**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended March 31, 2007**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from           to          .**

**CommissionFile Number 333-106586**

**El Paso Exploration & Production Company**

(Exact name of registrantas specified in its charter)

| **Delaware**                     |   | **76-0659544**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

| **El Paso Building**                      |   | **77002**  |
|-------------------------------------------|--------|------------|
| **1001  Louisiana Street**                |   | (Zip Code) |
| **Houston,  Texas**                       |   | ** ** |
| (Address of  principal executive offices) |   |       |

 

**Telephone Number: (713)420-2600**

**InternetWebsite:  www.elpaso.com**

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes  x   No  o.

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

| Large accelerated filer  o |   | Accelerated  filer  o |   | Non-accelerated filer  x |
|--------------------------------------|--------|---------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (As defined in Rule 12b-2 of the Exchange Act).   Yes  o   No  x.

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $1 per share. Sharesoutstanding on May 7, 2007: 1,000

**EL PASO EXPLORATION &PRODUCTION COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION H(1)(a) AND (b)TO FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED DISCLOSUREFORMAT AS PERMITTED BY SUCH INSTRUCTION.**

 

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**EL PASOEXPLORATION & PRODUCTION COMPANYTABLE OF CONTENTS**
| Caption   | ** ** | ** **                                                                                                                           | ** ** | **Page** |
|-----------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|      |       | PART  I — Financial Information                                                                                                 |       |     |
| Item 1.   |       | Financial Statements                                                                                                                 |       | 1        |
| Item 2.   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                          |       | 16       |
| Item 3.   |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                          |       | *        |
| Item 4T.  |       | Controls and  Procedures                                                                                                             |       | 22       |
|      |       |                                                                                                                                 |       |     |
|      |       | PART  II — Other Information                                                                                                    |       |     |
| Item 1.   |       | Legal Proceedings                                                                                                                    |       | 23       |
| Item  1A. |       | Risk  Factors                                                                                                                        |       | 23       |
|      |       | Cautionary Statements for Purposes of the “Safe  Harbor” Provisions of the Private SecuritiesLitigation Reform Act of 1995 |       | 23       |
| Item 2.   |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                         |       | *        |
| Item 3.   |       | Defaults Upon  Senior Securities                                                                                                     |       | *        |
| Item 4T.  |       | Submission of  Matters to a Vote of Security Holders                                                                                 |       | *        |
| Item 5.   |       | Other Information                                                                                                                    |       | 23       |
| Item  6.  |       | Exhibits                                                                                                                             |       | 23       |
|      |       | Signatures                                                                                                                           |       | 24       |

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*                    We have not included a response to this item in thisdocument since no response is required pursuant to the reduced disclosureformat permitted by General Instruction H to Form 10-Q.

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

| /d    |   | = |   | per day                                        |   | MMBtu |   | = |   | million British thermal units                 |
|-------|--------|---|--------|------------------------------------------------|--------|-------|--------|---|--------|-----------------------------------------------|
| Bbl   |   | = |   | Barrels                                        |   | MMcf  |   | = |   | million cubic feet                            |
| MBbls |   | = |   | thousand barrels                               |   | MMcfe |   | = |   | million cubic feet of natural gas equivalents |
| Mcf   |   | = |   | thousand cubic feet                            |   | NGL   |   | = |   | natural gas liquids                           |
| Mcfe  |   | = |   | thousand cubic feet of natural gas equivalents |   | TBtu  |   | = |   | trillion British thermal units                |

 

When we refer to natural gas and oil in “equivalents,”we are doing so to compare quantities of oil with quantities of natural gas orto express these different commodities in a common unit. In calculatingequivalents, we use a generally recognized standard in which one Bbl of oil isequal to six Mcf of natural gas. Also, when we refer to cubic feetmeasurements, all measurements are at a pressure of 14.73 pounds per squareinch.

When we refer to “us”, “we”, “our”, “ours” or “theCompany”, we are describing El Paso Exploration & Production Company and/orour subsidiaries.

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**PART I — FINANCIALINFORMATION**

**Item 1. FinancialStatements**

**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATED STATEMENTS OF INCOME(In millions)(Unaudited)**
| ** **                                        | ** ** | **Quarters Ended March 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Operating revenues                                |       | $                                           | 505        |   | $ | 385 |   |
| Operating expenses                                |       |                                        |       |   |   |
| Operation and  maintenance                        |       | 110                                         |       | 88 |   |
| Depreciation,  depletion and amortization         |       | 176                                         |       | 152 |   |
| Cost of sales                                     |       | 24                                          |       | 22 |   |
| Taxes, other  than income                         |       | 24                                          |       | 19 |   |
|                                              |       | 334                                         |       | 281 |   |
| Operating income                                  |       | 171                                         |       | 104 |   |
| Earnings (losses) from  unconsolidated affiliates |       | (1                                          | )          | 7 |   |
| Other income                                      |       | 3                                           |       | 1 |   |
| Interest expense                                  |       |                                        |       |   |   |
| Third party, net  of capitalized interest         |       | (23                                         | )          | (26 | ) |
| Affiliated                                        |       | —                                      |       | (1 | ) |
| Income before income  taxes                       |       | 150                                         |       | 85 |   |
| Income taxes                                      |       | (51                                         | )          | (28 | ) |
| Net income                                        |       | $                                           | 99         |   | $ | 57 |   |

 

See accompanying notes.

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**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS(In millions, except share amounts)(Unaudited)**
| ** **                                                                     | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ASSETS                                                                         |       |                     |       |                        |       |
| Current assets                                                                 |       |                     |       |                        |       |
| Cash and cash  equivalents                                                     |       | $                        | 20         |                        | $          | 132 |   |
| Accounts and notes  receivable                                                 |       |                     |       |                        |       |
| Customer, net                                                                  |       | 57                       |       | 54                          |       |
| Affiliates                                                                     |       | 254                      |       | 350                         |       |
| Other                                                                          |       | 98                       |       | 122                         |       |
| Assets held for  price risk management activities                              |       | 4                        |       | 144                         |       |
| Deferred income  taxes                                                         |       | 33                       |       | 73                          |       |
| Other                                                                          |       | 53                       |       | 48                          |       |
| Total current  assets                                                          |       | 519                      |       | 923                         |       |
| Property, plant and  equipment, at cost                                        |       |                     |       |                        |       |
| Natural gas and  oil properties                                                |       |                     |       |                        |       |
| Proved  properties - full cost method                                          |       | 16,440                   |       | 16,042                      |       |
| Unevaluated  costs excluded from amortization                                  |       | 533                      |       | 410                         |       |
| Other                                                                          |       | 125                      |       | 119                         |       |
|                                                                           |       | 17,098                   |       | 16,571                      |       |
| Less accumulated  depreciation, depletion and amortization                     |       | (11,476                  | )          | (11,383                     | )          |
| Total property,  plant and equipment                                           |       | 5,622                    |       | 5,188                       |       |
| Other assets                                                                   |       |                     |       |                        |       |
| Investments in  unconsolidated affiliates                                      |       | 709                      |       | 729                         |       |
| Other                                                                          |       | 104                      |       | 85                          |       |
|                                                                           |       | 813                      |       | 814                         |       |
| Total assets                                                                   |       | $                        | 6,954      |                        | $          | 6,925 |   |
|                                                                           |       |                     |       |                        |       |
| LIABILITIES AND  STOCKHOLDER’S EQUITY                                     |       |                     |       |                        |       |
| Current liabilities                                                            |       |                     |       |                        |       |
| Accounts and  notes payable                                                    |       |                     |       |                        |       |
| Trade                                                                          |       | $                        | 84         |                        | $          | 82 |   |
| Affiliates                                                                     |       | 113                      |       | 19                          |       |
| Other                                                                          |       | 260                      |       | 267                         |       |
| Income tax  payable                                                            |       | 44                       |       | 106                         |       |
| Other                                                                          |       | 160                      |       | 139                         |       |
| Total current  liabilities                                                     |       | 661                      |       | 613                         |       |
| Long-term debt                                                                 |       | 1,400                    |       | 1,345                       |       |
| Other                                                                          |       |                     |       |                        |       |
| Deferred income  taxes                                                         |       | 338                      |       | 408                         |       |
| Other                                                                          |       | 259                      |       | 247                         |       |
|                                                                           |       | 597                      |       | 655                         |       |
| Commitments and  contingencies                                                 |       |                     |       |                        |       |
|                                                                           |       |                     |       |                        |       |
| Stockholder’s equity                                                      |       |                     |       |                        |       |
| Common stock,  par value $1 per share; 1,000 shares authorized and outstanding |       | —                   |       | —                      |       |
| Additional  paid-in capital                                                    |       | 4,310                    |       | 4,310                       |       |
| Retained  earnings (accumulated deficit)                                       |       | 9                        |       | (82                         | )          |
| Accumulated  other comprehensive income (loss)                                 |       | (23                      | )          | 84                          |       |
| Total  stockholder’s equity                                               |       | 4,296                    |       | 4,312                       |       |
| Total liabilities and  stockholder’s equity                               |       | $                        | 6,954      |                        | $          | 6,925 |   |

 

See accompanying notes.

