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 SEPTEMBER 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 21,
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 (SEC). 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
September 30, 2004, and for the quarters and nine months ended September 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 nine months ended September
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. From
August 2004 until November 2004, one of our subsidiaries, Colorado Interstate
Gas Company (CIG), did not advance funds to El Paso via the cash management
program due to its anticipated cash needs. With the completion of El Paso's new
credit agreement as further discussed below, CIG began participating in the
program once again. 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.
Based on its belief that the restatements would cause a delay in filing its
financial statements and that the representations and warranties related to its
historical financial statements and its debt to total capitalization ratio would
not be accurate, El Paso obtained waivers and amended its previous revolving
credit facility (under which some of our subsidiaries were eligible borrowers
and also served as collateral for the facility) and various other financing
arrangements. El Paso has filed its financial statements within the time frames
provided by these waivers.

In November 2004, El Paso replaced its previous revolving credit facility
with a new credit agreement with a group of lenders for an aggregate of $3
billion in financings. The new credit agreement consists of a $1.25 billion term
loan, a $750 million funded letter of credit facility, and a $1 billion
revolving credit facility. Upon closing of the new credit agreement, El Paso
borrowed $1.25 billion under the term loan and utilized the $750 million letter
of credit facility and approximately $0.4 billion of the $1 billion revolving
credit facility to replace approximately $1.2 billion of letters of credit
issued under its previous revolving credit facility. Our
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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 Company Ltd. (WIC), and ANR Storage Company continue to
be 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.

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 Company 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. As of September 30, 2004, Blue
Lake has $9 million of third party debt that is non-recourse to us. We
consolidated Blue Lake because we are allocated a majority of its losses and
returns through our equity interest.

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 September 30, 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 $818 million as of September 30, 2004) and our guarantees and
other agreements associated with these entities (a maximum of $42 million as of
September 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
clarifies the types of costs that should be expensed rather than capitalized as
inventory. This statement also clarifies the circumstances under which fixed
overhead costs associated with operating facilities involved in inventory
processing should be capitalized. The provisions of SFAS No. 151 are effective
for fiscal years beginning after June 15, 2005, and may impact certain inventory
costs we incur after January 1, 2006. We are currently evaluating the impact, if
any, of this standard on our consolidated financial statements.

Accounting for Deferred Taxes on Foreign Earnings. In December 2004, the
FASB is expected to issue FASB Staff Position (FSP) No. 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Job Creation Act of 2004. FSP No. 109-2 will amend the existing
accounting literature that requires companies to record deferred taxes on
foreign earnings, unless they intend to indefinitely reinvest those earnings
outside the U.S. This pronouncement will temporarily allow companies that are
evaluating whether to repatriate foreign earnings under the American Jobs
Creation Act of 2004 to delay recognizing any related taxes until that decision
is made. This pronouncement will also require companies that are considering
repatriating earnings to disclose the status of their evaluation and the
potential amounts being considered for repatriation. The U.S. Treasury
Department has not issued final guidelines for applying the repatriation
provisions of the American Jobs Creation Act. We continue to evaluate this
legislation and FSP No. 109-2 to determine whether we will repatriate any
foreign earnings and the impact, if any, that this pronouncement will have on
our consolidated financial statements.

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3. DIVESTITURES

Sales of Assets and Investments

During the nine months ended September 30, 2004, we completed the sale of a
number of assets and investments. The following table summarizes the proceeds
from these sales (in millions):

Production.................................................. $ 24
- Brazilian exploration and production assets

Power....................................................... 92
- Utility Contract Funding (UCF)
- Mohawk River Funding IV
- Bastrop power investment

Field Services
- Dauphin Island and Mobile Bay equity investments........ 3
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Total continuing............................................ 119(1)

Discontinued................................................ 1,289
- Natural gas and oil production properties in Canada and
other international production assets
- Aruba and Eagle Point refineries and other petroleum
assets(2)
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Total....................................................... $1,408
======

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(1) 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 $23 million for the nine months
ended September 30, 2004. Proceeds also exclude any non-cash consideration
received in these sales.

(2) We sold an additional $2 million of petroleum assets in the fourth quarter
of 2004.

9

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(1) Proceeds include costs incurred in preparing assets for disposal and exclude
returns of invested capital and cash transferred with the assets sold. These
items increased our sales proceeds by $8 million for the nine months ended
September 30, 2003.

See Notes 4 and 11 for a discussion of gains, losses and asset impairments
related to the sales above.

10

Discontinued Operations

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.

