UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

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 1-14365

El Paso Corporation

(Exact Name of Registrant as Specified in its Charter)

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 þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ                    Accelerated filer o                    Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ

     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 May 3, 2006: 660,021,504

EL PASO CORPORATION

TABLE OF CONTENTS

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

     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. 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”, “the company” or “El Paso”, we are describing El Paso Corporation and/or our subsidiaries.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

EL PASO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per common share amounts)

(Unaudited)

See accompanying notes.

EL PASO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)

(Unaudited)

See accompanying notes.

EL PASO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS — (Continued)

(In millions, except share amounts)

(Unaudited)

See accompanying notes.

EL PASO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

See accompanying notes.

EL PASO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

See accompanying notes.

EL PASO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

  Basis of Presentation

      We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the United States Securities and Exchange Commission. Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by accounting principles generally accepted in the United States of America. You should read this Quarterly Report on Form 10-Q along with our 2005 Annual Report on Form 10-K, which includes a summary of our significant accounting policies and other disclosures. The financial statements as of March 31, 2006, and for the quarters ended March 31, 2006 and 2005, are unaudited. We derived the balance sheet as of December 31, 2005, from the audited balance sheet included in our 2005 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 our results of operations for the entire year. Our results for all periods presented reflect our south Louisiana gathering and processing assets, which were part of our historical Field Services segment, and our Macae power facility in Brazil and certain other international power operations as discontinued operations. Additionally, our financial statements for prior periods include reclassifications that were made to conform to the current period presentation. Those reclassifications did not impact our reported net income or stockholders’ equity.

  Significant Accounting Policies

      Our significant accounting policies are discussed in our 2005 Annual Report on Form 10-K. The information below provides updating information, disclosure where these policies have changed or required interim disclosures with respect to those policies.

      Stock Based Compensation. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment. This standard and related interpretations amend previous stock-based compensation guidance and require companies to measure all employee stock-based compensation awards at fair value on the date they are granted to employees and recognize compensation cost in their financial statements over the requisite service period. Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R) for stock based compensation awards granted on or after that date and for unvested awards outstanding at that date using the modified prospective application method. Under this method, prior period results were not restated. Prior to January 1, 2006, we accounted for these plans using the intrinsic value method under the provisions of Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and its related interpretations and did not record expense on stock options granted at the market value on the date of grant. The adoption of SFAS No. 123(R) did not have a material impact to our financial statements as of and for the quarter ended March 31, 2006. For additional information on the adoption of this standard, see Note 12.

      Accounting for Pipeline Integrity Costs. On January 1, 2006, we adopted an accounting release issued by the Federal Energy Regulatory Commission (FERC) that requires us to begin expensing certain costs our interstate pipelines incur related to their pipeline integrity programs. Prior to January 1, 2006, we capitalized these costs as part of our property, plant and equipment. The adoption of this accounting release did not have a material impact to our financial statements as of and for the quarter ended March 31, 2006.

2. Acquisitions

      In August 2005, we acquired Medicine Bow Energy Corporation, a privately held energy company, for total cash consideration of $853 million. Medicine Bow owns a 43.1 percent interest in Four Star Oil & Gas

Company, an unconsolidated affiliate. Our proportionate share of the operating results associated with Four Star are reflected as earnings from unconsolidated affiliates in our financial statements.

      We reflected Medicine Bow’s results of operations in our income statement beginning September 1, 2005. The following summary unaudited pro forma consolidated results of operations for the quarter ended March 31, 2005 reflect the combination of our historical income statements with Medicine Bow, adjusted for certain effects of the acquisition and related funding. These pro forma results are prepared as if the acquisition had occurred as of the beginning of the period presented and are not necessarily indicative of the operating results that would have occurred had the acquisition been consummated at that date, nor are they necessarily indicative of future operating results.

3. Divestitures

      During the quarters ended March 31, we completed the sale of a number of assets and investments. The following table summarizes the proceeds from these sales:

     The following table summarizes the significant assets sold during the quarters ended March 31:

      In addition to the above asset sales, we have also completed or entered into agreements to sell a number of our power assets for total proceeds of approximately $675 million, including our Macae power facility in Brazil, our interests in our remaining Asian power assets and substantially all of our interests in our Central American power assets. We also signed a letter of intent in the first quarter of 2006 to resolve the arbitration proceedings with COPEL relating to the Araucaria power facility in Brazil and to sell our interest in the facility to COPEL for $190 million. See Note 9 for a further discussion of these matters. Additionally, in April 2006, we completed the sale of certain non-strategic south Texas natural gas and oil properties for $67 million.

      Under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classify assets to be disposed of as held for sale or, if appropriate, discontinued operations when they have received appropriate approvals by our management or Board of Directors and when they meet other criteria. The following is a description of our discontinued operations.

      Macae and Other International Power Operations. In the first quarter of 2006, our Board of Directors approved the sale of our interest in the Macae power facility in Brazil to Petrobras. In conjunction with the sale completed in April 2006, we received $358 million and repaid approximately $229 million of Macae’s project debt. During 2005, our Board of Directors approved the sale of our Asian and Central American power asset portfolio, which included our consolidated interests in the Nejapa, CEBU and East Asia Utilities power plants. We expect to complete the sale of these power plants during 2006.