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**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions)(Unaudited)**
| ** **                                                                 | ** ** | **Quarters Ended** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                 | ** ** | **March 31,**      | ** ** |
| ** **                                                                 | ** ** | **2007**                | ** ** | **2006** | ** ** |
| Cash flows from  operating activities                                      |       |                    |       |   |   |
| Net income                                                                 |       | $                       | 99         |   | $ | 57 |   |
| Adjustments to  reconcile net income to net cash from operating activities |       |                    |       |   |   |
| Depreciation,  depletion and amortization                                  |       | 176                     |       | 152 |   |
| Deferred income  tax expense                                               |       | 109                     |       | 7 |   |
| Earnings from  unconsolidated affiliates, adjusted for cash distributions  |       | 20                      |       | 3 |   |
| Other non-cash  items                                                      |       | 1                       |       | 1 |   |
| Asset and  liability changes                                               |       | (56                     | )          | 89 |   |
| Net cash  provided by operating activities                                 |       | 349                     |       | 309 |   |
|                                                                       |       |                    |       |   |   |
| Cash flows from  investing activities                                      |       |                    |       |   |   |
| Capital  expenditures                                                      |       | (585                    | )          | (175 | ) |
| Net proceeds  from the sale of assets                                      |       | 2                       |       | 2 |   |
| Change in note  receivable from affiliate                                  |       | 59                      |       | (4 | ) |
| Net cash used in  investing activities                                     |       | (524                    | )          | (177 | ) |
|                                                                       |       |                    |       |   |   |
| Cash flows from  financing activities                                      |       |                    |       |   |   |
| Repayment of  amounts borrowed under revolving credit facility             |       | (200                    | )          | — |   |
| Proceeds from  borrowings under revolving credit facility                  |       | 255                     |       | — |   |
| Change in note  payable with affiliate                                     |       | 8                       |       | (66 | ) |
| Net cash  provided by (used in) financing activities                       |       | 63                      |       | (66 | ) |
|                                                                       |       |                    |       |   |   |
| Change in cash and cash  equivalents                                       |       | (112                    | )          | 66 |   |
|                                                                       |       |                    |       |   |   |
| Cash and cash  equivalents                                                 |       |                    |       |   |   |
| Beginning of  period                                                       |       | 132                     |       | 60 |   |
| End of period                                                              |       | $                       | 20         |   | $ | 126 |   |

 

See accompanying notes.

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**EL PASOEXPLORATION & PRODUCTION COMPANYCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In millions)(Unaudited)**
| ** **                                                                                                                           | ** ** | **Quarters Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                           | ** ** | **March 31,**      | ** ** |
| ** **                                                                                                                           | ** ** | **2007**                | ** ** | **2006** | ** ** |
|                                                                                                                                 |       |                    |       |   |   |
| Net income                                                                                                                           |       | $                       | 99         |   | $ | 57 |   |
| Net gains (losses) from  cash flow hedging activities:                                                                               |       |                    |       |   |   |
| Unrealized  mark-to-market gains (losses) arising during period (net of income taxes of  $46 and $79 in 2007 and 2006)               |       | (82                     | )          | 136 |   |
| Reclassification  adjustments for changes in initial value to settlement date (net of income  taxes of $15 and $41 in 2007 and 2006) |       | (25                     | )          | 72 |   |
| Other  comprehensive income (loss)                                                                                                   |       | (107                    | )          | 208 |   |
| Comprehensive income (loss)                                                                                                          |       | $                       | (8         | ) | $ | 265 |   |

 

See accompanying notes.

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**EL PASOEXPLORATION & PRODUCTION COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1. Basis ofPresentation and Significant Accounting Policies**

*Basis of Presentation*

We are a Delaware corporation formed in 1999 as awholly-owned direct subsidiary of El Paso Corporation (El Paso). We preparedthis Quarterly Report on Form 10-Q under the rules and regulations of theUnited States Securities and Exchange Commission (SEC). Because this is aninterim period filing presented using a condensed format, it does not includeall of the disclosures required by United States generally accepted accountingprinciples. You should read this Quarterly Report on Form 10-Q along withour 2006 Annual Report on Form 10-K, which contains a summary of our significantaccounting policies and other disclosures. The financial statements as ofMarch 31, 2007, and for the quarters ended March 31, 2007 and 2006,are unaudited. We derived the consolidated balance sheet as ofDecember 31, 2006, from the audited balance sheet filed in our 2006 AnnualReport on Form 10-K. In our opinion, we have made all adjustments whichare of a normal, recurring nature to fairly present our interim period results.Due to the seasonal nature of our businesses, information for interim periodsmay not be indicative of our results of operations for the entire year.

*Significant Accounting Policies*

Our significant accounting policies and accountingpronouncements issued but not yet adopted are discussed in our 2006 AnnualReport on Form 10-K.  The informationbelow provides updating information, disclosures where these policies havechanged and required interim disclosures with respect to those policies.

*Accounting for Uncertainty in IncomeTaxes.*  On January 1, 2007, we adopted theFinancial Accounting Standard Board (FASB) Interpretation (FIN) No. 48, *Accounting for Uncertainty in Income Taxes* and its related interpretation*.*FIN No. 48 clarifiesStatement of Financial Accounting Standards (SFAS) No. 109, *Accounting for Income Taxes,*and requiresus to evaluate our tax positions for all jurisdictions and for all years wherethe statute of limitations has not expired. FIN No. 48 requirescompanies to meet a “more-likely-than-not” threshold (i.e. greater than a50 percent likelihood of a tax position being sustained under examination)prior to recording a benefit for their tax positions. Additionally, for taxpositions meeting this “more-likely-than-not” threshold, the amount of benefitis limited to the largest benefit that has a greater than 50 percentprobability of being realized upon ultimate settlement. For further informationon the impact on our financial statements of the adoption of thisinterpretation, see Note 4.

**2. Acquisitions**

*Zapata County.*InJanuary 2007, we acquired operated producing properties and undeveloped acreagein Zapata County, Texas for $254 million. These properties complement ourexisting South Texas Wilcox operations and provide a re-entry into the Loboarea. The net acreage acquired in this transaction provide a multi-yeardrilling inventory with significant additional exploration and developmentdrilling opportunities. We borrowed amounts under our $500 million revolvingcredit facility to fund this acquisition.

**3. Debt andAvailable Credit Facilities**
| ** **                                                                | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                | ** ** | **(In millions)**   | ** ** |
| $1.2 billion  senior notes, due June 1, 2013, 7.75%(1)                    |       | $                        | 1,200      |                        | $          | 1,200 |   |
| $500 million  revolving credit facility, due August 30, 2010, variable(2) |       | 200                      |       | 145                         |       |
| Total                                                                     |       | $                        | 1,400      |                        | $          | 1,345 |   |

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(1)                   We have the ability to prepay our $1.2 billion seniornotes after June 1, 2008.

(2)                   We have the ability to prepay amountsoutstanding under this facility at anytime.

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Our $500 million revolving credit facility can beutilized for new revolving loans or letters of credit through its maturity dateof August 30, 2010 and is collateralized by certain of our domestic natural gasand oil properties.  Borrowing costsunder this facility can range from LIBOR plus 1.25% to LIBOR plus 1.875%depending on usage.

**4. Income Taxes**

El Paso files consolidated U.S. federal and  various state and foreign tax returns, whichinclude our taxable income.  In certainstate and foreign taxing jurisdictions, we file and pay taxes directly to thestate and foreign taxing authorities. With few exceptions, we and El Paso are no longer subject to U.S.federal, state and local, or non-U.S. income tax examinations by taxauthorities for years before 1999.  Certain issues raised on examination by taxing authorities on El Paso’s2003 and 2004 federal tax years are currently being appealed. For our openyears, we have unrecognized tax benefits (liabilities for uncertain taxmatters), which could increase or decrease our income tax expense and effectivetax rate as these matters are finalized.