International Natural Gas and Oil Production 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 nine
months ended September 30, 2004, we recognized approximately $98 million in
realized losses on asset sales and asset impairments based on El Paso's decision
to sell these assets. We expect to complete the sale of the remainder of these
properties in early 2005.

Petroleum Markets. During 2003, El Paso's Board of Directors approved the
sales of our petroleum markets businesses and operations. These businesses and
operations consisted of our Eagle Point and Aruba refineries, our asphalt
business, our Florida terminal, tug and barge business, our lease crude
operations, 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 pre-tax impairment
charges of approximately $1,337 million during the nine months ended September
30, 2003 related to these 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 $59 million in
the first nine months of 2003 from the sale of our Corpus Christi refinery, our
asphalt assets and our 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. These
sales resulted in realized losses of approximately $37 million in the first nine
months of 2004. In addition, in the first quarter of 2004, we reclassified our
petroleum ship charter operations from discontinued operations to continuing
operations in our financial statements based on our decision to retain these
operations. Our financial statements for all periods presented reflect this
change.

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 September 30, 2004. The
summarized financial results and financial position data of our discontinued
operations were as follows:

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(1) We also had $7 million of current assets held for sale related to a domestic
power plant in our Power segment as of December 31, 2003. We did not have
any assets held for sale as of September 30, 2004.

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 September 30, our loss (gain) on long-lived assets was
as follows:

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Our 2004 loss on long-lived assets occurred primarily in our Power segment,
where we recognized an $89 million impairment in the first quarter of 2004
related to the sale of UCF, which owned a restructured power contract. We also
recorded a $6 million impairment charge in the third quarter of 2004 on our
CDECCA power plant to adjust its carrying value to the expected sales proceeds.
Our 2003 gains on long-lived assets were 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 $2 million gain on aircraft
sales associated with our corporate operations, a $6 million gain on the sale of
our Table Rock sulfur extraction facility in the second quarter of 2003 and a $2
million gain on the sale of our Horsham pipeline in the third quarter of 2003 in
our Pipelines segment. Our Production segment also recorded a $5 million gain on
the sale of non-full cost pool assets in the second quarter of 2003 and a $10
million impairment in the third quarter of 2003 related to a crude oil pipeline.

5. PRICE RISK MANAGEMENT ACTIVITIES

The following table summarizes the carrying value of the derivatives used
in our price risk management activities as of September 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.

(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 $55 million of inventory as of September 30, 2004 and December 31,
2003, of which the majority was materials and supplies.

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7. DEBT, OTHER FINANCING OBLIGATIONS AND OTHER CREDIT FACILITIES

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 replaced its previous revolving credit facility
with a new credit agreement with a group of lenders for an aggregate of $3
billion in financings. The new credit agreement consists of a $1.25 billion term
loan, a $750 million funded letter of credit facility, and a $1 billion
revolving credit facility. Upon closing of the new credit agreement, El Paso
borrowed $1.25 billion under the term loan and utilized the $750 million letter
of credit facility and approximately $0.4 billion of the $1 billion revolving
credit facility to replace approximately $1.2 billion of letters of credit
issued 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 continue
to be 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.

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

15

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 in
April 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 59 such lawsuits nationwide, which have been or are in the process
of being 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
are not currently determinable.

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

Governmental Investigations

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

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

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Storage Reporting. 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 (EIA) 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. In November 2004, ANR received a data request from
the FERC in connection with its investigation into the weekly storage withdrawal
number reported by the EIA for the eastern region on November 24, 2004, that was
subsequently revised downward by the EIA. Specifically, ANR provided information
on its weekly EIA submissions, which was unrevised subsequent to its original
submissions. Although ANR made a correction to one daily posting on its
electronic bulletin board during this period, those postings are unrelated to
EIA submissions. In December 2004, ANR received a similar data request from the
CFTC. We are cooperating with the CFTC's request.

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 origin 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 (Coastal)
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 investigations of this matter by the U.S. Attorney,
the SEC and the Senate Subcommittee.

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
September 30, 2004, we had approximately $31 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 September
30, 2004, we had accrued approximately $127 million, including approximately
$126 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
$127 million accrual, $86 million was reserved for facilities we currently
operate, and $41 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 $127 million to
approximately $199 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 ($92 million
to $164 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
September 30, 2004 (in millions):

Balance as of January 1, 2004............................... $131
Additions/adjustments for remediation activities............ 3
Payments for remediation activities......................... (11)
Other charges, net.......................................... 4
----
Balance as of September 30, 2004............................ $127
====

For the remainder of 2004, we estimate that our total remediation
expenditures will be approximately $8 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 September 30, 2004,
we have estimated our share of the remediation costs at these sites to be
between $4 million and $9 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.