      South Louisiana Gathering and Processing Operations. During the second quarter of 2005, our Board of Directors approved the sale of our south Louisiana gathering and processing assets, which were part of our historical Field Services segment. In the fourth quarter of 2005, we completed the sale of these assets.

      International Natural Gas and Oil Operations. In 2004 and 2005, we completed the sales of these operations, which consisted of our Canadian and certain other international natural gas and oil production operations.

      Petroleum Markets. As of December 31, 2005, the sale of substantially all of these operations had been completed.

      The summarized operating results of our discontinued operations were as follows:

      Assets and liabilities of discontinued operations primarily relate to our Macae power facility. As of March 31, 2006 and December 31, 2005, we had total assets of approximately $0.6 billion, including net property, plant, and equipment of approximately $0.3 billion and other assets, primarily current restricted cash. As of March 31, 2006 and December 31, 2005, total liabilities were approximately $0.5 billion and $0.4 billion, which included current maturities of long-term debt of approximately $0.2 billion and other liabilities, primarily other accounts payable.

4. Loss on Long-Lived Assets

      Our loss on long-lived assets consists of realized gains and losses on sales of long-lived assets and impairments of long-lived assets. During the quarter ended March 31, 2005, our loss on long-lived assets of $7 million was primarily due to a $15 million impairment recorded by our Power segment to adjust the carrying value of its power turbines to their expected sales price, partially offset by a gain of $7 million recorded by our Pipelines segment on the sale of facilities located in the southeastern United States.

5. Income Taxes

      Income taxes included in our income from continuing operations for the quarters ended March 31 were as follows:

      We compute our quarterly taxes under the effective tax rate method based on applying an anticipated annual effective rate to our year-to-date income or loss, except for significant unusual or extraordinary transactions. Income taxes for significant unusual or extraordinary transactions are computed and recorded in the period that the specific transaction occurs. During the first quarter of 2006, our overall effective tax rate on

continuing operations was different than the statutory rate of 35 percent primarily due to a reduction of our liabilities for tax contingencies as a result of IRS settlements on an El Paso Corporation income tax return, tax refunds, and other items, including (i) state income taxes, net of a federal income tax effect and (ii) earnings/losses from unconsolidated affiliates where we anticipate receiving dividends.

      During the first quarter of 2005, our overall effective tax rate on continuing operations was significantly different than the statutory rate of 35 percent primarily due to a reduction in our liabilities for tax contingencies as a result of an IRS settlement on the 1995 to 1997 The Coastal Corporation (now known as El Paso CGP, L.L.C.) income tax returns. Also impacting our effective tax rate were tax benefits recognized on the sale of a foreign investment and state tax adjustments to reflect income tax returns as filed. Partially offsetting these items was the tax impact of an impairment of certain of our foreign investments for which there was no corresponding tax benefit.

6. Earnings Per Share

      We calculated basic and diluted earnings per common share as follows for the quarters ended March 31 (in millions):

      We exclude potentially dilutive securities from the determination of diluted earnings per share (as well as their related income statement impacts) when their impact on income per common share is antidilutive. In 2005, these securities primarily included shares related to employee stock options and restricted stock, trust preferred securities and convertible debentures. For the first quarter of 2006, only convertible debentures were antidilutive.

7. Price Risk Management Activities

      The following table summarizes the carrying value of the derivatives used in our price risk management activities as of March 31, 2006 and December 31, 2005. In the table, derivatives designated as hedges consist of instruments used to hedge our natural gas and oil production. Other commodity-based derivative contracts

relate to derivative contracts not designated as hedges, such as options, swaps and other natural gas and power purchase and supply contracts as well as contracts related to our historical energy trading activities. Finally, interest rate and foreign currency hedging derivatives consist of swaps that are designed to hedge our interest rate and currency risks on long-term debt.

8. Debt, Other Financing Obligations and Other Credit Facilities

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

      As of March 31, 2006, we have approximately $600 million of debt that is redeemable by holders in 2007, which is prior to its stated maturity date. Additionally, a number of our debt obligations are also callable by us prior to their stated maturity date. At this time, we have approximately $11 billion of debt obligations callable in 2006 and an additional $600 million callable in 2007 and thereafter. To the extent we decide to redeem any of this debt, certain obligations will require us to pay a make whole premium.

      From January 1, 2006 through the date of this filing, we had the following changes in our long-term financing obligations:

     Prior to their redemption in 2006, we recorded accretion expense on our zero coupon bonds, which increased the principal balance each period and was included in long-term debt. During the quarters ended March 31, 2006 and 2005, the accretion amounts recorded were $4 million and $7 million. During the quarter ended March 31, 2006 and 2005, we redeemed $612 million and $185 million of our zero coupon debentures, of which $110 million and $26 million represented increased principal due to the accretion of interest on the debentures. We account for these redemptions as financing activities in our statement of cash flows.