Upon the adoption of FIN No. 48 and a relatedamendment to our tax sharing agreement with El Paso, we recorded an increase toour accumulated deficit as of January 1, 2007 of $8 million. As of January 1,2007 and at March 31, 2007, we had unrecognized tax benefits of approximately$10 million, including interest and penalty. These unrecognized tax benefits,net of federal tax benefits, would favorably affect our income tax expense andeffective income tax rate if recognized in future periods.  While the amount of our unrecognized taxbenefits could change in the next twelve months, we do not expect this changeto have a significant impact on our results of operations or financialposition.

We recognize accrued interest and penalties related tounrecognized tax benefits in income tax expense on our income statement.  Total interest and penalties recognized inour income statement was not material for the quarters ended March 31, 2007 and2006.  As of January 1, 2007 and March31, 2007, we had accrued approximately $6 million of liabilities for interestand penalties related to our unrecognized tax benefits.

**5. Commitments and Contingencies**

*LegalProceedings and Other Contingencies*

*Gas Measurement Cases.*Anumber of El Paso entities, including us, were named defendants in actions thatgenerally allege mismeasurement of natural gas volumes and/or heating contentresulting in the underpayment of royalties. The first set of cases was filed in1997 by an individual under the False Claims Act, which has been consolidatedfor pretrial purposes (*In re: Natural Gas**Royalties Qui Tam Litigation*,U.S. District Court for the District of Wyoming.) These complaints allege anindustry-wide conspiracy to underreport the heating value as well as thevolumes of the natural gas produced from federal and Native American lands. InMay 2005, a representative appointed by the court issued a recommendation todismiss most of the actions. In October 2006, the U.S. District Judge issued anorder dismissing all mismeasurement claims against all defendants. An appealhas been filed.

Similar allegations were filed in a second set ofactions initiated in 1999 in *Will Price, etal. v. Gas Pipelines and Their Predecessors, et al.*, in the DistrictCourt of Stevens County, Kansas. The plaintiffs currently seek certification ofa class of royalty owners in wells on non-federal and non-Native American landsin Kansas, Wyoming and Colorado. Motions for class certification have beenbriefed and argued in the proceedings and the parties are awaiting the court’sruling. The plaintiff seeks an unspecified amount of monetary damages in theform of additional royalty payments (along with interest, expenses and punitivedamages) and injunctive relief with regard to future gas measurement practices.Our costs and legal exposure related to these lawsuits and claims are notcurrently determinable.

*Reserve Revisions.*InMarch 2004, El Paso received a subpoena from the SEC requesting documentsrelating to its December 31, 2003 natural gas and oil reserve revisions. Wecontinue to assist El Paso and its Audit Committee in their efforts tocooperate with the SEC in its investigation related to such reserve revisions.

In addition to the above matters, we and oursubsidiaries and affiliates are named defendants in numerous lawsuits andgovernmental proceedings that arise in the ordinary course of our business. Foreach of our outstanding legal and other contingent matters, we evaluate themerits of the case, our exposure to the matter, possible legal or settlementstrategies and the likelihood of an unfavorable outcome. If we determine thatan unfavorable outcome is probable and can be estimated, we establish thenecessary accruals. While the outcome of these matters, discussed

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above, cannot be predicted with certainty and thereare still uncertainties related to the costs we may incur, based upon ourevaluation and experience to date, we believe we have established appropriatereserves. However, it is possible that new information or future developmentscould require us to reassess our potential exposure related to these mattersand adjust our accruals accordingly and these adjustments could be material. Asof March 31, 2007, we had approximately $23 million accrued for all outstandinglegal and other contingent matters.

*EnvironmentalMatters*

We are subject to federal, state and local laws andregulations governing environmental quality and pollution control. These lawsand regulations require us to remove or remedy the effect on the environment ofthe disposal or release of specified substances at current and former operatingsites. As of March 31, 2007, we had accrued approximately $6 million forrelated environmental remediation costs associated onsite, offsite andgroundwater technical studies and for related environmental legal costs. Ouraccrual represents a combination of two estimation methodologies. First, wherethe most likely outcome can be reasonably estimated, that cost has beenaccrued. Second, where the most likely outcome cannot be estimated, a range ofcosts is established and if no one amount in that range is more likely than anyother, the lower end of the expected range has been accrued. Our exposure couldbe as high as $12 million. Our environmental remediation projects are invarious stages of completion. The liabilities we have recorded reflect ourcurrent estimates of amounts we will expend to remediate these sites. However,depending on the stage of completion or assessment, the ultimate extent ofcontamination or remediation required may not be known. As additionalassessments occur or remediation efforts continue, we may incur additionalliabilities.

Below is a reconciliationof our accrued liability from January 1, 2007 to March 31, 2007 (in millions):
| Balance at  January 1, 2007          |   | $  | 7 |   |
|--------------------------------------|--------|----|---|--------|
| Payments for  remediation activities |   | (1 | ) |
| Balance at March 31,  2007           |   | $  | 6 |   |

 

For the remainder of 2007, we estimate that our totalremediation expenditures will be approximately $1 million, which will beexpended under government directed clean-up plans.

*CERCLA Matters.*Wehave received notice that we could be designated, or have been asked forinformation to determine whether we could be designated as a PotentiallyResponsible Party (PRP) with respect to one active site under the ComprehensiveEnvironmental Response, Compensation and Liability Act (CERCLA) or stateequivalents. We have sought to resolve our liability as a PRP at this sitethrough indemnification by third parties and settlements which provide forpayment of our allocable share of remediation costs. As of March 31, 2007, wehave estimated our share of the remediation costs at this site to beapproximately $1 million. Because the clean-up costs are estimates and aresubject to revision as more information becomes available about the extent ofremediation required, and in some cases we have asserted a defense to anyliability, our estimates could change. Moreover, liability under the federalCERCLA statute is joint and several, meaning that we could be required to payin excess of our pro rata share of remediation costs. Our understanding of thefinancial strength of other PRPs has been considered, where appropriate, in estimatingour liabilities. Accruals for these matters are included in the environmentalreserve discussed above.

It is possible that new information or futuredevelopments could require us to reassess our potential exposure related toenvironmental matters. We may incur significant costs and liabilities in orderto comply with existing environmental laws and regulations. It is also possiblethat other developments, such as increasingly strict environmental laws,regulations, and orders of regulatory agencies, as well as claims for damagesto property and the environment or injuries to employees and other personsresulting from our current or past operations, could result in substantialcosts and liabilities in the future. As this information becomes available, orother relevant developments occur, we will adjust our accrual amountsaccordingly. While there are still uncertainties related to the ultimate costswe may incur, based upon our evaluation and experience to date, we believe ourreserves are adequate.

*Guarantees and Indemnifications*

We periodically provide indemnification arrangementsrelated to assets or businesses we have sold. These indemnifications arrangements include, but are not limited to,indemnification for income taxes, the resolution of

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existing disputes, environmental matters, andnecessary expenditures to ensure the safety and integrity of assets sold.  Our potential exposure under these guaranteeand indemnification agreements can range from a specified amount to anunlimited dollar amount, depending on the nature of the claim and theparticular transaction.  For thosearrangements with a specified dollar amount, we have a maximum stated value ofapproximately $64 million.  As of March31, 2007, we have not recognized any liabilities related to our guarantees andindemnification arrangements.  We areunable to estimate a maximum exposure for our guarantee and indemnificationagreements that do not provide for limits on the amount of future paymentsunder the agreement due to the uncertainty of these exposures.