18

Rates and Regulatory Matters

Proposed Release Regarding Pipeline Integrity Cost. In November 2004, the
FERC issued an
industry-wide Proposed Accounting Release that, if enacted as written, would
require our interstate pipelines to expense rather than capitalize 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 the
impact, if any, this release will have on our consolidated financial statements.

Inquiry Regarding Income Tax Allowances. On December 2, 2004, the Federal
Energy Regulatory Commission (FERC) issued a notice of inquiry in response to a
recent D.C. Circuit decision that held the FERC had not adequately justified its
policy of providing a certain oil pipeline limited partnership with an income
tax allowance equal to the proportion of its limited partnership interests owned
by corporate partners. The FERC seeks comments on whether the court's reasoning
should be applied to other partnerships or other ownership structures. We own
interests in non-taxable entities that could be affected by this ruling. We
cannot predict what impact this inquiry will have on our interstate pipelines,
including those pipelines that are not owned by a corporate entity, such as
Great Lakes Gas Transmission Limited Partnership which is jointly owned with
unaffiliated parties.

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 that are further described in our 2003
Report on Form 10-K. As of September 30, 2004, we had approximately $11 million
of both financial and performance guarantees not otherwise reflected in our
consolidated financial statements.

9. RETIREMENT BENEFITS

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

We made $10 million of cash contributions to our other postretirement plans
during the nine months ended September 30, 2004 and $11 million of cash
contributions during the nine months ended September 30, 2003. We expect to
contribute an additional $3 million to our other postretirement plans during the
remainder of 2004 and do not anticipate making any other contributions to our
other retirement benefit

19

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 will adopt a new accounting standard
in the fourth quarter of 2004 (FSP No. 106-2) that we believe will not
materially affect our previously reported benefit information and our net
benefit cost for the year ending 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.
They are managed separately as each segment requires different technology and
marketing strategies. Our corporate operations include our general and
administrative functions as well as other unregulated operations, including our
petroleum ship charter operations and various other contracts and assets. 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 consolidated 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 September 30:

20

The following tables reflect our segment results for the periods ended
September 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.

21

(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.

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 $3 million for each of the quarters ended September
30, 2004 and 2003, and $18 million and $11 million for the nine months ended
September 30, 2004 and 2003, related to our proportionate share of affiliates
in which we hold a greater than 50 percent interest.

22

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 September 30:

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

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

We received distributions and dividends from our investments of $29 million
for both of the quarters ended September 30, 2004 and 2003, and $76 million and
$60 million for the nine months ended September 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 September 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.

In September 2004, El Paso restated its financial statements for the manner
in which it accounted for certain hedges of our anticipated natural gas
production. While the restatement did not directly affect our financial
statements, its effects were that many of the financial instruments that hedge
commodity price risk in our financial statements did not qualify as hedges in El
Paso's consolidated financial statements. We have historically hedged a portion
of our anticipated natural gas and oil production with affiliates of El Paso,
and it has been El Paso's intent that these positions qualify as hedges in El
Paso's consolidated financial statements. As a result, we executed a series of
transactions in order to make our hedge relationships consistent with El Paso's
consolidated hedge relationships following the restatement.

23

On December 1, 2004, through these transactions, we replaced existing
hedges on approximately 51 TBtu of natural gas with new hedge transactions at
the same volume and over the same time period. The combination of our original
hedges and the new transactions will not change the average price at which we
are hedged and will not have an impact on our realized prices. As a result,
these transactions will have the same overall impact on our accumulated other
comprehensive income balances, cash flow and income statement as our original
derivative positions that existed prior to December 1, 2004. However, these
transactions "locked in" a pre-tax loss of approximately $180 million in
accumulated other comprehensive income that will be recognized in earnings as
our original hedged transactions settle in 2005. We have also entered into a
service agreement with El Paso that provides for a reimbursement of 2.5 cents
per MMBtu in 2005 for our expected administrative costs associated with these
transactions.

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. From August 2004 until November 2004, one of our subsidiaries, CIG, did
not advance funds to El Paso via the cash management program due to its
anticipated cash needs. With the completion of El Paso's new credit agreement,
CIG began participating in the program once again. As of September 30, 2004 and
December 31, 2003, we had borrowed $126 million and $906 million. The interest
rate as of September 30, 2004, and December 31, 2003, was 2.7% and 2.8%. In
addition, we had a demand note receivable with El Paso of $374 million and $275
million at September 30, 2004 and December 31, 2003. The interest rate for this
demand note receivable was approximately 2.5% at September 30, 2004 and 1.7% at
December 31, 2003.