     Credit Facilities

      As of March 31, 2006, we had borrowing capacity under our $3 billion credit agreement of $0.2 billion. Amounts outstanding under the credit agreement were a $1.2 billion term loan and $1.6 billion of letters of credit. Our $400 million credit facility matured in May 2006. For a further discussion of our credit agreements and other credit facilities, as well as the related restrictive financial and non-financial covenants and restrictions, see our 2005 Annual Report on Form 10-K.

     Letters of Credit

      As of March 31, 2006, we had outstanding letters of credit of approximately $1.9 billion of which approximately $0.2 billion related to Macae. Approximately $1.1 billion collateralize our recorded obligations related to price risk management activities.

9. Commitments and Contingencies

Legal Proceedings

     Shareholder/ Derivative/ ERISA Litigation

      Cash Balance Plan Lawsuit. In December 2004, a purported class action lawsuit entitled Tomlinson, et al. v. El Paso Corporation and El Paso Corporation Pension Plan was filed in U.S. District Court for Denver, Colorado. The lawsuit alleges various violations of ERISA and/or the Age Discrimination in Employment Act as a result of our change from a final average earnings formula pension plan to a cash balance pension plan. Our costs and legal exposure related to this lawsuit are not currently determinable.

      Retiree Medical Benefits Matters. We currently serve as the plan administrator for a medical benefits plan that covers a closed group of retirees of the Case Corporation who retired on or before June 30, 1994. Case was formerly a subsidiary of Tenneco, Inc. that was spun off prior to our acquisition of Tenneco in 1996. In connection with the Tenneco-Case Reorganization Agreement of 1994, Tenneco assumed the obligation to provide certain medical and prescription drug benefits to eligible retirees and their spouses. We assumed this obligation as a result of our merger with Tenneco. However, we believed that our liability for these benefits is limited to certain previously established maximums, or caps, and costs in excess of these maximums are assumed by plan participants. In 2002, we and Case were sued by individual retirees in federal court in Detroit, Michigan in an action entitled Yolton et al. v. El Paso Tennessee Pipeline Co. and Case Corporation. The suit alleges, among other things, that El Paso and Case violated ERISA and that they should be required to pay all amounts above the cap. Case further filed claims against El Paso asserting that El Paso is obligated to indemnify, defend and hold Case harmless for the amounts it would be required to pay. In separate rulings in 2004, the court ruled that, pending a trial on the merits, Case must pay the amounts incurred above the cap and that El Paso must reimburse Case for those payments. In January 2006, these rulings were upheld on appeal before a 3-member panel of the U.S. Court of Appeals for the 6th Circuit. In February 2006, we filed for a review of this decision by the full panel of the U.S. Court of Appeals for the 6th Circuit as a result of conflicting precedent. In March 2006, the plaintiff filed a reply brief, as requested by the appellate court. If such a review is not granted, we will proceed with a trial on the merits with regard to the issue of whether the cap is enforceable. Until this is resolved, El Paso will indemnify Case for any payments Case makes above the cap, which are currently about $1.7 million per month. We continue to defend the action and have filed for approval by the trial court various amendments to the medical benefit plans which would allow us to deliver the benefits to plan participants in a more cost effective manner. We will seek expeditious approval of such plan amendments. Although it is uncertain what plan amendments will ultimately be approved, the approval of plan amendments could reduce our overall costs and, as a result, could reduce our recorded liability. We have established an accrual for this matter which we believe is adequate.

      Natural Gas Commodities Litigation. Beginning in August 2003, several lawsuits have been filed against El Paso Marketing L.P. (EPM), formerly El Paso Merchant Energy L.P., our affiliate, in which plaintiffs alleged, in part, that El Paso, EPM and other energy companies conspired to manipulate the price of natural gas by providing false price information to industry trade publications that published gas indices. The first cases were filed in the U.S. District Court for the Southern District of New York, which included: Cornerstone Propane Partners, L.P. v. Reliant Energy Services Inc., et al.; Roberto E. Calle Gracey v.