**6. Investments in and Earnings from Unconsolidated Affiliates and RelatedParty****Transactions**

**Investments in UnconsolidatedAffiliates**

We hold investments in unconsolidated affiliates whichare accounted for using the equity method of accounting. Our income statementtypically reflects (i) our share of net earnings directly attributable tothese unconsolidated affiliates, and (ii) other adjustments, such as theamortization of the excess purchase price. During the quarters ended March 31, 2007 and 2006, we received dividendsof $19 million and $10 million.  The information below related to ourunconsolidated affiliates includes (i) our net investment and earnings (losses)we recorded from these investments, and (ii) summarized financial informationof our proportionate share of these investments.
| ** **                                                 | ** ** | ** **             | ** ** | ** **                         | ** ** | **Earnings (Losses) from**       | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|------------------------------------|------------|--------------------------------------------|------------|
| *** ***                                               | ** ** | **Investment**         | ** ** | **Unconsolidated Affiliates** | ** ** |
| ** **                                                 | ** ** | **March 31,**     | ** ** | **December 31,**              | ** ** | **Quarter ended March 31,** | ** ** |
| ** **                                                 | ** ** | **2007**               | ** ** | **2006**                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(In millions)** | ** ** | **(In millions)**             | ** ** |
| *Net investment and earnings (losses)* |       |                   |       |                               |       |                                       |       |   |   |
| Four Star Oil & Gas  Company (Four Star)(1)            |       | $                      | 703        |                               | $          | 723                                        |       | $ | (1 | ) | $ | 7 |   |
| Black Warrior  Transmission Corp.                          |       | 6                      |       | 6                                  |       | _                                          |       | _ |   |
|  Total                                                |       | $                      | 709        |                               | $          | 729                                        |       | $ | (1 | ) | $ | 7 |   |

----

(1)                   Amortization of our purchase cost in excess of theunderlying net assets of Four Star was $14 million during each of thequarters ended March 31, 2007 and 2006.

*Summarized financial information*
| *** ***                                      | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| *** ***                                      | ** ** | **March 31,**     | ** ** |
| ** **                                        | ** ** | **2007**               | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **(In millions)** | ** ** |
| Operating  results data:                          |       |                   |       |   |   |
| Operating revenues                                |       | $                      | 41         |   | $ | 47 |   |
| Operating expenses                                |       | 19                     |       | 17 |   |
| Income from  continuing operations and net income |       | 13                     |       | 21 |   |
|                                                   |            |                        |            |  |  |  |  |

 

**Related Party Transactions**

*Cash Management Program.*Subjectto limitations in our indenture and our credit facility, we participate in ElPaso’s cash management program which matches short-term cash surpluses andneeds of its participating affiliates, thus minimizing total borrowings fromoutside sources by El Paso. At March 31, 2007, we had a note payable to El Pasoof $8 million and at December 31, 2006, we had a note receivable from El Pasoof $59 million, which are classified on our balance sheet as current, primarilybased on the anticipated activity under the cash management program. Theinterest rate under the cash management program was 5.8% at March 31, 2007 and5.3% at December 31, 2006.

*Taxes.*  El Pasofiles consolidated income tax returns in the U.S. federal jurisdiction andvarious state and foreign jurisdictions. In certain state and foreign jurisdictions, we file and pay taxesdirectly to the state and foreign taxing authorities. At March 31, 2007 andDecember 31, 2006, we had federal income taxes payable of $39 million and$98 million and state income taxes payable of $5 million and $8 million.  These liabilities are recorded as currentliabilities on our balance sheet.  Themajority of these balances, as well as our deferred income taxes, will becomepayable to or due from El Paso.

During the quarter ended March 31, 2007, we amended our tax sharingagreement and intercompany tax billing policy with El Paso to clarify thebilling of taxes and tax related items to El Paso’s subsidiaries. Also, duringthe first quarter of 2007, El Paso billed us $88 million for certain taxattributes previously reflected as deferred income taxes in our financialstatements through intercompany accounts.

During the quarter ended March 31, 2007, El Paso utilizedapproximately $89 million of our tax assets on net operating loss carryovers tooffset taxes due on the gain on sale of ANR Pipeline Company, anotherwholly-owned subsidiary of El Paso.

*OtherAffiliated Transactions.*During the ordinary course ofconducting our business, we enter into transactions with affiliates primarilyrelated to the sale, transport and hedging our natural gas, oil and NGLproduction. The following table shows revenues and charges to/from ouraffiliates for the quarters ended March 31:
| ** **                                                  | ** ** | **2007**               | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                  | ** ** | **(In millions)** | ** ** |
| Operating  revenues                                         |       | $                      | 279        |     | $          | 263 |   |
| Operating  expenses from affiliates                         |       | 26                     |       | 26       |       |
| Reimbursements of  operating expenses charged to affiliates |       | 4                      |       | 7        |       |
|                                                             |            |                        |            |          |            |  |  |

 

8

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·             *El Paso.*El Paso bills us directly forcertain general and administrative costs and allocates a portion of its generaland administrative costs to us. This allocation is based on the estimated levelof resources devoted to our operations and the relative size of our EBIT, grossproperty and payroll. These expenses are primarily related to management,legal, financial, tax, consultative, administrative and other services,including employee benefits, annual incentive bonuses, rent, insurance, andinformation technology. El Paso currently bills us directly for compensationexpense related to certain stock-based compensation awards granted directly toour employees as well as allocates to us our proportionate share of El Paso’scorporate compensation expense.

AtMarch 31, 2007 and December 31, 2006, we had accounts payable to our affiliatesof approximately $105 million and $19 million. We also had a service agreementwith El Paso that provided for a reimbursement of 2.5 cents per MMBtu in 2006for our expected administrative costs associated with hedging transactions weentered into in December 2004.  Thisservice agreement expired December 31, 2006.

·             *El Paso Marketing.*We sell our natural gasprimarily to El Paso Marketing at spot market prices. Substantially all of ouraffiliated accounts and notes receivable of $254 million at March 31, 2007 and$291 million at December 31, 2006 related to sales of natural gas to El PasoMarketing. We are also a party to a master hedging contract with El PasoMarketing whereby we hedge a portion of our natural gas production with El PasoMarketing. Realized gains and losses on these hedges are included in ouraffiliated operating revenues.

·             *El Paso Pipelines.*We also contract forservices with El Paso’s regulated interstate pipelines that providetransportation and related services for our natural gas production. At March31, 2007 and December 31, 2006, we had contractual deposits of $6 million withEl Paso’s regulated interstate pipelines.

9

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**7.  Consolidating Financial Statements**

Our $1.2 billion seniornotes are fully and unconditionally guaranteed by certain of our direct andindirect, wholly-owned domestic subsidiaries (the “Guarantor Subsidiaries”) ona joint and several basis. Our foreign subsidiaries and certain of ourremaining domestic subsidiaries (the “Non-Guarantor Subsidiaries”) do notprovide such guarantees. Based on this distinction, the following presentscondensed consolidating balance sheets as of March 31, 2007 and December 31,2006 and condensed consolidating statements of income and cash flows for thequarters ended March 31, 2007 and 2006 on an issuer, guarantor subsidiaries,non-guarantor subsidiaries, eliminating entries and consolidated basis.Elimination entries presented are necessary to combine the entities.

**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATING STATEMENT OF INCOMEFOR THE QUARTER ENDED MARCH 31, 2007(In millions)(Unaudited)**
| ** **                                                                     | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                     | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                     | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                                                            |       | $          | —     |             | $          | 501              |       | $                | 4          |             | $          | — |   | $ | 505 |   |
| Operating  expenses                                                            |       |       |       |             |       |             |       |             |       |             |       |
| Operation and maintenance                                                      |       | —     |       | 106              |       | 4                |       | —           |       | 110              |       |
| Depreciation, depletion and amortization                                       |       | —     |       | 171              |       | 5                |       | —           |       | 176              |       |
| Cost of sales                                                                  |       | —     |       | 24               |       | —           |       | —           |       | 24               |       |
| Taxes, other than income                                                       |       | —     |       | 24               |       | —           |       | —           |       | 24               |       |
|                                                                           |       | —     |       | 325              |       | 9                |       | —           |       | 334              |       |
| Operating income  (loss)                                                       |       | —     |       | 176              |       | (5               | )          | —           |       | 171              |       |
| Loss from  unconsolidated affiliates                                           |       | —     |       | (1               | )          | —           |       | —           |       | (1               | )          |
| Other income                                                                   |       | —     |       | 1                |       | 2                |       | —           |       | 3                |       |
| Interest  (expense) income                                                     |       |       |       |             |       |             |       |             |       |             |       |
| Third party, net of capitalized interest                                       |       | (30        | )          | 6                |       | 1                |       | —           |       | (23              | )          |
| Affiliated                                                                     |       | 9          |       | (7               | )          | (2               | )          | —           |       | —           |       |
| Income (loss)  before income taxes and earnings from consolidated subsidiaries |       | (21        | )          | 175              |       | (4               | )          | —           |       | 150              |       |
| Income taxes                                                                   |       | 7          |       | (59              | )          | 1                |       | —           |       | (51              | )          |
| Income (loss)  before earnings from consolidated subsidiaries                  |       | (14        | )          | 116              |       | (3               | )          | —           |       | 99               |       |
| Earnings from  consolidated subsidiaries                                       |       | 113        |       | (3               | )          | —           |       | (110             | )          | —           |       |
| Net income (loss)                                                              |       | $          | 99         |             | $          | 113              |       | $                | (3         | )                | $          | (110 | ) | $ | 99 |   |