At September 30, 2004, and December 31, 2003, we had current accounts and
notes receivable from related parties of $39 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 $110 million and $127
million included in other non-current assets at September 30, 2004 and at
December 31, 2003.

At September 30, 2004, and December 31, 2003, we had other accounts payable
to related parties of $91 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.

24

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 nine
months ended September 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 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. From August 2004 until November 2004, one of our subsidiaries,
CIG, did not advance funds to El Paso via the cash management program due to its
anticipated cash needs. With the completion of El Paso's new credit agreement as
further discussed below, CIG began participating in the program once again. 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.
Based on its belief that the restatements would cause a delay in filing its
financial statements and that the representations and warranties related to its
historical financial statements and its debt to total capitalization ratio would
not be accurate, El Paso obtained waivers and amended its previous revolving
credit facility (under which some of our subsidiaries were eligible borrowers
and also served as collateral for the facility) and various other financing
arrangements. El Paso has filed its financial statements within the time frames
provided by these waivers.

In November 2004, El Paso replaced its previous revolving credit facility
with a new credit agreement with a group of lenders for an aggregate of $3
billion in financings. The new credit agreement consists of a $1.25 billion term
loan, a $750 million funded letter of credit facility, and a $1 billion
revolving credit facility. Upon closing of the new credit agreement, El Paso
borrowed $1.25 billion under the term loan and utilized the $750 million letter
of credit facility and approximately $0.4 billion of the $1 billion revolving
credit facility to replace approximately $1.2 billion of letters of credit
issued 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 continue
to be 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.

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.

25

OVERVIEW OF CASH FLOW ACTIVITIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003

For the nine months ended September 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 $0.7
billion during the first nine months of 2004 versus $1.1 billion during the same
period in 2003. We experienced a $0.4 billion 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 on operations of lower capital spending in
our Production segment.

Cash from Continuing Investing Activities

Net cash used by our continuing investing activities was $0.5 billion for
the nine months ended September 30, 2004, due to $0.6 billion in capital
expenditures partially offset by $0.1 billion of proceeds from the sale of
assets and investments. Our capital expenditures for the nine months ended
September 30, 2004 are as follows (in billions):

For the remainder of 2004, we expect our total capital expenditures to be
approximately $0.3 billion, which includes approximately $0.2 billion for our
Pipelines segment and $0.1 billion for our Production segment.

Cash from Continuing Financing Activities

Net cash used in our continuing financing activities for the nine months
ended September 30, 2004 primarily consisted of payments on affiliated notes
payable of $0.8 billion and payments to retire long-term debt and other
financing obligations of $0.5 billion. 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 $1.0
billion 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 nine months of 2004, our discontinued operations
contributed $1.0 billion of cash. We generated $0.2 billion in cash in these
operations and received $1.2 billion of proceeds from the sales of our Eagle
Point and Aruba refineries and our western Canada production operations. These
inflows were offset by $0.4 billion of repayments of long-term debt related to
the Aruba refinery.

26

SEGMENT RESULTS

Below are our results of operations (as measured by EBIT) by segment.
During 2004, El Paso reorganized its business structure into two primary
business lines, regulated and unregulated. Historically, our operating segments
included Pipelines, Production, Merchant Energy and Field Services. As a result
of El Paso's reorganization, we renamed our Merchant Energy segment as our Power
segment. All periods presented reflect this change 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 operations include our general and
administrative functions as well as other unregulated activities, including our
petroleum ship charter operations and various other contracts and assets. 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 consolidated 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 September 30:

27

The following is a discussion of the comparative quarterly and nine month
period results of each of our business segments as well as our corporate
operations; 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 September 30:

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

(1) Throughput volumes exclude intrasegment activities.

Operating Results (EBIT)

Some of the key items affecting our Pipelines segment operations for the
periods ending September 30, 2004 include the impact on revenues and operating
expenses of our efforts to recontract available capacity, the impact of selling
excess fuel over the amount needed to operate the facilities and higher
operating costs. The following contributed to our overall EBIT decrease of $12
million and $70 million for the quarter and nine months ended September 30, 2004
as compared to the same periods ended September 30, 2003:

Our contract modifications/terminations include the renegotiation or
restructuring of several contracts on our pipeline systems, including our
contracts with ANR's customer, We Energies. The modification of the We Energies
contracts 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

28

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 our operating income
or EBIT. Finally, ANR has entered into an agreement with a shipper to
restructure another of its transportation contracts on its Southeast Leg as well
as a related gathering contract. We anticipate this restructuring will be
completed in March 2005 upon which ANR will receive and reflect in its earnings
approximately $26 million.