American Electric Power Company, Inc., et al.; and Dominick Viola v. Reliant Energy Services Inc., et al. In December 2003, those cases were consolidated in federal court in New York for all pre-trial purposes. The consolidated cases are styled, in re: Gas Commodity Litigation. In September 2005, the court certified the class to include all persons who purchased or sold NYMEX natural gas futures between January 1, 2000 and December 31, 2002. Other defendants in the case have negotiated tentative settlements with the plaintiffs that are subject to court approval. EPM and the remaining defendants have petitioned the U.S. Court of Appeals for the Second Circuit for permission to appeal the class certification order. The second set of cases involve similar allegations on behalf of commercial and residential customers. These cases were filed in the U.S. District Court for the Eastern District of California, which include Texas Ohio Energy, Inc. v. CenterPoint Energy, Inc. et al. (filed in November 2003); Fairhaven Power v. El Paso Corporation et al.(filed in September 2004); Utility Savings and Refund Services, et al. v. Reliant Energy, et al. (filed in December 2004); and Abelman Art Glass, et al. v. Encana Corporation, et al. (filed in December 2004). Each of these cases was transferred to a multi-district litigation proceeding (MDL), in re Western States Wholesale Natural Gas Antitrust Litigation, pending in the U.S. District Court for Nevada. These cases have been dismissed and have been appealed. The third set of cases also involve similar allegations on behalf of certain purchasers of natural gas. These include a purported class action lawsuit styled Leggett et al. v. Duke Energy Corporation et al. (filed in Chancery Court of Tennessee in January 2005); the purported class action Ever-Bloom Inc. v. AEP Energy Services Inc. et al. (filed in federal court for the Eastern District of California in June 2005); Farmland Industries, Inc. v. Oneok Inc.(filed in state court in Wyandotte County, Kansas in July 2005); and the purported class action Learjet, Inc. v. Oneok Inc. (filed in state court in Wyandotte County, Kansas in September 2005). All four actions have been transferred to the MDL proceeding in federal district court in Nevada. Similar motions to dismiss have either been filed or are anticipated to be filed in these cases as well. Our costs and legal exposure related to these lawsuits and claims are not currently determinable.

      Gas Measurement Cases. A number of our subsidiaries were named defendants in actions that generally allege a mismeasurement of natural gas volumes and/or heating content resulting in the underpayment of royalties. The first set of cases was filed in 1997 by an individual under the False Claims Act, which has been consolidated for pretrial purposes (in re: Natural Gas Royalties Qui Tam Litigation, U.S. District Court for the District of Wyoming.) These complaints allege an industry-wide conspiracy to underreport the heating value as well as the volumes of the natural gas produced from federal and Native American lands. In May 2005, a representative appointed by the court issued a recommendation to dismiss most of the actions on jurisdictional grounds. If the court adopts these recommendations, it will result in the dismissal on jurisdictional grounds of six of the district court actions involving most of the El Paso entities named as defendants. The seventh case involves only a few midstream entities previously owned by El Paso, which have meritorious defenses to the underlying claims. Similar allegations were filed in a second action in 1999 in Will Price, et al. v. Gas Pipelines and Their Predecessors, et al., in the District Court of Stevens County, Kansas on non-federal and non-Native American lands. The plaintiffs currently seek certification of a class of royalty owners in wells in Kansas, Wyoming and Colorado. Motions for class certification have been briefed and argued in the proceedings and the parties are awaiting the court’s ruling. In each of these cases, the applicable plaintiff seeks an unspecified amount of monetary damages in the form of additional royalty payments (along with interest, expenses and punitive damages) and injunctive relief with regard to future gas measurement practices. Our costs and legal exposure related to these lawsuits and claims are not currently determinable.

      Hurricane Litigation. One of our affiliates has been named in two class action petitions for damages filed in the U.S. District Court for the Eastern District of Louisiana against all oil and natural gas pipeline and production companies that dredged pipeline canals, installed transmission lines or drilled for oil and natural gas in the marshes of coastal Louisiana. The lawsuits, George Barasich, et al. v. Columbia Gulf Transmission Company, et al. and Charles Villa Jr., et al. v. Columbia Gulf Transmission Company, et al. assert that the defendants caused erosion and land loss, which destroyed critical protection against hurricane surges and winds and was a substantial cause of the loss of life and destruction of property. The first lawsuit alleges damages associated with Hurricane Katrina. The second lawsuit alleges damages associated with Hurricanes Katrina and Rita. The court consolidated the two lawsuits. Our costs and legal exposure related to these lawsuits and claims are not currently determinable.

      Bank of America. We are a named defendant, along with Burlington Resources, Inc. (Burlington), in two class action lawsuits styled as Bank of America, et al. v. El Paso Natural Gas Company, et al., and Deane W. Moore, et al. v. Burlington Northern, Inc., et al., each filed in 1997 in the District Court of Washita County, State of Oklahoma and subsequently consolidated by the court. The consolidated class action has been settled pursuant to a settlement agreement executed in January 2006. A third action, styled Bank of America, et al. v. El Paso Natural Gas and Burlington Resources Oil and Gas Company, was filed in October 2003 in the District Court of Kiowa County, Oklahoma asserting similar claims as to specified shallow wells in Oklahoma, Texas and New Mexico. All the claims in this action have been settled as part of the January 2006 settlement. The settlement of all these claims is subject to court approval, after a fairness hearing scheduled in the second quarter of 2006. We filed an action styled El Paso Natural Gas Company v. Burlington Resources, Inc. and Burlington Resources Oil and Gas Company, L.P. against Burlington in state court in Harris County, Texas relating to indemnity issues between Burlington and us. That action was stayed by agreement of the parties and settled in November 2005, subject to the underlying class settlements being finalized and approved by the court. Upon final court approval of these settlements, our contribution will be approximately $30 million plus interest, which has been accrued as of March 31, 2006.