 

10

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**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATING STATEMENT OF INCOMEFOR THE QUARTER ENDED MARCH 31, 2006(In millions)(Unaudited)**
| ** **                                                                     | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                     | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                     | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Operating  revenues                                                            |       | $          | —     |             | $          | 375              |       | $                | 10         |             | $          | — |   | $ | 385 |   |
| Operating  expenses                                                            |       |       |       |             |       |             |       |             |       |             |       |
| Operation and maintenance                                                      |       | —     |       | 87               |       | 1                |       | —           |       | 88               |       |
| Depreciation, depletion and amortization                                       |       | —     |       | 146              |       | 6                |       | —           |       | 152              |       |
| Cost of sales                                                                  |       | —     |       | 22               |       | —           |       | —           |       | 22               |       |
| Taxes, other than income                                                       |       | —     |       | 17               |       | 2                |       | —           |       | 19               |       |
|                                                                           |       | —     |       | 272              |       | 9                |       | —           |       | 281              |       |
| Operating income                                                               |       | —     |       | 103              |       | 1                |       | —           |       | 104              |       |
| Earnings from  unconsolidated affiliates                                       |       | —     |       | 7                |       | —           |       | —           |       | 7                |       |
| Other income                                                                   |       | —     |       | —           |       | 1                |       | —           |       | 1                |       |
| Interest  (expense) income                                                     |       |       |       |             |       |             |       |             |       |             |       |
| Third party, net of capitalized interest                                       |       | (32        | )          | 6                |       | —           |       | —           |       | (26              | )          |
| Affiliated                                                                     |       | 8          |       | (9               | )          | —           |       | —           |       | (1               | )          |
| Income (loss)  before income taxes and earnings from consolidated subsidiaries |       | (24        | )          | 107              |       | 2                |       | —           |       | 85               |       |
| Income taxes                                                                   |       | 8          |       | (36              | )          | —           |       | —           |       | (28              | )          |
| Income (loss)  before earnings from consolidated subsidiaries                  |       | (16        | )          | 71               |       | 2                |       | —           |       | 57               |       |
| Earnings from  consolidated subsidiaries                                       |       | 73         |       | 2                |       | —           |       | (75              | )          | —           |       |
| Net income                                                                     |       | $          | 57         |             | $          | 73               |       | $                | 2          |             | $          | (75 | ) | $ | 57 |   |

 

11

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**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATING BALANCE SHEETAS OF MARCH 31, 2007(In millions, except share amounts)(Unaudited)**
| ** **                                                                     | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                     | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                     | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ASSETS                                                                         |       |       |       |             |       |             |       |             |       |             |       |
| Current assets                                                                 |       |       |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents                                                     |       | $          | —     |             | $          | 7                |       | $                | 13         |             | $          | — |   | $ | 20 |   |
| Accounts and  notes receivable                                                 |       |       |       |             |       |             |       |             |       |             |       |
| Customer, net                                                                  |       | —     |       | 52               |       | 5                |       | —           |       | 57               |       |
| Affiliates                                                                     |       | 6          |       | 263              |       | —           |       | (15              | )          | 254              |       |
| Other                                                                          |       | 24         |       | 92               |       | 6                |       | (24              | )          | 98               |       |
| Assets from price risk management activities                                   |       | —     |       | 4                |       | —           |       | —           |       | 4                |       |
| Deferred income  taxes                                                         |       | 2          |       | 31               |       | —           |       | —           |       | 33               |       |
| Other                                                                          |       | —     |       | 43               |       | 10               |       | —           |       | 53               |       |
| Total current  assets                                                          |       | 32         |       | 492              |       | 34               |       | (39              | )          | 519              |       |
| Property, plant and  equipment, at cost                                        |       |       |       |             |       |             |       |             |       |             |       |
| Natural gas and  oil properties                                                |       |       |       |             |       |             |       |             |       |             |       |
| Proved  properties - full cost method                                          |       | —     |       | 15,979           |       | 461              |       | —           |       | 16,440           |       |
| Unevaluated  costs excluded from amortization                                  |       | —     |       | 411              |       | 122              |       | —           |       | 533              |       |
| Other                                                                          |       | —     |       | 124              |       | 1                |       | —           |       | 125              |       |
|                                                                           |       | —     |       | 16,514           |       | 584              |       | —           |       | 17,098           |       |
| Less accumulated  depreciation, depletion and amortization                     |       | —     |       | (11,269          | )          | (207             | )          | —           |       | (11,476          | )          |
| Total property,  plant and equipment                                           |       | —     |       | 5,245            |       | 377              |       | —           |       | 5,622            |       |
| Other assets                                                                   |       |       |       |             |       |             |       |             |       |             |       |
| Investments in  consolidated subsidiaries and unconsolidated affiliates        |       | 4,969      |       | 998              |       | 43               |       | (5,301           | )          | 709              |       |
| Notes receivable  from affiliates                                              |       | 673        |       | 153              |       | —           |       | (826             | )          | —           |       |
| Other                                                                          |       | 53         |       | 28               |       | 52               |       | (29              | )          | 104              |       |
|                                                                           |       | 5,695      |       | 1,179            |       | 95               |       | (6,156           | )          | 813              |       |
| Total assets                                                                   |       | $          | 5,727      |             | $          | 6,916            |       | $                | 506        |             | $          | (6,195 | ) | $ | 6,954 |   |
|                                                                           |       |       |       |             |       |             |       |             |       |             |       |
| LIABILITIES AND  STOCKHOLDER’S EQUITY                                     |       |       |       |             |       |             |       |             |       |             |       |
| Current liabilities                                                            |       |       |       |             |       |             |       |             |       |             |       |
| Accounts and  notes payable                                                    |       |       |       |             |       |             |       |             |       |             |       |
| Trade                                                                          |       | $          | —     |             | $          | 83               |       | $                | 1          |             | $          | — |   | $ | 84 |   |
| Affiliates                                                                     |       | —     |       | 113              |       | 15               |       | (15              | )          | 113              |       |
| Other                                                                          |       | —     |       | 222              |       | 38               |       | —           |       | 260              |       |
| Income taxes  payable                                                          |       | —     |       | 68               |       | —           |       | (24              | )          | 44               |       |
| Other                                                                          |       | 31         |       | 123              |       | 6                |       | —           |       | 160              |       |
| Total current  liabilities                                                     |       | 31         |       | 609              |       | 60               |       | (39              | )          | 661              |       |
| Long-term debt                                                                 |       | 1,400      |       | —           |       | —           |       | —           |       | 1,400            |       |
| Other                                                                          |       |       |       |             |       |             |       |             |       |             |       |
| Note payable to  affiliates                                                    |       | —     |       | 674              |       | 152              |       | (826             | )          | —           |       |
| Deferred income  taxes                                                         |       | —     |       | 367              |       | —           |       | (29              | )          | 338              |       |
| Other                                                                          |       | —     |       | 254              |       | 5                |       | —           |       | 259              |       |
|                                                                           |       | —     |       | 1,295            |       | 157              |       | (855             | )          | 597              |       |
| Commitments and  contingencies                                                 |       |       |       |             |       |             |       |             |       |             |       |
|                                                                           |       |       |       |             |       |             |       |             |       |             |       |
| Stockholder’s equity                                                      |       |       |       |             |       |             |       |             |       |             |       |
| Common stock, par value  $1 per share; 1,000 shares authorized and outstanding |       | —     |       | —           |       | —           |       | —           |       | —           |       |
| Preferred stock                                                                |       | —     |       | —           |       | 12               |       | (12              | )          | —           |       |
| Additional  paid-in capital                                                    |       | 4,310      |       | 4,734            |       | 311              |       | (5,045           | )          | 4,310            |       |
| Retained  earnings (accumulated deficit)                                       |       | 9          |       | 301              |       | (30              | )          | (271             | )          | 9                |       |
| Accumulated  other comprehensive income (loss)                                 |       | (23        | )          | (23              | )          | (4               | )          | 27               |       | (23              | )          |
| Total  stockholder’s equity                                               |       | 4,296      |       | 5,012            |       | 289              |       | (5,301           | )          | 4,296            |       |
| Total liabilities and  stockholder’s equity                               |       | $          | 5,727      |             | $          | 6,916            |       | $                | 506        |             | $          | (6,195 | ) | $ | 6,954 |   |