In November 2004, the FERC issued an industry-wide Proposed Accounting
Release that, if enacted as written, would require our interstate pipelines to
expense rather than capitalize 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 the impact, if any, this release
will have on our consolidated financial statements.

On December 1, 2004, the mainline of our newly constructed Cheyenne Plains
Gas Pipeline was placed in service. Compression and gas treatment facilities are
scheduled to be completed at the beginning of 2005, which will finalize the
first phase of the project.

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 international 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 nine months ended September 30, 2004, our total equivalent
production has declined approximately 42 Bcfe or 31 percent as compared to the
same period in 2003, primarily due to normal production declines, asset sales
and disappointing drilling results. We expect our fourth quarter of 2004
production to average 330 MMcfe/d and our annual production to average 295
MMcfe/d. The 2004 projected annual production average excludes approximately 15
MMcfe/d related to our discontinued production operations. Our expected fourth
quarter of 2004 production levels will also be negatively impacted by Hurricane
Ivan that occurred in September 2004 in the Gulf of Mexico. The hurricane caused
us to shut-in production and also caused damage to third party facilities that
process or transport our production. We continue to experience reduced
production levels in this region as a result of the damage and do not expect 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 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 $2.48 per Mcfe during the third quarter of 2004
to $2.68 per Mcfe for the fourth quarter of 2004.

Production Hedging

We conduct hedging activities to stabilize cash flows and reduce the risk
of downward commodity price movements on our sales. We conduct these activities
through natural gas and oil derivatives on our natural gas and oil production
with EPM. Because our 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

29

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.

In September 2004, El Paso restated its financial statements for the manner
in which it accounted for certain hedges of our anticipated natural gas
production. While the restatement did not directly affect our financial
statements, its effects were that many of the financial instruments that hedge
commodity price risk in our financial statements did not qualify as hedges in El
Paso's consolidated financial statements.

We have historically hedged a portion of our anticipated natural gas and
oil production with affiliates of El Paso, and it has been El Paso's intent that
these positions qualify as hedges in El Paso's consolidated financial
statements. As a result, we executed a series of transactions in order to make
our hedge relationships consistent with El Paso's consolidated hedge
relationships following the restatement.

On December 1, 2004, through these transactions, we replaced existing
hedges on approximately 51 TBtu of natural gas with new hedge transactions at
the same volume and over the same time period. The combination of our original
hedges and the new transactions will not change the average price at which we
are hedged and will not have an impact on our realized prices. As a result,
these transactions will have the same impact on our overall accumulated other
comprehensive income balances, cash flow and income statement as our original
derivative positions that existed prior to December 1, 2004. However, these
transactions "locked in" a pre-tax loss of approximately $180 million in
accumulated other comprehensive income that will be recognized in earnings as
our original hedged transactions settle in 2005. We have also entered into a
service agreement with El Paso that provides for a reimbursement of 2.5 cents
per MMBtu in 2005 for our expected administrative costs associated with these
transactions.

Operating Results

Below are the operating results and analysis of these results for our
Production segment for each of the periods ended September 30:

- ---------------
(1) Transportation and net product costs are included in operating expenses on
our consolidated statements of income.

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

(3) Includes ceiling test charges, asset impairments and gains on asset sales.

(4) Prices are stated before transportation costs.

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

EBIT. For the quarter ended September 30, 2004, EBIT was $35 million
higher than the same period in 2003. The increase in EBIT was primarily due to
ceiling test charges recorded in the third quarter of 2003 and higher natural
gas and oil prices in 2004, offset partially by the impact on revenues of lower
production volumes due to normal production declines and disappointing drilling
results.

Operating Revenues. The following table describes the variance in revenue
between the quarters ended September 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 September 30, 2004, operating revenues were $18
million lower than the same period in 2003 due to lower production volumes,
partially offset by higher natural gas and oil prices. The

31

decline in production volumes resulted from normal production declines in our
Texas Gulf Coast and offshore Gulf of Mexico regions and disappointing drilling
results. Production in the third quarter of 2004 was also impacted by Hurricane
Ivan in September 2004 in the Gulf of Mexico, which caused us to shut-in
production and also caused damage to third party facilities that process or
transport our production.

Average realized natural gas prices for the third quarter of 2004,
excluding hedges, were $0.64 per Mcf higher than the same period in 2003, an
increase of 13 percent. In addition, our natural gas hedging losses decreased
from $15 million in 2003 to $9 million in 2004. We expect to continue to incur
hedging losses for the remainder of 2004.