      Araucaria. We own a 60 percent interest in a 484 MW gas-fired power project known as the Araucaria project located near Curitiba, Brazil. In December 2002, the utility that had entered into a long-term agreement to purchase power from the project ceased making payments. Various actions have been filed in relation to this failure to continue to make payments, including in local Brazilian courts as well as international arbitration. We expect to settle these disputes and sell our interest in Araucaria to the utility for $190 million in the second quarter of 2006.

      Macae. We owned a 928 MW gas-fired power plant known as the Macae project located near the city of Macae, Brazil which generated revenues largely from payments made by Petrobras under a participation agreement that originally extended through August 2007. Petrobras sought rescission of the participation agreement and reimbursement of prior payments that it had made by filing for international arbitration as well as filing a lawsuit in Brazilian courts. Although an initial arbitration award was issued in the proceeding, we entered into an agreement with Petrobras in March 2006 that provides for the settlement of this matter and the sale of the entities that own our interest in the Macae power plant. In April 2006, pursuant to that agreement, we repaid all of the approximately $229 million of outstanding debt on the plant and completed the sale of our interest in the facility to Petrobras for approximately $358 million, thereby fully resolving the matters in dispute with Petrobras. As part of the sale, we indemnified Petrobras against certain customary liabilities, including any liability associated with a proposed Brazilian tax assessment of $78 million. We have retained the control of defense of these matters and believe we have valid defenses and have challenged the assessment with the Brazilian tax authorities. We also retained rights to receive half of any net refund or other tax benefits received in respect of the companies sold, including half of an approximately $11 million income tax receivable related to overpayment of estimated income taxes in 2004 and 2005 and half of a potential tax benefit of approximately $23 million in respect of tax payments that were previously made related to interest income that has recently been determined to be unconstitutional in a similar case.

      MTBE. In compliance with the 1990 amendments to the Clean Air Act, certain of our subsidiaries used the gasoline additive MTBE in some of their gasoline. Certain subsidiaries 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. Some of our subsidiaries are among the defendants in over 65 such lawsuits. These suits either 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, certain state attorneys general, various water districts and a limited number of individual water customers seek remediation of their groundwater, prevention of future contamination, a variety of compensatory damages, punitive damages, attorney’s fees, court costs and, in one lawsuit, a request for medical monitoring. Among other allegations, plaintiffs assert that gasoline containing MTBE is a defective product and that defendant refiners are liable in proportion to their market share. The plaintiff states of California and New Hampshire have filed an appeal to the 2nd Circuit Court of Appeals challenging the removal of the cases from state to federal court. That appeal is pending. Various motions to dismiss or limit the scope of the lawsuits have been

filed and are pending court review. Our costs and legal exposure related to these lawsuits are not currently determinable.

Government Investigations and Inquiries

      Reserve Revisions. In March 2004, we received a subpoena from the SEC requesting documents relating to our December 31, 2003 natural gas and oil reserve revisions. We will continue to cooperate with the SEC in its investigation related to such reserve revisions. Although we had also received federal grand jury subpoenas for documents with regard to these reserve revisions, in June 2005, we were informed that the U.S. Attorney’s office closed this investigation and will not pursue prosecution at this time.

      Iraq Oil Sales. Several government agencies and congressional committees have been reviewing and making formal and informal requests related to The Coastal Corporation’s and El Paso’s purchases of crude oil from Iraq under the United Nations’ Oil for Food Program. These agencies include a grand jury of the U.S. District Court for the Southern District of New York, the SEC and several congressional committees. In October 2005, a grand jury sitting in the Southern District of New York handed down an indictment against Oscar S. Wyatt, Jr., a former CEO and Chairman of Coastal. Also in October 2005, the Independent Inquiry Committee into the United Nations’ Oil for Food Program issued its final report. The report states that $201,877 in surcharges were paid with respect to a single contract entered into by our subsidiary, Coastal Petroleum NV (CPNV). The report lists Oscar Wyatt as the non-contractual beneficiary of the contract. The report indicates that the payments were made by two other individuals or entities and does not contend that CPNV paid that surcharge. We continue to cooperate with all government investigations into this matter.

      Other Government Investigations. We also continue to provide information and cooperate with the inquiry or investigation of the U.S. Attorney and the SEC in response to requests for information regarding price reporting of transactional data to the energy trade press and the hedges of our natural gas production.

Other Contingencies

      El Paso Natural Gas Company Rate Case. In June 2005, EPNG filed a rate case with the Federal Energy Regulatory Commission proposing an increase in revenues of 10.6 percent or $56 million over current tariff rates, new services and revisions to certain terms and conditions of existing services, including the adoption of a fuel tracking mechanism. As part of this filing, we proposed to modify our depreciation rates to a range of approximately two percent to 20 percent per year. On January 1, 2006, the tariff rates and depreciation rates, which are subject to refund, and the fuel tracking mechanism became effective. In March 2006, the FERC issued orders that addressed the applicability for a rate cap set forth in a prior rate case settlement, as well as generally approved our proposed new services. The FERC accepted a delay in the implementation date of the new services until June 1, 2006, pending further action. In April 2006, we solicited and received bids for certain new services and are currently evaluating those bids. EPNG is continuing settlement discussions with its customers. The outcome of this rate case cannot be predicted with certainty at this time.