 

12

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**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATING BALANCE SHEETAS OF DECEMBER 31, 2006(In millions, except share amounts)(Unaudited)**
| ** **                                                                     | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                     | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                     | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ASSETS                                                                         |       |       |       |             |       |             |       |             |       |             |       |
| Current assets                                                                 |       |       |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents                                                     |       | $          | —     |             | $          | 95               |       | $                | 37         |             | $          | — |   | $ | 132 |   |
| Accounts and  notes receivable                                                 |       |       |       |             |       |             |       |             |       |             |       |
| Customer, net                                                                  |       | —     |       | 49               |       | 5                |       | —           |       | 54               |       |
| Affiliates                                                                     |       | 56         |       | 305              |       | —           |       | (11              | )          | 350              |       |
| Other                                                                          |       | 29         |       | 117              |       | 6                |       | (30              | )          | 122              |       |
| Assets from  price risk management activities                                  |       | —     |       | 144              |       | —           |       | —           |       | 144              |       |
| Deferred income  taxes                                                         |       | —     |       | 73               |       | —           |       | —           |       | 73               |       |
| Other                                                                          |       | —     |       | 39               |       | 9                |       | —           |       | 48               |       |
| Total current  assets                                                          |       | 85         |       | 822              |       | 57               |       | (41              | )          | 923              |       |
| Property, plant and  equipment, at cost                                        |       |       |       |             |       |             |       |             |       |             |       |
| Natural gas and  oil properties                                                |       |       |       |             |       |             |       |             |       |             |       |
| Proved  properties - full cost method                                          |       | —     |       | 15,587           |       | 455              |       | —           |       | 16,042           |       |
| Unevaluated  costs excluded from amortization                                  |       | —     |       | 333              |       | 77               |       | —           |       | 410              |       |
| Other                                                                          |       | —     |       | 118              |       | 1                |       | —           |       | 119              |       |
|                                                                           |       | —     |       | 16,038           |       | 533              |       | —           |       | 16,571           |       |
| Less accumulated  depreciation, depletion and amortization                     |       | —     |       | (11,181          | )          | (202             | )          | —           |       | (11,383          | )          |
| Total property,  plant and equipment                                           |       | —     |       | 4,857            |       | 331              |       | —           |       | 5,188            |       |
| Other assets                                                                   |       |       |       |             |       |             |       |             |       |             |       |
| Investments in  consolidated subsidiaries and unconsolidated affiliates        |       | 4,972      |       | 1,021            |       | 42               |       | (5,306           | )          | 729              |       |
| Notes receivable  from affiliates                                              |       | 565        |       | 142              |       | —           |       | (707             | )          | —           |       |
| Other                                                                          |       | 44         |       | 9                |       | 51               |       | (19              | )          | 85               |       |
|                                                                           |       | 5,581      |       | 1,172            |       | 93               |       | (6,032           | )          | 814              |       |
| Total assets                                                                   |       | $          | 5,666      |             | $          | 6,851            |       | $                | 481        |             | $          | (6,073 | ) | $ | 6,925 |   |
|                                                                           |       |       |       |             |       |             |       |             |       |             |       |
| LIABILITIES AND  STOCKHOLDER’S EQUITY                                     |       |       |       |             |       |             |       |             |       |             |       |
| Current liabilities                                                            |       |       |       |             |       |             |       |             |       |             |       |
| Accounts and  notes payable                                                    |       |       |       |             |       |             |       |             |       |             |       |
| Trade                                                                          |       | $          | —     |             | $          | 81               |       | $                | 1          |             | $          | — |   | $ | 82 |   |
| Affiliates                                                                     |       | —     |       | 19               |       | 11               |       | (11              | )          | 19               |       |
| Other                                                                          |       | —     |       | 244              |       | 23               |       | —           |       | 267              |       |
| Income taxes  payable                                                          |       | —     |       | 136              |       | —           |       | (30              | )          | 106              |       |
| Other                                                                          |       | 9          |       | 123              |       | 7                |       | —           |       | 139              |       |
| Total current  liabilities                                                     |       | 9          |       | 603              |       | 42               |       | (41              | )          | 613              |       |
| Long-term debt                                                                 |       | 1,345      |       | —           |       | —           |       | —           |       | 1,345            |       |
| Other                                                                          |       |       |       |             |       |             |       |             |       |             |       |
| Note payable to  affiliates                                                    |       | —     |       | 563              |       | 144              |       | (707             | )          | —           |       |
| Deferred income  taxes                                                         |       | —     |       | 427              |       | —           |       | (19              | )          | 408              |       |
| Other                                                                          |       | —     |       | 244              |       | 3                |       | —           |       | 247              |       |
|                                                                           |       | —     |       | 1,234            |       | 147              |       | (726             | )          | 655              |       |
| Commitments and  contingencies                                                 |       |       |       |             |       |             |       |             |       |             |       |
|                                                                           |       |       |       |             |       |             |       |             |       |             |       |
| Stockholder’s equity                                                      |       |       |       |             |       |             |       |             |       |             |       |
| Common stock,  par value $1 per share; 1,000 shares authorized and outstanding |       | —     |       | —           |       | —           |       | —           |       | —           |       |
| Preferred stock                                                                |       | —     |       | —           |       | 12               |       | (12              | )          | —           |       |
| Additional  paid-in capital                                                    |       | 4,310      |       | 4,734            |       | 311              |       | (5,045           | )          | 4,310            |       |
| Retained  earnings (accumulated deficit)                                       |       | (82        | )          | 196              |       | (27              | )          | (169             | )          | (82              | )          |
| Accumulated  other comprehensive income (loss)                                 |       | 84         |       | 84               |       | (4               | )          | (80              | )          | 84               |       |
| Total  stockholder’s equity                                               |       | 4,312      |       | 5,014            |       | 292              |       | (5,306           | )          | 4,312            |       |
| Total liabilities and  stockholder’s equity                               |       | $          | 5,666      |             | $          | 6,851            |       | $                | 481        |             | $          | (6,073 | ) | $ | 6,925 |   |

 

13

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**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE QUARTER ENDED MARCH 31, 2007(In millions)(Unaudited)**
| ** **                                                                        | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                        | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash flows from  operating activities                                             |       |       |       |             |       |             |       |             |       |             |       |
| Net income  (loss)                                                                |       | $          | 99         |             | $          | 113              |       | $                | (3         | )                | $          | (110 | ) | $ | 99 |   |
| Adjustments to  reconcile net income (loss) to net cash from operating activities |       |       |       |             |       |             |       |             |       |             |       |
| Depreciation,  depletion and amortization                                         |       | —     |       | 171              |       | 5                |       | —           |       | 176              |       |
| Deferred income  tax expense (benefit)                                            |       | (12        | )          | 124              |       | (3               | )          | —           |       | 109              |       |
| Earnings from  consolidated subsidiaries, adjusted for cashdistributions          |       | (113       | )          | 3                |       | —           |       | 110              |       | —           |       |
| Earnings from  unconsolidated affiliates, adjusted for cash distributions         |       | —     |       | 20               |       | —           |       | —           |       | 20               |       |
| Other non-cash  items                                                             |       | 1          |       | —           |       | —           |       | —           |       | 1                |       |
| Asset and  liability changes                                                      |       | 29         |       | (88              | )          | 3                |       | —           |       | (56              | )          |
| Net cash  provided by operating activities                                        |       | 4          |       | 343              |       | 2                |       | —           |       | 349              |       |
| Cash flows from  investing activities                                             |       |       |       |             |       |             |       |             |       |             |       |
| Capital  expenditures                                                             |       | —     |       | (546             | )          | (39              | )          | —           |       | (585             | )          |
| Net proceeds  from the sale of assets                                             |       | —     |       | 2                |       | —           |       | —           |       | 2                |       |
| Change in note  receivable from affiliates                                        |       | (59        | )          | (4               | )          | —           |       | 122              |       | 59               |       |
| Net cash used by  investing activities                                            |       | (59        | )          | (548             | )          | (39              | )          | 122              |       | (524             | )          |
| Cash flows from  financing activities                                             |       |       |       |             |       |             |       |             |       |             |       |
| Repayment of  amounts borrowed under revolving credit facility                    |       | (200       | )          |             |       |             |       |             |       | (200             | )          |
| Proceeds from  borrowings under revolving credit facility                         |       | 255        |       | —           |       | —           |       | —           |       | 255              |       |
| Change in note  payable with affiliates                                           |       | —     |       | 117              |       | 13               |       | (122             | )          | 8                |       |
| Net cash  provided by financing activities                                        |       | 55         |       | 117              |       | 13               |       | (122             | )          | 63               |       |
| Change in cash and cash  equivalents                                              |       | —     |       | (88              | )          | (24              | )          | —           |       | (112             | )          |
| Cash and cash  equivalents                                                        |       |       |       |             |       |             |       |             |       |             |       |
| Beginning of  period                                                              |       | —     |       | 95               |       | 37               |       | —           |       | 132              |       |
| End of period                                                                     |       | $          | —     |             | $          | 7                |       | $                | 13         |             | $          | — |   | $ | 20 |   |