Operating Expenses. Total operating expenses were $55 million lower for
the third quarter of 2004 compared with the same period in 2003. The decrease
was primarily due to ceiling test charges of $39 million in our domestic and
Brazilian operations and a $10 million impairment of non-full cost pool assets
in the third quarter of 2003.

Total depreciation, depletion, and amortization expense decreased $8
million in the third quarter of 2004 compared with 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 $23 million.
Partially offsetting this decrease were higher depletion rates due to higher
finding and development costs which contributed an increase of $15 million.

Production costs increased by $8 million in the third quarter of 2004
compared with the same period in 2003 due to an increase in lease operating
costs and production taxes. Lease operating cost increased due to higher
workover costs in 2004 in our offshore Gulf of Mexico region, while production
taxes were higher due to the favorable settlement of ad valorem tax issues in
2003. On a per Mcfe basis, production taxes increased $0.20 in 2004 and lease
operating costs increased $0.31 in 2004 primarily due to the higher costs and
the lower production volumes discussed above.

General and administrative expenses decreased by $5 million for the third
quarter of 2004 compared with the same period in 2003. The increase on a per
unit basis was primarily due to lower production volumes. For the fourth quarter
of 2004, we expect our allocated expenses will be approximately the same as the
third quarter of 2004.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003

EBIT. For the nine months ended September 30, 2004, EBIT was $62 million
lower than the same period in 2003. The decrease in EBIT was primarily due to
the impact on revenues of lower production volumes due to normal production
declines, asset sales and disappointing drilling results. Partially offsetting
these decreases was a reduction in losses in 2004 from our hedging program,
higher natural gas and oil prices, and lower operating expenses in 2004,
primarily due to ceiling test charges recorded in 2003.

Operating Revenues. The following table describes the variance in revenue
between the nine months ended September 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 nine months ended September 30, 2004, operating revenues were $153
million lower than the same period in 2003 primarily due to lower production
volumes, partially offset by higher natural gas and oil

32

prices and a decrease in our hedging losses. The decline in natural gas volumes
is primarily due to normal production declines, particularly in our Texas Gulf
Coast and offshore Gulf of Mexico regions, the impact of sales of properties in
New Mexico and disappointing drilling results. Production for the nine months
ended September 30, 2004 was also impacted by Hurricane Ivan in September 2004
in the Gulf of Mexico, which caused us to shut-in production and damaged third
party facilities that process or transport our production.

Average realized oil, condensate, and liquids prices for 2004, were $7.80
per Bbl higher than the same period in 2003, an increase of 30 percent. In
addition, hedging losses decreased from $84 million in 2003 to $32 million in
2004 relating to our natural gas hedge positions. We expect to continue to incur
hedging losses for the remainder of 2004.

Operating Expenses. Total operating expenses were $85 million lower in
2004 compared with the same period in 2003 primarily due to ceiling test charges
of $39 million for our domestic and Brazilian operations and a $10 million
impairment of non-full cost pool assets in the third quarter of 2003. In
addition, we experienced lower depreciation, depletion, and amortization
expense, lower production costs and lower general and administrative expenses in
2004 compared with the same period in 2003.

Total depreciation, depletion, and amortization expense decreased by $22
million in 2004 compared with 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 $76 million. Partially
offsetting this decrease were higher depletion rates due to higher finding and
development costs which contributed an increase of $53 million.

Production costs decreased by $6 million in 2004 compared with the same
period in 2003 primarily due to a decrease in production taxes resulting from
high cost gas well tax credits in 2004 and lower production volumes in 2004 as
compared to 2003. Partially offsetting the decrease were higher lease operating
costs due to higher workover costs in 2004 primarily in our offshore Gulf of
Mexico region. On a per Mcfe basis, production taxes decreased $0.06 in 2004.
However, our total production costs per Mcfe increased $0.20 as lease operating
expenses increased $0.26 per Mcfe due to the higher costs and lower production
volumes discussed above.

General and administrative expenses decreased by $11 million in 2004
compared with the same period in 2003. The decrease was primarily due to lower
allocated expenses. However, the cost per unit increased $0.11 per Mcfe due to
lower production volumes. For the fourth quarter of 2004, we expect our
allocated expenses will be approximately the same as the third quarter of 2004.

UNREGULATED BUSINESSES -- POWER SEGMENT

Our Power segment includes the ownership and operation of domestic and
international power generation facilities and 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 September 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.

