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 June 30, 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 August 3, 2006: 695,949,316

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

(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 United States generally accepted accounting principles. You should read this Quarterly Report on Form 10-Q along with our Current Report on Form 8-K dated May 12, 2006, which updated the financial information originally presented in our 2005 Form 10-K to reclassify our Macae power facility in Brazil as a discontinued operation, and which contains a summary of our significant accounting policies and other disclosures. The financial statements as of June 30, 2006, and for the quarters and six months ended June 30, 2006 and 2005, are unaudited. We derived the condensed balance sheet as of December 31, 2005, from the audited balance sheet filed in our Current Report on Form 8-K dated May 12, 2006. 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. 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 Current Report on Form 8-K dated May 12, 2006. The information below provides updating information, disclosures where these policies have changed and 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 its 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) Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations, and did not record compensation expense on stock options that were granted at the market value of the stock 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 and six months ended June 30, 2006. For additional information on the adoption of this standard, see Note 12.

      Accounting for Pipeline Integrity Costs. As of January 1, 2006, we had 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 adoption, we capitalized these costs as part of our property, plant and equipment. During the quarter and six months ended June 30, 2006, we expensed approximately $6 million and $7 million as a result of the adoption of this accounting release, which was less than $0.01 per basic and fully diluted share for both the quarter and six month periods ended June 30, 2006. We anticipate we will expense additional costs of approximately $21 million for the remainder of the year.

  New Accounting Pronouncements Issued But Not Yet Adopted

      Accounting for Uncertainty in Income Taxes. In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 clarifies SFAS No. 109, Accounting for Income Taxes, and requires us to evaluate our tax positions for all jurisdictions and all years where the statute of limitations has not expired. FIN No. 48 requires companies to meet a “more-likely-than-not” threshold (i.e. greater than a 50 percent likelihood of being sustained under examination) prior to recording a benefit for its tax positions. Additionally, for tax positions meeting this “more-likely-than-not” threshold, the amount of benefit is limited to the largest benefit that has a greater than 50 percent probability of being realized upon ultimate settlement. The cumulative effect of applying the provisions of the new interpretation will be recorded as an adjustment to the beginning balance of retained earnings, or other components of stockholders’ equity, as appropriate, in the period of adoption. We will adopt the provisions of this interpretation effective January 1, 2007, and are currently evaluating the impact, if any, that this interpretation will have on our financial statements.

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 of unaudited pro forma consolidated results of operations for the quarter and six months ended June 30, 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 periods 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 six months ended June 30, 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 six months ended June 30:

      In addition to the above, subsequent to June 30, 2006, we completed the sale of our interests in certain power assets, including our investment in Midland Cogeneration Venture (MCV) and several Asian assets, for approximately $30 million. We also have agreements to sell additional assets for total proceeds of approximately $130 million, including certain Brazilian natural gas and oil properties and substantially all of our interests in our remaining domestic, Asian and Central American power assets.

      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. Cash flows from our discontinued businesses are reflected as discontinued operating, investing, and financing activities in our statement of cash flows. To the extent these operations do not maintain separate cash balances, we reflect the net cash flows generated from these businesses as a contribution to continuing operations. We reflect this contribution in cash from continuing financing activities. The following is a description of our discontinued operations and summarized results of these operations for the quarters and six months ended June 30, 2006 and 2005.

      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 completed the sale of our CEBU and East Asia Utilities power plants in July 2006. Our only

remaining power asset in discontinued operations is our Nejapa power plant. We expect to complete the sale of this plant in the second half of 2006. For a further discussion related to our international power operations, see Note 14.

      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 Production Operations. In 2004 and 2005, we sold these operations, which consisted of our Canadian and certain other international natural gas and oil production operations.

      Petroleum Markets. As of December 31, 2005, substantially all of these operations had been sold.

      Assets and liabilities of discontinued operations primarily relate to our international power facilities. As of June 30, 2006 and December 31, 2005, we had total assets of approximately $38 million and $583 million classified as discontinued operations. As of June 30, 2006 and December 31, 2005, total liabilities classified as discontinued operations were approximately $24 million and $422 million.