      Colorado Interstate Gas Company (CIG) Rate Case. CIG anticipates filing a new rate case by June 30, 2006. In March 2006, the FERC granted CIG’s request to change the effective date of its proposed new rates to no later than January 1, 2007. CIG is engaged in settlement discussions with its customers. The outcome of this rate case and its impact on revenues cannot be predicted with certainty at this time.

      Iraq Imports. In December 2005, the Ministry of Oil for the State Oil Marketing Organization of Iraq (SOMO) sent an invoice to one of Coastal’s subsidiaries with regard to shipments of crude oil that SOMO alleged were purchased and paid for by Coastal in 1990. The invoices request an additional $144 million of payments for such shipments, along with an allegation of an undefined amount of interest. The invoice appears to be associated with cargoes that Coastal had purchased just before the 1990 invasion of Kuwait by Iraq. We have requested additional information from SOMO to further assist in our evaluation of the invoice and the underlying facts. In addition, we are evaluating our legal defenses, including applicable statute of limitation periods.

      Navajo Nation. Approximately 900 looped pipeline miles of the north mainline of our EPNG pipeline system are located on lands held in trust by the United States for the benefit of the Navajo Nation. Although our rights-of-way on lands crossing the Navajo Nation expired in October 2005, we entered into an interim agreement with the Navajo Nation to extend our use of existing rights-of-way through the end of 2006. Negotiations on the terms of the long-term agreement are continuing. Although the Navajo Nation has at times demanded more than ten times the $2 million annual fee that existed prior to the execution of the interim agreement, EPNG continues to offer a combination of cash and non-cash consideration, including collaborative projects to benefit the Navajo Nation. In addition, EPNG continues to preserve other legal and regulatory alternatives, which include continuing to pursue our application with the Department of the Interior for renewal of our rights-of-way on Navajo Nation lands. EPNG also continues to press for public policy intervention by Congress in this area. The Energy Policy Act of 2005 commissioned a comprehensive study of energy infrastructure rights-of-way on tribal lands. The study, to be conducted jointly by the Department of Energy and the Department of Interior, must be submitted to Congress by August 2006. It is uncertain whether our negotiation, public policy or litigation efforts will be successful, or if successful, what will be the ultimate cost of obtaining the rights-of-way or whether EPNG will be able to recover these costs in its rate case.

      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. For each of our outstanding legal and other contingent 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. While the outcome of these matters, discussed above, cannot be predicted with certainty, and there are still uncertainties related to the costs we may incur, based upon our evaluation and experience to date, 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, and these adjustments could be material. As of March 31, 2006, we had approximately $560 million accrued, net of related insurance receivables, for outstanding legal and other contingent matters.

Environmental Matters

      We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remedy the effect on the environment of the disposal or release of specified substances at current and former operating sites. As of March 31, 2006, we have accrued approximately $379 million, which has not been reduced by $27 million for amounts to be paid directly under government sponsored programs. Our accrual includes approximately $368 million for expected remediation costs and associated onsite, offsite and groundwater technical studies and approximately $11 million for related environmental legal costs. Of the $379 million accrual, $72 million was reserved for facilities we currently operate and $307 million was reserved for non-operating sites (facilities that are shut down or have been sold) and Superfund sites.

      Our reserve estimates range from approximately $379 million to approximately $540 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 ($72 million). Second, where the most likely outcome cannot be estimated, a range of costs is established ($307 million to $468 million) and if no one amount in that range is more likely than any other, the lower end of the expected range has been accrued. Our environmental remediation projects are in various stages of completion. Our recorded liabilities reflect our current estimates of amounts we will expend to remediate these sites. However, depending on the stage of completion or assessment, the ultimate extent of contamination or remediation required may not be known. As

additional assessments occur or remediation efforts continue, we may incur additional liabilities. 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, 2006 to March 31, 2006 (in millions):

      For the remainder of 2006, we estimate that our total remediation expenditures will be approximately $78 million, most of which will be expended under government directed clean-up plans. In addition, we expect to make capital expenditures for environmental matters of approximately $91 million in the aggregate for the years 2006 through 2010. These expenditures primarily relate to compliance with clean air regulations.

      Polychlorinated Biphenyls (PCB) Cost Recoveries. Pursuant to a consent order executed by Tennessee Gas Pipeline Company (TGP), our wholly owned subsidiary, in May 1994, with the Environmental Protection Agency (EPA), TGP has been conducting various remediation activities at certain of its compressor stations associated with the presence of PCB and certain other hazardous materials. TGP has recovered a substantial portion of the environmental costs identified in its PCB remediation project through a surcharge to its customers. An agreement with TGP’s customers, approved by the FERC in November 1995, established the surcharge mechanism. The current surcharge collection period is currently set to expire in June 2006, with further extensions subject to a filing with the FERC. As of March 31, 2006, TGP had pre-collected PCB costs of approximately $134 million. This pre-collected amount will be reduced by future eligible costs incurred for the remainder of the remediation project. To the extent actual eligible expenditures are less than the amounts pre-collected, TGP will refund to its customers the difference, plus carrying charges incurred up to the date of the refunds. At March 31, 2006, TGP had a regulatory liability of $120 million for the estimated future refund obligations.