 

14

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**EL PASOEXPLORATION & PRODUCTION COMPANYCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE QUARTER ENDED MARCH 31, 2006(In millions)(Unaudited)**
| ** **                                                                 | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                 | ** ** | ** ** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                 | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash flows from  operating activities                                      |       |       |       |             |       |             |       |             |       |             |       |
| Net income                                                                 |       | $          | 57         |             | $          | 73               |       | $                | 2          |             | $          | (75 | ) | $ | 57 |   |
| Adjustments to  reconcile net income to net cash from operating activities |       |       |       |             |       |             |       |             |       |             |       |
| Depreciation,  depletion and amortization                                  |       | —     |       | 146              |       | 6                |       | —           |       | 152              |       |
| Deferred income  tax expense                                               |       | —     |       | 6                |       | 1                |       | —           |       | 7                |       |
| Earnings from  consolidated subsidiaries, adjusted for cash distributions  |       | (73        | )          | (2               | )          | —           |       | 75               |       | —           |       |
| Earnings from  unconsolidated affiliates, adjusted for cash distributions  |       | —     |       | 3                |       | —           |       | —           |       | 3                |       |
| Other non-cash  items                                                      |       | 1          |       | —           |       | —           |       | —           |       | 1                |       |
| Asset and  liability changes                                               |       | 4          |       | 96               |       | (11              | )          | —           |       | 89               |       |
| Net cash  provided by (used in) operating activities                       |       | (11        | )          | 322              |       | (2               | )          | —           |       | 309              |       |
| Cash flows from  investing activities                                      |       |       |       |             |       |             |       |             |       |             |       |
| Capital  expenditures                                                      |       | —     |       | (165             | )          | (10              | )          | —           |       | (175             | )          |
| Net proceeds  from the sale of assets                                      |       | —     |       | 2                |       | —           |       | —           |       | 2                |       |
| Change in note  receivable from affiliates                                 |       | 1          |       | (1               | )          | (5               | )          | 1                |       | (4               | )          |
| Net cash  provided by (used in) investing activities                       |       | 1          |       | (164             | )          | (15              | )          | 1                |       | (177             | )          |
| Cash flows from  financing activities                                      |       |       |       |             |       |             |       |             |       |             |       |
| Change in note  payable with affiliates                                    |       | —     |       | (72              | )          | 7                |       | (1               | )          | (66              | )          |
| Net cash  provided by (used in) financing activities                       |       | —     |       | (72              | )          | 7                |       | (1               | )          | (66              | )          |
| Change in cash and cash  equivalents                                       |       | (10        | )          | 86               |       | (10              | )          | —           |       | 66               |       |
| Cash and cash  equivalents                                                 |       |       |       |             |       |             |       |             |       |             |       |
| Beginning of  period                                                       |       | 10         |       | 37               |       | 13               |       | —           |       | 60               |       |
| End of period                                                              |       | $          | —     |             | $          | 123              |       | $                | 3          |             | $          | — |   | $ | 126 |   |

 

15

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

The information required by this Item is presented ina reduced disclosure format pursuant to General Instruction H to Form 10-Q. Inaddition, the information contained in Item 2 updates, and you should read itin conjunction with, information disclosed in our 2006 Annual Report on Form10-K, and the financial statements and notes presented in Item 1 of thisQuarterly Report on Form 10-Q.

**Overview**

Our business consists of natural gas and oilexploration and production activities. Our profitability and performance aredriven by the ability to locate and develop economic natural gas and oilreserves and extract those reserves with the lowest possible production andadministrative costs. Accordingly, we manage our business with the goal ofcreating value through disciplined capital allocation, cost control andportfolio management. Our domestic natural gas and oil reserve portfolio blendsslower decline rate, typically longer lived assets in our Onshore region, withsteeper decline rate, shorter lived assets in our Texas Gulf Coast and Gulf ofMexico Shelf and south Louisiana regions. We believe the combination of ourassets in these regions provides significant near-term cash flows whileproviding consistent opportunities for competitive investment returns. Inaddition, our international activities in Brazil and Egypt provide opportunityfor additional future reserve additions and longer term cash flows.  For a further discussion of our business andstrategy, see our 2006 Annual Report on Form 10-K.

*Operating Results for the QuarterEnded March 31, 2007*

*Average Daily Production.*  Ouraverage daily production for the three months ended March 31, 2007, was750 MMcfe/d (excluding 70 MMcfe/d from our equity investment in FourStar). Our average daily production levels in the first quarter of 2007 wereconsistent with the levels originally expected for the quarter and haveincreased as compared to the same period in 2006. Below is a further analysisof our production by region for the quarters ended March 31:
| ** **                                   | ** ** | **2007**      | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|---------------|------------|----------|------------|
|                                         | ** ** | **(MMcfe/d)** | ** ** |
| United States                                |       |          |       |     |       |
|  Onshore                                |       | 363           |       | 334      |       |
|  Texas Gulf  Coast                      |       | 189           |       | 195      |       |
|  Gulf of  Mexico Shelf /south Louisiana |       | 182           |       | 133      |       |
| International                                |       |          |       |     |       |
|  Brazil                                 |       | 16            |       | 32       |       |
| Total  Consolidated                          |       | 750           |       | 694      |       |
| Four Star(1)                                 |       | 70            |       | 71       |       |
|                                              |            |               |            |          |            |  |

----

(1)                   Amounts represent our proportionate shareof the production of Four Star.

In our Onshore region, our 2007 production increasedthrough capital projects where we maintained or increased production in most ofour major operating areas, with the majority of growth coming from theRockies.  In the Texas Gulf Coast region,our 2007 production volumes remained stable as the acquisition of properties inthe first quarter of 2007 mostly offset natural production declines and thesale of certain non-strategic south Texas properties in 2006.  In the Gulf of Mexico Shelf/south Louisianaregion, we increased production in 2007 through development projects in theWest Cameron area and our Catapult project and recovery of volumes shut-in byhurricane damage, which helped to offset natural production declines. InBrazil, production volumes decreased primarily due to a contractual reductionof our ownership interest in the Pescada-Arabaiana fields in early 2006.

### Drilling

*Onshore.*  Werealized a 100 percent success rate on 152 gross wells drilled.

*Texas Gulf Coast.*  Weexperienced a 91 percent success rate on 23 gross wells drilled.

16

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*Gulf of Mexico Shelf and southLouisiana.*  We drilled two unsuccessful wells inthe first quarter of 2007, but expect to place four to eight wells inproduction for the remainder of 2007.

*Brazil.*  Inthe Pinauna Field in the Camamu Basin, we began drilling two exploratorywells.  Additionally, we began drillingan exploration well with Petrobras in the ES-5 Block in the Espirito SantoBasin.  These three exploratory wells areexpected to reach their targeted zones and be evaluated by the third quarter of2007.

*Egypt.*  InApril 2007, we received formal government approval and signed the concessionagreement for the South Mariut Block.  Wepaid $3 million for the concession and agreed to a $22 million firmworking commitment over three years. The block is approximately 1.2 millionacres and is located onshore in the western part of the Nile Delta.