4. Loss on Long-Lived Assets

      Our loss on long-lived assets consists of realized gains and losses on sales and impairments of long-lived assets. During the six months ended June 30, 2005, our net loss on long-lived assets of $7 million was primarily due to a $15 million impairment recorded by our Power segment on several of its power turbines, partially offset by a gain of $9 million in 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 periods ended June 30 were as follows:

      We compute our quarterly income taxes using a method based on applying an anticipated annual effective rate to our year-to-date income or loss except for significant unusual or infrequently occurring transactions. Income taxes for significant or infrequently occurring transactions are separately computed and recorded in the period that the specific transaction occurs. The IRS audits of the Coastal Corporation’s 1998-2000 tax years and El Paso’s 2001 tax year were concluded in 2006. During 2006, our overall effective tax rate on continuing operations was lower than the statutory rate of 35 percent primarily due to conclusion of these IRS audits resulting in the reduction of tax contingencies and reinstatement of certain tax credits. These amounts were $34 million and $50 million for the quarter and six months ended June 30, 2006. Also reducing our effective rate in 2006 were net tax benefits recognized on certain foreign investments, among other items.

      During the six months ended June 30, 2005, our overall effective tax rate on continuing operations was 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 for the 1995-1997 income tax returns for The Coastal Corporation.

      Other Tax Matters. The IRS audit of El Paso’s 2002 tax year is still subject to review but is expected to be concluded in 2006. In addition, the IRS is currently auditing El Paso’s 2003 and 2004 tax years. We have

recorded a liability for tax contingencies associated with these audits, as well as for proceedings and examinations with other taxing authorities, which management believes is adequate. As these matters are finalized, we may be required to adjust our liability which could significantly increase or decrease our income tax expense in future periods.

6. Earnings Per Share

      We calculated basic and diluted earnings per common share as follows:

      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 from continuing operations per common share is antidilutive. These antidilutive securities included our zero coupon convertible debentures (which were paid off in April 2006) and certain employee stock options in all periods presented. In addition, our trust preferred securities were antidilutive in all periods except for the six months ended June 30, 2006, and our convertible preferred stock was antidilutive for the quarter ended June 30, 2005. For a discussion of our capital stock activity in 2006, our stock based compensation arrangements, and other instruments noted above, see Notes 11 and 12 as well as our Current Report on Form 8-K dated May 12, 2006.

7. Price Risk Management Activities

      The following table summarizes the carrying value of the derivatives used in our price risk management activities as of June 30, 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 that are not designated as hedges. 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 June 30, 2006, we have approximately $600 million of debt that is redeemable by holders in the first half of 2007, which is prior to its stated maturity date. As a result, we have classified these amounts as current liabilities in our balance sheet. Additionally, a number of debt obligations are callable by us prior to their stated maturity date. At this time, approximately $10 billion of debt obligations are callable by us in 2006 and an additional $600 million is callable by us 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 July 31, 2006, 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 of long-term debt each period. During the six months ended June 30, 2006 and 2005, the accretion recorded in interest expense was $4 million and $13 million. During the six months ended June 30, 2006 and 2005, we redeemed $615 million and $236 million of our zero coupon debentures, of which $110 million and $34 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 and Letters of Credit

      Available Capacity under Credit Agreements. As of June 30, 2006, we had available capacity under our credit agreements of $772 million. Of this amount $500 million related to a revolving credit agreement of our subsidiary, El Paso Exploration & Production Company (EPEP) which can be used for loans or letters of credit of EPEP through its maturity date of August 2010. Borrowings carry an interest rate of LIBOR plus a fixed percentage ranging from 1.25% to 1.875%, depending on utilization. In August 2006, we borrowed $75 million under this agreement. The remaining $272 million of capacity was available under our $3 billion credit agreement. In May 2006, our $400 million credit facility matured unutilized.

      Letters of Credit. As of June 30, 2006, we had total outstanding letters of credit of approximately $1.6 billion, of which $1.5 billion were issued under our $3 billion credit agreement. Of the total issued letters of credit, approximately $1.0 billion collateralize our recorded obligations related to price risk management activities.