33

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

For the quarter ended September 30, 2004, our EBIT was $3 million higher
than the same period in 2003. During 2004, we experienced lower operating costs
of $7 million at our Eagle Point power facility as a result of leasing the
facility to a third party in the first quarter of 2004. We also experienced $6
million in higher operating expenses in 2003 to convert our Eagle Point power
facility to operate it on a merchant basis. Also contributing to the increase in
EBIT was a $5 million increase in equity earnings from our investment in a power
facility located in Pakistan and a $4 million increase in equity earnings from
our investment in Midland Cogeneration Venture in 2004 compared to the same
period in 2003. Partially offsetting these increases was a $13 million increase
in 2003 in the fair value of the restructured power contracts held by Utility
Contract Funding and Mohawk River Funding IV, which were sold in the first half
of 2004, and a $6 million impairment charge recorded in 2004 on our CDECCA power
plant to adjust the carrying value of this plant to the expected sales proceeds.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003

For the nine months ended September 30, 2004, our EBIT was $120 million
lower than the same period in 2003. This 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 including in
operating expenses. As a result of the sale of our restructured power contracts
in 2004, the fair value of these contracts increased by only $36 million in 2004
compared to an increase of $49 million in 2003. Further contributing to the
decrease was an $18 million reduction in equity earnings in 2004 compared to the
same period in 2003 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 a 2003 reduction of $8 million of estimated costs associated with our
power contract restructuring activities. Partially offsetting these decreases
was the increase in equity earnings from a Pakistani investment and lower Eagle
Point conversion costs, net of the CDECCA power plant impairment described
above.

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.

34

UNREGULATED BUSINESSES -- FIELD SERVICES SEGMENT

Our Field Services segment conducts our midstream activities, which include
gathering and processing of natural gas. During 2004, we sold our Dauphin Island
and Mobile Bay investments. Following these sales, 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 September 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 nine months ended September 30, 2004, our EBIT was $13
million and $81 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 our anticipated losses on the sales of these investments,
which were completed in the third quarter of 2004.

35

CORPORATE, NET

Our corporate operations include our general and administrative functions
as well as 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.

For the quarter ended September 30, 2004, EBIT decreased $9 million from
the same period in 2003. This decrease was primarily due to higher legal and
environmental costs and higher minority interest expense in 2004. For the nine
months ended September 30, 2004, EBIT increased by $12 million compared with the
same period in 2003. This increase was due to higher operating income in 2004 on
petroleum ship charters of $10 million due to higher demand for those services,
and the favorable impact of 2003 losses of $13 million related to a gas supply
contract with one of our affiliates that was terminated. Partially offsetting
these favorable items were the higher costs discussed above.

INTEREST AND DEBT EXPENSE

Interest and debt expense for the quarter and nine months ended September
30, 2004, was $29 million and $37 million lower than the same periods in 2003.
Below is an analysis of our interest expense for the periods ended September 30:

Interest expense on long-term debt decreased primarily due to net
retirements of debt during 2003 and 2004. Partially offsetting these retirements
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 distributions on
preferred interests. Other interest decreased due to the retirements of other
financing obligations.

AFFILIATED INTEREST INCOME (EXPENSE), NET

Net affiliated interest expense decreased for the quarter and nine months
ended September 30, 2004 compared with the same periods in 2003 primarily due to
lower average advances balances with El Paso under our cash management program
in 2004, partially offset by higher average short-term interest rates. During
the fourth quarter of 2003, we received a $1.5 billion contribution from El
Paso. This contribution lowered our average balances under El Paso's cash
management program in 2004. The average advances balance for the third quarter
decreased from a net liability of $2.1 billion in 2003 to a net asset of $0.2
billion in 2004 and for the nine months decreased from a net liability of $2.1
billion in 2003 to $0.3 billion in 2004. However, the average short-term
interest rates for 2003 increased from 1.9% for the third quarter and 1.6% for
the nine months to 2.5% for both the third quarter and the nine month periods in
2004.

DISTRIBUTIONS ON PREFERRED INTERESTS OF CONSOLIDATED SUBSIDIARIES

Distributions on preferred interests of consolidated subsidiaries for the
quarter and nine months ended September 30, 2004, were $1 million and $15
million lower than the same periods in 2003 primarily due to the

36

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 September 30 were as follows:

We compute our quarterly taxes under the effective tax rate method based on
applying an anticipated annual effective tax rate to our year-to-date income or
loss except for significant unusual or extraordinary transactions. Changes to
these anticipated annual rates during an interim period can significantly affect
our quarterly income taxes as we apply the revised rate to year-to-date income
or loss. Income taxes for significant unusual or extraordinary transactions are
computed and recorded in the period that the specific transaction occurs.

Our effective tax rates were different than the statutory tax rate of 35
percent in 2004 and 2003 primarily due to:

- state income taxes, net of federal income tax benefit; and

- foreign income taxed at different rates.