      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 51 active sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or state equivalents. We have sought to resolve our liability as a PRP at these sites through indemnification by third-parties and settlements, which provide for payment of our allocable share of remediation costs. As of March 31, 2006, we have estimated our share of the remediation costs at these sites to be between $38 million and $68 million. Because the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required, and 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, regulations and orders of regulatory agencies, as well as claims for damages to property and the environment or injuries to employees and other persons 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 related to the ultimate costs we may incur, based upon our evaluation and experience to date, we believe our reserves are adequate.

Guarantees

      We are involved in various joint ventures and other ownership arrangements that sometimes require additional financial support that results in the issuance of financial and performance guarantees. See our 2005 Annual Report on Form 10-K for a description of these commitments. As of March 31, 2006, we had a liability of $69 million related to our guarantees and indemnification arrangements. These arrangements had a total stated value of $212 million, for which we are indemnified by third parties for $26 million. These amounts exclude guarantees for which we have issued related letters of credit discussed in Note 8.

      In addition to the exposures described above, a trial court has ruled, which was upheld on appeal, that we are required to indemnify a third party for benefits being paid to a closed group of retirees of one of our former subsidiaries. We have a liability of approximately $380 million associated with our estimated exposure under this matter as of March 31, 2006. For a further discussion of this matter, see Retiree Medical Benefits Matters above.

10. Retirement Benefits

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

     We made $11 million and $18 million of cash contributions to our Supplemental Executive Retirement Plan (SERP) and other postretirement plans during the quarters ended March 31, 2006 and 2005. We expect to contribute an additional $3 million to the SERP and $35 million to our other postretirement plans for the remainder of 2006. Contributions to our other retirement benefit plans will be approximately $11 million for the remainder of 2006.

11. Capital Stock

      The table below shows the amount of dividends paid and declared (in millions, except per share amounts).

      Dividends on our common stock are treated as a reduction of additional paid-in-capital since we currently have an accumulated deficit. We expect dividends paid on our common and preferred stock in 2006 will be taxable to our stockholders because we anticipate that these dividends will be paid out of current or accumulated earnings and profits for tax purposes. For a further discussion of our common and preferred stock including dividend restrictions, refer to our 2005 Annual Report on Form 10-K.

12. Stock-Based Compensation

      Under our stock-based compensation plans, we may issue to our employees incentive stock options on our common stock (intended to qualify under Section 422 of the Internal Revenue Code), non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance shares, performance units and other stock-based awards. We are authorized to grant awards of approximately 42.5 million shares of our common stock under our current plans, which includes 35 million shares under our employee plan, 2.5 million shares under our non-employee director plan and 5 million shares under our employee stock purchase plan. At March 31, 2006, approximately 40 million shares remain available for grant under our current plans. In addition, we have approximately 25 million shares of stock option awards outstanding that were granted under terminated plans that obligate us to issue additional shares of common stock if they are exercised. Stock option exercises and restricted stock are funded primarily through the issuance of new common shares.

      As discussed in Note 1, we adopted SFAS No. 123(R) on January 1, 2006 and began recognizing the cost of all of our stock-based compensation arrangements based on the grant date fair value of those awards in our financial statements. We record this cost as operation and maintenance expense in our consolidated statements of income over the requisite service period for each separately vesting portion of the award net of estimates of pre-vesting forfeiture rates. If actual forfeitures differ from our estimates, additional adjustments to compensation expense will be required in future periods.

      The impact of the adoption of SFAS No. 123(R) on earnings per share was less than $0.01 per basic and diluted share for the quarter ended March 31, 2006. During the quarter ended March 31, 2006, we recognized $3 million of additional pre-tax compensation expense while capitalizing less than $1 million as part of fixed assets and recording $1 million of income tax benefits as our option awards vested. We expect to record incremental compensation expense of approximately $9 million for the remainder of the year.

      Had we accounted for our stock-based compensation awards using the fair value recognition provisions of SFAS No. 123 for historical periods, rather than APB No. 25, the net income available to common stockholders and per share impacts on our financial statements would have been different. The following table shows the impact on net income available to common stockholders and income per share had we applied SFAS No. 123 (in millions, except for per share amounts):

      We follow the transition method described in SFAS No. 123(R) for calculating the historical pool of excess tax benefits available (the “APIC Pool”) to absorb any tax deficiencies recognized after January 1, 2006, if actual tax benefits realized upon the exercise of stock options are less than the recorded tax benefit. We are currently evaluating whether to elect the one-time transition election for calculating the APIC pool provided in FASB Staff Position (FSP) SFAS 123(R)-3, Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards.