      Credit Agreement Restructuring. In July 2006, we restructured our $3 billion credit agreement. As part of this restructuring, we entered into a new $1.75 billion credit agreement, consisting of a $1.25 billion three-year revolving credit facility and a $500 million five-year deposit letter of credit facility. At closing we had approximately $1.1 billion of letters of credit outstanding under both of these facilities. In conjunction with the restructuring, we will record a charge in the third quarter of approximately $17 million associated with unamortized financing costs on the previous credit agreement. Our subsidiaries Colorado Interstate Gas Company (CIG), El Paso Natural Gas Company (EPNG) and Tennessee Gas Pipeline Company (TGP) are eligible borrowers under this agreement. Additionally, El Paso and certain of its subsidiaries have guaranteed the $1.75 billion credit agreement, which is collateralized by our stock ownership in CIG, EPNG, and TGP.

      Under the $1.25 billion revolving credit facility which matures in July 2009, we can borrow funds at LIBOR plus 1.75% or issue letters of credit at 1.75% plus a fee of 0.15% of the amount issued. We pay an annual commitment fee of 0.375% on any unused capacity under the revolving credit facility. The terms of the $500 million deposit letter of credit facility provide for the ability to issue letters of credit or borrow amounts as revolving loans with a maturity in July 2011. We pay LIBOR plus 2.00% on any amounts borrowed under this facility, 2.15% on letters of credit and 2.10% on unused capacity.

      Under the new $1.75 billion credit agreement, the primary changes to our restrictive covenants as compared to our former $3 billion credit agreement were as follows:

      In addition to these covenants, we are restricted from placing liens on the equity of ANR Pipeline Company (ANR), however, we no longer have a restriction on the early retirement of debt with maturities beyond the maturity date of the $1.25 billion revolving credit facility.

      Unsecured revolving credit facility. In July 2006, we also entered into a $500 million unsecured revolving credit facility that matures in July 2011 with a third party and a third party trust that provides for both borrowings and issuing letters of credit. We are required to pay fixed facility fees at a rate of 2.3% on the total committed amount of the facility. In addition, we will pay interest on any borrowings at a rate comprised of either a base rate or LIBOR.

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 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 by the U.S. Court of Appeals for the 6th Circuit. We intend to pursue relief with the United States Supreme Court, and if it is not granted we will proceed with a trial on the merits with regard to the issues of whether the cap is enforceable and what degree of benefits have actually vested. 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 obligation. 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) that allege 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 have been consolidated in federal court in New York for all pre-trial purposes and 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 have been approved by the court. 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 have been transferred to a multi-district litigation proceeding (MDL) in the U.S. District Court for Nevada , In re Western States Wholesale Natural Gas Antitrust Litigation. 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); the purported

class action Learjet, Inc. v. Oneok Inc. (filed in state court in Wyandotte County, Kansas in September 2005); and the purported class action Breckenridge, et al v. Oneok Inc., et al. (filed in state court in Denver County, Colorado in May 2006). The Leggett case was removed but then remanded to state court. The Breckenridge case has been removed and conditionally transferred to the MDL proceeding in federal district court in Nevada. The remaining three cases have all been transferred to the MDL proceeding. 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. If the court adopts these recommendations, it will result in the dismissal 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 we believe 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 were a named defendant, along with Burlington Resources, Inc. (Burlington), in two class action lawsuits styled 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, Oklahoma and subsequently consolidated by the court. The consolidated class action has been settled pursuant to a settlement agreement executed in January 2006 and approved by the court after a fairness hearing held in May 2006. Our settlement contribution was approximately $30 million plus interest, which had been fully accrued and was paid on August 1, 2006. A third action, styled Bank of America, et al. v. El Paso Natural Gas and Burlington Resources Oil and Gas Company, L.P., 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 these claims is subject to court approval, after a fairness hearing scheduled for October 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 all the underlying class settlements being finalized and approved by the court.

      MTBE. In compliance with the 1990 amendments to the Clean Air Act, certain of our subsidiaries used the gasoline additive, methyl tertiary-butyl ether (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 70 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, 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. Our costs and legal exposure related to these lawsuits.

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.

      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

      EPNG Rate Case. In June 2005, EPNG filed a rate case with the FERC proposing an increase in revenues of 10.6 percent or $56 million annually over current tariff rates, new services and revisions to certain terms and conditions of existing services. On January 1, 2006, the rates became effective and are subject to refund. In March 2006, the FERC issued an order that generally approved our proposed new services, which were implemented on June 1, 2006. In April 2006, we solicited and received bids for certain new services and have entered into several contracts for new services. EPNG is continuing settlement discussions with its customers, and is evaluating the merits of filing an additional rate case later this year for rates to be effective next year. The outcome of this or any additional rate case cannot be predicted with certainty at this time.

      CIG Rate Case. In May 2006, CIG filed a request with the FERC to change the effective date of new rates from January 1, 2007 to February 1, 2007 to allow for continued settlement discussions with its customers. This request was granted by the FERC. In June 2006, CIG filed a petition with the FERC to amend its filing requirement and to approve a settlement reached with its customers to be effective October 1, 2006. CIG’s petition to amend the filing requirement and to approve the settlement was unopposed by the parties and FERC staff. 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 our 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. Our rights-of-way on lands crossing the Navajo Nation expired in October 2005, and we entered into an interim agreement with the Navajo Nation to extend the use of our 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, is scheduled to 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 the ultimate cost will be of obtaining the rights-of-way or whether EPNG will be able to recover these costs in its rates.

      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 June 30, 2006, we had approximately $570 million accrued, net of related insurance receivables and restricted cash, 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 June 30, 2006, we have accrued approximately $381 million, which has not been reduced by $31 million for amounts to be paid directly under government sponsored programs. Our accrual includes approximately $370 million for expected remediation costs and associated onsite, offsite and groundwater technical studies and approximately $11 million for related environmental legal costs. Of the $381 million accrual, $76 million was reserved for facilities we currently operate and $305 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 $381 million to approximately $592 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 ($70 million). Second, where the most likely outcome

cannot be estimated, a range of costs is established ($311 million to $522 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 June 30, 2006 (in millions):

      For the remainder of 2006, we estimate that our total remediation expenditures will be approximately $58 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 $93 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 with the United States EPA in May 1994, 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 surcharge collection period is currently set to expire in June 2008, with further extensions subject to a filing with the FERC. As of June 30, 2006, TGP had pre-collected PCB costs of approximately $136 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. TGP’s regulatory liability for estimated future refund obligations to its customers increased from approximately $110 million at December 31, 2005 to approximately $123 million as of June 30, 2006.

      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 53 active sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or state equivalents. We have sought to resolve our liability as a PRP at these sites through indemnification by third-parties and settlements, which provide for payment of our allocable share of remediation costs. As of June 30, 2006, we have estimated our share of the remediation costs at these sites to be between $36 million and $58 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. For a description of these commitments, see our Current Report on Form 8-K dated May 12, 2006. As of June 30, 2006, we had a liability of $69 million related to our guarantees and indemnification arrangements. These arrangements had a total stated value of $324 million, for which we are indemnified by third parties for $24 million. These amounts exclude guarantees for which we have issued related letters of credit discussed in Note 8. Included in the above stated value of $324 million is approximately $120 million associated with tax matters, related interest and other indemnifications arising out of the sale of our Macae power facility.

      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 June 30, 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 periods ended June 30 are as follows:

     We made $28 million and $36 million of cash contributions to our Supplemental Executive Retirement Plan (SERP) and other postretirement plans during the six months ended June 30, 2006 and 2005. We expect to contribute an additional $2 million to the SERP and $19 million to our other postretirement plans for the remainder of 2006. Contributions to our other retirement benefit plans will be approximately $8 million for the remainder of 2006.

11. Capital Stock

      In May 2006, we issued 35.7 million shares of common stock for net proceeds of approximately $500 million. The table below shows the amount of dividends paid and declared (in millions, except per share amounts) on our common and preferred stock:

      Dividends on our common and preferred 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 Current Report on Form 8-K dated May 12, 2006.

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 June 30, 2006, approximately 36 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 June 30, 2006, and approximately $0.01 per basic and diluted share for the six months ended June 30, 2006. During the quarter and six months ended June 30, 2006, we recognized $3 million and $6 million of additional pre-tax compensation expense, capitalized less than $1 million of this expense as part of fixed assets and recorded $1 million and $2 million of income tax benefits as our option awards vested. We expect to record incremental compensation expense of approximately $6 million for the remainder of the year.

      The following table shows the impact on the net loss available to common stockholders and loss per share had we applied the provisions of SFAS No. 123 in historical periods (in millions, except for per share amounts):