Additionally, during 2003 our effective tax rate was different than the
statutory tax rate of 35 percent due to the abandonment of certain foreign
investments. During the quarter ended September 30, 2003, we revised our
anticipated annual effective tax rate due to the U.S. tax benefits associated
with the abandonment of certain foreign investments. Our effective rate and the
tax benefit recorded for the third quarter of 2003 reflects the downward
revision of our federal taxable income for the nine months ended September 30,
2003, as a result of these abandonments, combined with low third quarter pretax
book losses.

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into
law. This legislation creates, among other things, a temporary incentive for
U.S. multinational companies to repatriate accumulated income earned outside the
U.S. at an effective tax rate of 5.25%. The U.S. Treasury Department has not
issued final guidelines for applying the repatriation provisions of the American
Jobs Creation Act. We have not provided deferred taxes on foreign earnings
because such earnings were intended to be indefinitely reinvested outside the
U.S. We are currently evaluating whether we will repatriate any foreign earnings
under the American Jobs Creation Act, and are evaluating the other provisions of
this legislation, which may impact our taxes in the future.

DISCONTINUED OPERATIONS

For the nine months ended September 30, 2004, the loss from our
discontinued operations was $151 million compared to a loss of $1,220 million
during the same period in 2003. In 2004, we incurred $77 million of losses and
impairments related to the sales of our discontinued Canadian and certain other
international production operations, and $74 million from our discontinued
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 primarily related to impairment charges on
our Aruba and Eagle Point refineries and on chemical assets, and ceiling test
charges on our Canadian production operations.

37

COMMITMENTS AND CONTINGENCIES

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

38

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;

- 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.

39

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.

40

ITEM 4. CONTROLS AND PROCEDURES

During 2004, we have been reviewing our internal controls over financial
reporting as part of our compliance efforts under Section 404 of the
Sarbanes-Oxley Act (SOX), which will apply to us at December 31, 2005, as well
as in connection with investigations into matters that required the restatement
of our historical financial statements for the periods from 1999 to 2002 and the
first nine months of 2003. Our SOX review is being performed consistent with the
guidance for independent auditors established by the Public Company Accounting
Oversight Board in Auditing Standard No. 2, An Audit of Internal Control Over
Financial Reporting Performed in Conjunction with an Audit of Financial
Statements. The project has entailed the 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, financial
management responsible for those processes internally reviewed or
"walked-through" these financial 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 involves testing the controls, including a review and inspection of the
documentation supporting the operation of the controls on which we are placing
reliance.

During our reviews, we identified a number of deficiencies in our internal
controls over financial reporting that we determined were material weaknesses in
our internal control structure. These deficiencies, which we have previously
disclosed, generally involved the control environment, information system
access, documentation and application of generally accepted accounting
principles, and deficiencies related to segregation of duties, account
reconciliations and change management over information systems. Our management,
with the oversight of El Paso's Audit Committee, has devoted considerable effort
to remediating the material weaknesses identified, and has made improvements in
our internal controls over financial reporting to address these weaknesses.
Specifically, in the quarter ending September 30, 2004, we implemented new
controls to improve our account reconciliation process, improve segregation of
duties and strengthen information system change management processes. We believe
that we have remediated the deficiencies in our internal controls related to all
of the material weaknesses previously identified. However, we continue to test
to determine whether the remediated controls are operating effectively. We
expect to complete this testing by early February 2005. We are currently
finalizing a framework upon which we will evaluate and classify the significance
of deficiencies identified in our testing process. This is an area that involves
judgment, and where interpretation and guidance continue to evolve. At this
time, we have identified a number of deficiencies and areas where we can improve
our internal controls. Following the completion of our testing procedures, we
will assess whether there are any remaining material weaknesses, represented by
either individually material deficiencies or an aggregation of significant
deficiencies.

Our disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC rules. Our disclosure
controls and procedures are also designed to ensure that such information is
accumulated and communicated to our management to allow timely decisions
regarding required disclosure. Because we have not completed the testing of many
of the processes and controls intended to remediate the control deficiencies
identified in our reviews and of internal controls, we were unable to conclude
that our disclosure controls and procedures were effective as of September 30,
2004. However, we did perform additional procedures to ensure that our
disclosure controls and procedures were effective over the preparation of these
financial statements.

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.

42

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.

43

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 21, 2004 /s/ D. DWIGHT SCOTT
------------------------------------
D. Dwight Scott
Executive Vice President,
Chief Financial Officer, and
Director
(Principal Financial Officer)

Date: December 21, 2004 /s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Principal Accounting Officer)

44

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.