      Under SFAS No. 123(R), beginning January 1, 2006, excess tax benefits from the exercise of stock-based compensation awards are recognized in cash flows from financing activities. Prior to this date, these amounts were recorded in cash flows from operating activities. Our excess tax benefits recorded in 2006 and 2005 were not material.

Non-Qualified Stock Options

      We grant non-qualified stock options to our employees with an exercise price equal to the market value of our stock on the grant date. Our stock option awards have contractual terms of 10 years and generally vest after completion of one to five years of continuous employment from the grant date. We do not pay dividends on unexercised options. A summary of our stock option transactions for the quarter ended March 31, 2006 is presented below:

      Total compensation cost related to non-vested option awards not yet recognized at March 31, 2006 was approximately $11 million, which is expected to be recognized over a weighted average vesting period of 13 months. The total intrinsic value, cash received and income tax benefits generated from option exercises were not material during the quarters ended March 31, 2006 and 2005.

      Fair Value Assumptions. The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes option-pricing model based on several assumptions. These assumptions are based on management’s best estimate at the time of grant. For the quarters ended March 31, 2006 and 2005, the weighted average grant date fair value per share of options granted was $4.99 and $3.67. Listed below is the weighted average of each assumption based on grants in each of the quarters ended March 31:

      Our expected volatilities are based on an analysis of implied volatilities from traded options on our common stock and our historical stock price volatility over the expected term, adjusted for certain time periods. Prior to January 1, 2006, we estimated expected volatility based primarily on adjusted historical stock price volatility. Effective January 1, 2006, we adopted the provisions of Staff Accounting Bulletin No. 107 and estimate the expected term of our option awards based on the vesting period and average remaining contractual term.

Restricted Stock

      We may grant shares of restricted common stock, which carry voting and dividend rights, to our officers and employees. However, sale or transfer of the shares is restricted until they vest. We currently have outstanding and grant only time-based restricted stock. Historically, we also granted performance-based restricted share awards. These shares have fully vested or were forfeited prior to the end of 2005. The fair value of our time-based restricted shares is determined on the grant date and typically vest over three years from the date of grant. A summary of the changes in our non-vested restricted shares for the quarter ended March 31, 2006, is presented below:

      The weighted average grant date fair value per share for restricted stock granted during the first quarter of 2006 and 2005 was $12.60 and $10.35. The total fair value of shares vested during the quarters ended March 31, 2006 and 2005 was $9 million and $5 million.

      During the quarters ended March 31, 2006 and 2005, we recognized approximately $4 million of pre-tax compensation expense, capitalized less than $1 million as part of fixed assets and recorded $1 million of income tax benefits related to restricted stock arrangements. The total unrecognized compensation cost related to these arrangements at March 31, 2006 was approximately $13 million, which is expected to be recognized over a weighted average vesting period of 18 months. Upon adoption of SFAS No. 123(R), we recorded a cumulative effect of a change in accounting principle of less than $1 million as a result of

estimating forfeitures for restricted stock on the date of grant as compared to recognizing forfeitures as they occur. We also reclassified unearned compensation as additional paid-in capital on our balance sheet as required by this standard.

Employee Stock Purchase Plan

      In July 2005, we reinstated our employee stock purchase plan under Section 423 of the Internal Revenue Code. The amended and restated plan allows participating employees the right to purchase our common stock at 95 percent of the market price on the last trading day of each month. This plan is non-compensatory under the provisions of SFAS No. 123(R).

13. Business Segment Information

      As of March 31, 2006, our business consists of our core Pipelines and Exploration and Production segments, as well as our Marketing and Trading and Power segments. Prior to 2006, we also had a Field Services segment. As of January 1, 2006, we had divested of substantially all of the assets and operations in this segment. 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 a telecommunications business and various other contracts and assets, all of which are immaterial. During 2006, our Board of Directors approved the sale of our interest in the Macae power facility in Brazil to Petrobras, and as a result, we reclassified these operations as discontinued. During 2005, we reclassified our south Louisiana gathering and processing assets, which were part of our historical Field Services segment, and the international power operations at our Nejapa, CEBU and East Asia Utilities power plants as discontinued operations. Our operating results for all periods presented reflect these operations as discontinued.

      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) 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 flows. Below is a reconciliation of our EBIT to our income from continuing operations for the quarters ended March 31:

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

     Total assets by segment are presented below:

      We hold investments in unconsolidated affiliates, which are accounted for using the equity method of accounting. Our income statement typically reflects (i) our share of net earnings directly attributable to these unconsolidated affiliates and (ii) impairments and other adjustments recorded by us. Our net ownership interest and earnings (losses) from our unconsolidated affiliates are as follows:

     Impairment charges and gains and losses on sales of equity investments are included in earnings (losses) from unconsolidated affiliates. During the quarters ended March 31, 2006 and 2005, our impairment gains and losses were primarily a result of our decision to sell these investments. We also had investments that experienced declines in their fair value due to changes in economics of the investments’ underlying contracts or the markets they serve. These gains and losses consisted of the following for the quarters ended March 31:

      The summarized financial information below includes our proportionate share of the operating results of our unconsolidated affiliates for the quarters ended March 31: