Energy L.P. Pursuant to that agreement, we hedge a portion of our
natural gas production with EPM. 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 June 30, 2004 and December 31, 2003, we had borrowed $32 million
and $906 million. The interest rate as of June 30, 2004, and December 31, 2003,
was 2.4% and 2.8%. In addition, we had a demand note receivable with El Paso of
$326 million and $275 million at June 30, 2004 and December 31, 2003. The
interest rate for this demand note receivable was approximately 2.1% at June 30,
2004 and 1.7% at December 31, 2003.

At June 30, 2004, and December 31, 2003, we had current accounts and notes
receivable from related parties of $110 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 $94 million and $127 million
included in other non-current assets at June 30, 2004 and at December 31, 2003.

At June 30, 2004, and December 31, 2003, we had other accounts payable to
related parties of $88 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 included the proceeds from the
issuance of these shares as securities of subsidiaries in our balance sheet.

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.

During the second quarter of 2004, we reclassified our historical Canadian
and certain other international natural gas and oil production operations from
our Production segment to discontinued operations in our financial statements
for all periods presented. In addition, our results for the quarter and six
months ended June 30, 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, 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. Under El Paso's cash management
program, we have historically and consistently borrowed cash. Currently, one of
our subsidiaries, CIG, is not advancing funds to El Paso via the cash management
program due to its anticipated cash needs. For a further discussion of our
participation in El Paso's cash management program, see Item 1, Financial
Statements, Note 11.

During 2004, El Paso restated its historical financial statements to
reflect the accounting impact of revisions to its natural gas and oil reserve
estimates and changes in the manner in which it accounted for certain derivative
contracts, primarily those related to the hedging of its natural gas production.
El Paso received several waivers based on its belief that the restatements would
cause a delay in filing its financial statements and would have constituted
various events of default under its then existing revolving credit facility and
various other financing transactions. El Paso subsequently filed its financial
statements within the time frames granted by these waivers. In November 2004, El
Paso entered into a new credit agreement with a group of lenders for an
aggregate of $3 billion in financings to replace its previous revolving credit
facility which was scheduled to mature in June 2005. Upon closing of the new
credit agreement, El Paso borrowed $1.25 billion and used approximately $1.2
billion of capacity to support existing letters of credit under its previous
revolving credit facility. Our subsidiaries, ANR and CIG, continue to be
eligible borrowers under the new credit agreement. Additionally, our interests
in ANR, CIG, WIC, and ANR Storage Company are pledged as collateral under the
new credit agreement. For a further discussion of El Paso's new credit agreement
and other information regarding our financing obligations, see Item 1, Financial
Statements, Note 7.

Additionally, under several of our financing arrangements, we are required
to file financial statements in a timely manner. We have not yet filed our
financial statements for the third quarter of 2004; however, no notice has been
given as to any violations under these financing arrangements for our failure to
file financial statements. We believe that we will file our financial statements
prior to any notice being given or within the allowed time frames under these
arrangements such that there will be no event of default. For a discussion of
risks that may impact our business, see our 2003 Annual Report on Form 10-K.

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, which are discussed in our 2003 Annual Report on Form 10-K.

24

OVERVIEW OF CASH FLOW ACTIVITIES FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

For the six months ended June 30, 2004 and 2003, our cash flows from
continuing operations are summarized as follows:

Cash from Continuing Operating Activities

Net cash generated from our continuing operating activities was $452
million during the first six months of 2004 versus $931 million during the same
period in 2003. In our operating activities, we experienced a $479 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 used by our continuing investing activities was $142 million for
the six months ended June 30, 2004, due to $296 million in capital expenditures
partially offset by $81 million of proceeds from the sale of assets and
investments and $34 million of returns of restricted cash. Our capital
expenditures for the six months ended June 30, 2004 included the following (in
millions):

From July through October 2004, we have spent approximately $259 million
for our Pipelines segment and approximately $107 million for our Production
segment.

Cash from Continuing Financing Activities

Net cash used in our continuing financing activities for the six months
ended June 30, 2004 primarily consisted of payments on affiliated notes payable
of $896 million and payments to retire long-term debt and other financing
obligations of $460 million. Offsetting these uses of cash were the proceeds
received from El Paso primarily related to the issuance of the preferred stock
of Coastal Stock Company, our wholly-owned subsidiary and $907 million of cash
contributed by our discontinued operations as further discussed below. We
reflect the net cash generated by our discontinued operations as a cash inflow
to our continuing financing activities.

Cash from Discontinued Operations

During the first six months of 2004, our discontinued operations
contributed $0.9 billion of cash. We generated $0.1 billion in cash in these
operations, received proceeds from the sales of the Eagle Point and Aruba
refineries of approximately $1.2 billion and repaid long-term debt of $0.4
billion related to the Aruba refinery.

25

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 in segments. 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 operations. During the second quarter of 2004, we
reclassified our Canadian and certain other international natural gas and oil
production operations from our Production segment to discontinued operations in
our financial statements. Our operating results for all periods presented
reflect these changes.

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 income (loss) for the periods ended June 30:

26

The following is a discussion of the comparative quarterly and six month
period results of each of our business segments; our corporate activities;
interest and debt expense; affiliated interest income (expense); net,
distributions on preferred interests of consolidated subsidiaries; income taxes;
and the results of our discontinued operations.

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 periods ended June 30:

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

(1) Throughput volumes exclude intrasegment activities.

Operating Results (EBIT)

The following factors contributed to our overall EBIT decrease of $17
million and $58 million for the quarter and six months ended June 30, 2004 as
compared to the same periods ended June 30, 2003:

The renegotiation or restructuring of several contracts on our pipeline
systems, including our contracts with We Energies, will continue to unfavorably
impact our operating results and EBIT for the remainder of 2004, among other
items noted below. 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 gasification facility 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

27

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, at which
time this amount will be reflected in earnings.

In November 2004, the FERC issued an industry-wide Proposed Accounting
Release that, if enacted as written, will disallow the capitalization of certain
costs that are part of our pipeline integrity program. The accounting release is
proposed to be effective January 2005 following a period of public comment on
the release. We are currently reviewing the release and have not determined what
impact, if any, this release will have on our consolidated financial statements.

UNREGULATED BUSINESSES -- PRODUCTION SEGMENT

Our Production segment conducts our natural gas and oil exploration and
production activities. Our operating results are driven 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. El Paso's long-term strategy for us includes
developing our production opportunities primarily in the U.S. and Brazil, while
currently divesting our production properties outside of these areas. As of
November 2004, we have sold all of our Canadian operations and substantially all
of our operations in Indonesia. Beginning in the second quarter of 2004, these
operations have been treated as discontinued operations as further discussed in
Item 1, Financial Statements, Note 3. All periods reflect this change.

Production and Capital Expenditures

For the six months ended June 30, 2004, our total equivalent production has
declined approximately 31 Bcfe or 32 percent as compared to the same period in
2003 primarily due to normal production declines, asset sales and disappointing
drilling results. Our average daily production through October 2004 has been as
follows:

January-October 2004........................................ 339 MMcfe/d
Month of October 2004....................................... 301 MMcfe/d

Our year to date 2004 and October 2004 production levels were negatively
impacted by hurricanes that occurred in September 2004 in the Gulf of Mexico.
The hurricanes caused us to shut-in production and also caused damage to third
party facilities that transport our production. We continue to experience
reduced production levels in our offshore Gulf of Mexico operations as a result
of the damage to third party facilities and do not expect these facilities to
return to full production until mid-2005. Our future production levels are
dependent upon the amount of capital allocated to us, the level of success in
our drilling programs and future asset sales or acquisitions.

Through October 31, 2004, we have spent $240 million in capital
expenditures for acquisition, exploration, and development activities. Based on
the results to date of our 2004 drilling program, we expect our domestic unit of
production depletion rate to increase from $2.32 per Mcfe during the second
quarter of 2004 to $2.48 per Mcfe for the third quarter of 2004 and to $2.68 per
Mcfe for the fourth quarter of 2004.

Production Hedging

We primarily conduct our hedging activities with EPM, 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.

28

Operating Results

Below are the operating results and analysis of these results for each of
the periods ended June 30:

- ---------------
(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 June 30, 2004 Compared to Quarter Ended June 30, 2003

EBIT. For the quarter ended June 30, 2004, EBIT was $34 million lower than
the same period in 2003. The decrease in EBIT was primarily due to lower
production volumes due to normal production declines and disappointing drilling
results. Partially offsetting these decreases were higher natural gas and oil
prices and lower operating expenses.

Operating Revenues. The following table describes the variance in revenue
between the quarters ended June 30, 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.

For the quarter ended June 30, 2004, operating revenues were $50 million
lower than the same period in 2003 primarily due to lower production volumes,
partially offset by higher natural gas and oil prices. The decline in production
volumes was primarily due to normal production declines, particularly in our
Texas Gulf Coast region, and disappointing drilling results.

Average realized natural gas prices for the second quarter of 2004,
excluding hedges, were $0.74 per Mcf higher than the same period in 2003, an
increase of 14 percent. In addition, our natural gas hedging losses decreased
from $14 million in 2003 to $9 million in 2004. We expect to continue to incur
hedging losses in 2004.

Operating Expenses. Total operating expenses were $11 million lower for
the second quarter of 2004 as compared to the same period in 2003 primarily due
to lower depreciation, depletion, and amortization expense and lower production
costs, partially offset by a $5 million gain on the sale of non-full cost pool
assets in 2003.

Total depreciation, depletion, and amortization expense decreased by $7
million in the second quarter of 2004 as compared to the same period in 2003.
Lower production volumes in 2004 due to the production declines discussed above
reduced our depreciation, depletion, and amortization expense by $26 million.
Partially offsetting this decrease were higher depletion rates due to higher
finding and development costs which contributed an increase of $19 million.

30

Production costs decreased by $8 million in the second quarter of 2004 as
compared to the same period in 2003 due to a decrease in lease operating costs
and production taxes as a result of the lower production volumes in 2004
compared to 2003. On a per Mcfe basis, production taxes decreased $0.03 in 2004.
However, our total production costs per Mcfe increased $0.06 as lease operating
expenses increased $0.09 per Mcfe due to the lower production volumes discussed
above.

General and administrative expenses decreased $1 million in the second
quarter of 2004 as compared to the same period in 2003. While total general and
administrative costs remained relatively unchanged from period to period, the
cost per unit increased $0.16 per Mcfe due to lower production volumes. For the
remainder of 2004, we will have higher allocated expenses.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

EBIT. For the six months ended June 30, 2004, EBIT was $97 million lower
than the same period in 2003. The decrease in EBIT was primarily due to lower
production volumes due to normal production declines, asset sales and
disappointing drilling results. Partially offsetting these decreases were lower
operating expenses and decreased losses in 2004 from our hedging program.

Operating Revenues. The following table describes the variance in revenue
between the six months ended June 30, 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.

For the six months ended June 30, 2004, operating revenues were $135
million lower than the same period in 2003 primarily due to lower production
volumes and lower natural gas prices, partially offset by a decrease in our
hedging losses. The decline in production volumes was primarily due to normal
production declines, particularly in our Texas Gulf Coast region, the sale of
properties in New Mexico as well as disappointing drilling results.

Average realized natural gas prices for 2004, excluding hedges, were $0.14
per Mcf lower than the same period in 2003, a decrease of two percent. However,
more than offsetting the decrease in revenues due to lower natural gas prices
were $24 million of hedging losses in 2004 compared to $70 million 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 $30 million lower in
2004 as compared to the same period in 2003 primarily due to lower depreciation,
depletion, and amortization expense, lower production costs and lower general
and administrative expenses, partially offset by a $5 million gain on the sale
of non-full cost pool assets in 2003.

Total depreciation, depletion, and amortization expense decreased by $14
million in 2004 as compared to the same period in 2003. Lower production volumes
in 2004 due to asset sales and other production declines discussed above reduced
our depreciation, depletion, and amortization expenses by $52 million. Partially
offsetting this decrease were higher depletion rates due to higher finding and
development costs which contributed an increase of $38 million.

Production costs decreased by $14 million in 2004 as compared to the same
period in 2003 primarily due to a decrease in production taxes resulting from
high cost gas well tax credits in 2004 and due to lower production volumes in
2004 compared to 2003. On a per Mcfe basis, production taxes decreased $0.16 in
2004.

31

However, our total production costs per Mcfe increased $0.07 as lease operating
expenses increased $0.23 per Mcfe due to the lower production volumes discussed
above.

General and administrative expenses decreased by $6 million in 2004 as
compared to the same period in 2003. The decrease was primarily due to lower
allocated expenses. However, our costs per unit increased $0.12 per Mcfe due to
the lower production volumes. For the remainder of 2004, we will have higher
allocated expenses.

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 periods ended June 30:

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

(1) Gross margin 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 June 30, 2004 Compared to Quarter Ended June 30, 2003

For the quarter ended June 30, 2004, our EBIT was $28 million lower than
the same period in 2003. The decrease was primarily due to a $16 million
decrease in equity earnings from our investment in Midland Cogeneration Venture
due to higher natural gas costs to run the power plant. Also contributing to the
decrease in EBIT was a 2003 reduction of $8 million of estimated costs
associated with our power contract restructuring activities and an $8 million
gain in 2003 on the termination of a steam contract at our Fulton power plant.
We had previously recorded a liability related to our obligations under this
steam contract. Partially offsetting these decreases were higher equity earnings
of $6 million from two of our Asian equity investments in 2004 compared to the
same period in 2003 and a $3 million gain on the sale of our equity investment
in the Bastrop power facility in 2004.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

For the six months ended June 30, 2004, our EBIT was $123 million lower
than the same period in 2003. The decrease was primarily due to the sale of
Utility Contract Funding and its restructured power contract and related debt,
which resulted in an $89 million impairment loss in 2004 included in operating
expenses. Also contributing to the decrease in EBIT was a $22 million decrease
in equity earnings from our investment in Midland Cogeneration Venture, an $8
million gain in 2003 on the termination of a steam contract at our Fulton power
plant, and an $8 million reduction of estimated power contract restructuring
costs in 2003. Partially offsetting these decreases were higher equity earnings
of $8 million from two of our Asian equity investments and a $3 million gain on
the sale of Bastrop in 2004.

We currently anticipate selling a number of our domestic and international
power assets. 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.

32

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 periods ended
June 30:

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

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

For the quarter and six months ended June 30, 2004, our EBIT was $65
million and $68 million higher than the same periods in 2003. Below is a summary
of significant factors affecting EBIT.

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

(1) Our equity investments in Dauphin Island and Mobile Bay were impaired in
2003 based on anticipated losses on the sales of these investments, which
were completed in the third quarter of 2004.

33

CORPORATE, NET

Our corporate operations 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
operations. Our operating results for all periods reflect this change. Below are
the operating results and analysis of these results for our corporate operations
for the periods ended June 30:

CORPORATE RESULTS

Quarter Ended June 30, 2004 Compared to Quarter Ended June 30, 2003

For the quarter ended June 30, 2004, our EBIT increased by $12 million as
compared to the same period in 2003 primarily due to $9 million of losses in
2003 on a gas supply contract with EPM, our affiliate, that was terminated in
2003.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

For the six months ended June 30, 2004, our EBIT increased by $21 million
as compared to the same period in 2003 primarily due to $13 million of losses in
2003 on a gas supply contract with EPM, our affiliate, that was terminated in
2003. Also contributing to the increase was a $7 million increase in EBIT earned
on our petroleum ship charters during 2004 that resulted from increased demand
for those charter services.

INTEREST AND DEBT EXPENSE

Interest and debt expense for the quarter and six months ended June 30,
2004, was $10 million and $8 million lower than the same periods in 2003. Below
is an analysis of our interest expense for the periods ended June 30:

Quarter and Six Months Ended June 30, 2004 Compared to Quarter and Six Months
Ended June 30, 2003

Interest expense on long term debt decreased primarily due to retirements
of debt during 2003 and 2004. Partially offsetting this decrease was 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

34

distributions on preferred interests. Other interest decreased due to the
retirements of other financing obligations.

AFFILIATED INTEREST INCOME (EXPENSE), NET

Affiliated interest income (expense), net for the quarter ended June 30,
2004 was $12 million lower than the same period in 2003. The decrease was
primarily due to lower average advances payable to El Paso under our cash
management program in 2004, partially offset by higher average short-term
interest rates. The average advances balance for the second quarter decreased
from a net liability of $2.3 billion in 2003 to a net asset of $0.1 billion in
2004. The decrease in advances includes a $1.5 billion contribution from El
Paso. However, the average short-term interest rate for the second quarter
increased from 1.3% in 2003 to 2.3% in 2004.

Affiliated interest expense, net for the six months ended June 30, 2004 was
$5 million lower than the same period in 2003. The decrease was primarily due to
lower average advances payable to El Paso under our cash management program in
2004, partially offset by higher average short-term interest rates. The average
advances payable balance for the six months decreased from $2.1 billion in 2003
to $0.5 billion in 2004. The decrease in advances includes a $1.5 billion
contribution from El Paso. However, the average short-term interest rate for the
six months increase from 1.4% in 2003 to 2.5% in 2004.

DISTRIBUTIONS ON PREFERRED INTERESTS OF CONSOLIDATED SUBSIDIARIES

Distributions on preferred interests of consolidated subsidiaries for the
quarter and six months ended June 30, 2004, were $7 million and $14 million
lower than the same periods 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 taxes included in our income from continuing operations and our
effective tax rates for the periods ended June 30 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 benefit;

- foreign income taxed at different rates.

DISCONTINUED OPERATIONS

The loss from our discontinued operations for the second quarter of 2004
was $11 million compared to a loss of $931 million for the same period of 2003.
The 2004 loss primarily relates to operating losses and general and
administrative expenses in our remaining petroleum markets operations during the
second quarter of 2004. The loss in 2003 was primarily due to impairments at our
Aruba refining facility that was approved for sale by El Paso's Board of
Directors during the second quarter of 2003.

For the six months ended June 30, 2004, the loss from our discontinued
operations was $139 million compared to a loss of $1,151 million during the same
period in 2003. In 2004, $69 million of losses from

35

discontinued operations related to our Canadian and certain other international
production operations, primarily from losses on asset sales and impairments, and
$70 million was from our petroleum markets activities, primarily related to
losses on the completed sales of our Eagle Point and Aruba refineries along with
other operational and severance costs. The losses in 2003 related to impairment
charges on our Aruba and Eagle Point refineries and on chemical assets, all as a
result of the decision by El Paso's Board of Directors to exit and sell these
businesses.

COMMITMENTS AND CONTINGENCIES

See Item 1, Financial Statements, Note 8, which is incorporated herein by
reference.

36

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.

37

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

During 2004, we sold our remaining third party long-term power purchase and
our power supply derivative contracts held by Utility Contract Funding and
Mohawk River Funding IV, which eliminated our exposure to interest rate risk
related to these contracts. Our remaining exposure to interest rate risk relates
to our long-term financing obligations.

38

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, 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 related to the
restatement of our historical financial statements, and those identified as a
result of our SOX implementation 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 booking
proved natural gas and oil reserves;

- 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 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 during 2004:

- 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;

- 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;

39

- 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 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, which we expect to have 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 six months ended June 30, 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.

We also reviewed our overall disclosure controls and procedures for the
quarter ended June 30, 2004. 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

40

executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.

As a result of the internal control deficiencies described above, we
concluded that our disclosure controls and procedures were not effective at June
30, 2004. However, we expanded our procedures to include additional analysis and
other post-closing procedures to ensure that the disclosure controls and
procedures over the preparation of these financial statements were effective.

41

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, Note 8, 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.

42

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: December 3, 2004 /s/ D. DWIGHT SCOTT
------------------------------------
D. Dwight Scott
Executive Vice President,
Chief Financial Officer, and
Director
(Principal Financial Officer)

Date: December 3, 2004 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Principal Accounting Officer)

43

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.