*Cash Operating Costs.*  Wemonitor the cash operating costs required to produce our natural gas and oilvolumes. These costs are generally reported on a per Mcfe basis and includetotal operating expenses less depreciation, depletion and amortization expenseand cost of sales on our income statement. During the three months ended March31, 2007, cash operating costs increased to $1.99/Mcfe as compared to$1.71/Mcfe for the same period in 2006, primarily as a result of higher productioncosts from higher workover activity levels, industry inflation in services,labor and material costs and lower severance tax credits.

*Capital Expenditures.  *Our total natural gas and oil capitalexpenditures on an accrual basis were $606 million for the quarter ended March31, 2007, including $254 million to acquire producing properties andundeveloped acreage in Zapata County, Texas in January 2007.  The acquisition in Zapata County complementsour existing Texas Gulf Coast operations and provides a re-entry into the Loboarea.

*Outlook*

For the full year 2007, we anticipate the following ona worldwide basis:

·         Average daily production volumes ofapproximately 740 MMcfe/d to 795 MMcfe/d, which excludesapproximately 60 MMcfe/d to 65 MMcfe/d from our equity investment inFour Star.

·         Capital expenditures, excluding acquisitions,between $1.4 billion and $1.5 billion. While 85% of the planned 2007 capital program is allocated to ourdomestic program, we plan to invest approximately $215 million internationallyduring 2007, primarily in our Brazil exploration and development program.

·         Average cash operating costs which includeproduction costs, general and administrative expenses and taxes (other thanproduction and income) of approximately $1.68/Mcfe to $2.00/Mcfe; and

·         Depreciation, depletion, and amortization ratebetween $2.60/Mcfe and $2.85/Mcfe.

*Price Risk Management Activities*

As part of our strategy, we enter into derivativecontracts on our natural gas and oil production to stabilize cash flows, toreduce the risk and financial impact of downward commodity price movements oncommodity sales and to protect the economic assumptions associated with ourcapital investment programs. Because this strategy only partially reduces ourexposure to downward movements in commodity prices, our reported results ofoperations, financial position and cash flows can be impacted significantly bymovements in commodity prices from period to period. Adjustments to our hedgingstrategy and the decision to enter into new positions or to alter existingpositions are made based on the goals of the overall company.

In March 2007, we entered into additional floor andceiling option contracts on approximately 44 TBtu of our anticipated 2008natural gas production.  The followingtable reflects the contracted volumes and the minimum, maximum and averageprices we will receive under our derivative contracts when combined with thesale of the underlying hedged production as of March 31, 2007:

17

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| ** **    | ** ** | **Fixed Price** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **      | ** ** | ** **  | ** ** | **Basis** | ** ** |
|---------------|------------|----------------------|------------|---------------|------------|-----------------|------------|-----------------|------------|-------------|------------|-----------|------------|
| ** **    | ** ** | **Swaps**(1)         | ** ** | **Floors**(1) | ** ** | **Ceilings**(1) | ** ** | **Swaps**(1)(2) | ** ** |
| ** **    | ** ** | **Volumes**          | ** ** | **Price**     | ** ** | **Volumes**     | ** ** | **Price**       | ** ** | **Volumes** | ** ** | **Price** | ** ** | **Volumes** | ** ** |
| *Natural Gas* |       |                 |       |          |       |            |       |            |       |        |       |      |       |   |   |
| 2007          |       | 59                   |       | $             | 7.71       |            | 41         |            | $          | 8.00        |       | 41        |       | $ | 16.89 |   | 83 |   |
| 2008          |       | 5                    |       | $             | 3.42       |            | 44         |            | $          | 8.00        |       | 44        |       | $ | 10.53 |   | — |   |
| 2009          |       | 5                    |       | $             | 3.56       |            | —     |            | —     |        | —     |      | —     |   | — |   |
| 2010-2012     |       | 11                   |       | $             | 3.81       |            | —     |            | —     |        | —     |      | —     |   | — |   |
| *Oil*         |       |                 |       |          |       |            |       |            |       |        |       |      |       |   |   |
| 2007          |       | 144                  |       | $             | 35.15      |            | —     |            | —     |        | —     |      | —     |   | — |   |

----

(1)                   Volumes presented are TBtu for natural gasand MBbl for oil. Prices presented are per MMBtu of natural gas and per Bbl ofoil.

(2)                   Our basis swaps effectively “lock-in”locational price differences on a portion of our natural gas production inTexas and Oklahoma.

Our natural gas fixed price swaps, floors and ceilingcontracts in the table above are designated as accounting hedges. Gains andlosses associated with these natural gas contracts are deferred in accumulatedother comprehensive income and will be recognized in earnings upon the sale ofthe related production at market prices, resulting in a realized price that isapproximately equal to the hedged price. Our oil fixed price swaps andapproximately 39 TBtu of our natural gas basis swaps are not designated asaccounting hedges. Accordingly, changes in the fair value of these swaps arenot deferred, but are recognized in earnings each period.

The table above does not include net realized gains onderivative contracts we previously accounted for as hedges on which we willrecord an additional $45 million as natural gas and oil revenues for theremainder of 2007, which are also currently deferred in accumulated othercomprehensive income.

**Results ofOperations**

Our management, aswell as El Paso’s management, uses earnings before interest expense and incometaxes (EBIT) to assess the operating results and effectiveness of ourbusiness.  We believe EBIT is useful toour investors because it allows them to more effectively evaluate our operatingperformance using the same performance measure analyzed internally by ourmanagement. We define EBIT as net income or loss adjusted for (i) itemsthat do not impact our income or loss from continuing operations, such as thecumulative effect of accounting changes, (ii) income taxes,(iii) interest, which includes third party and affiliated interestexpense.  We exclude interest and debtexpense so investors may evaluate our operating results without regard to ourfinancing methods or capital structure. EBIT may not be comparable to measuresused by other companies. Additionally, EBIT should be considered in conjunctionwith net income and other performance measures such as operating income oroperating cash flow.  Below is areconciliation of our EBIT to our net income for the quarters endedMarch 31:
| ** **                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Operating  revenues                               |       | $        | 505        |     | $          | 385 |   |
| Operating  expenses                               |       | 334      |       | 281      |       |
| Operating income                                  |       | 171      |       | 104      |       |
| Earnings (losses)  from unconsolidated affiliates |       | (1       | )          | 7        |       |
| Other income,  net                                |       | 3        |       | 1        |       |
| EBIT                                              |       | 173      |       | 112      |       |
| Interest expense                                  |       | (23      | )          | (27      | )          |
| Income taxes                                      |       | (51      | )          | (28      | )          |
| Net income                                        |       | $        | 99         |     | $          | 57 |   |

 

18

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*Financial Results and VarianceAnalysis*

The tables below and thediscussion that follows provide our financial results and analysis ofsignificant variances in these results during the quarters ended March 31:
| ** **                                      | ** ** | **2007**               | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                      | ** ** | **(In millions)** | ** ** |
| Operating  Revenues:                            |       |                   |       |     |       |
|  Natural gas                               |       | $                      | 408        |     | $          | 285 |   |
|  Oil,  condensate and NGL                  |       | 88                     |       | 90       |       |
|  Other                                     |       | 9                      |       | 10       |       |
|  Total  operating revenues                 |       | 505                    |       | 385      |       |
| Operating  Expenses:                            |       |                   |       |     |       |
|  Depreciation,  depletion and amortization |       | (176                   | )          | (152     | )          |
|  Production  costs(1)                      |       | (86                    | )          | (64      | )          |
|  Cost of sales                             |       | (24                    | )          | (22      | )          |
|  General and  administrative expenses      |       | (46                    | )          | (42      | )          |
|  Taxes, other  than production and income  |       | (2                     | )          | (1       | )          |
|  Total  operating expenses                 |       | (334                   | )          | (281     | )          |
| Operating income                                |       | 171                    |       | 104      |       |
| Other income(2)                                 |       | 2                      |       | 8        |       |
| EBIT                                            |       | $                      | 173        |     | $          | 112 |   |

----

(1)                   Production costs include lease operating costs andproduction related taxes (including ad valorem and severance taxes). 

(2)                   Includes equity earnings from ourinvestment in Four Star.
| ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                                | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Variance** | ** ** |
| *Consolidated  volumes, prices and costs per unit:*       |       |       |       |       |       |         |       |
| Natural gas                                               |       |       |       |       |       |         |       |
| Volumes (MMcf)                                            |       | 56,713     |       | 52,029     |       | 9            | %          |
| Prices ($/Mcf)                                            |       |       |       |       |       |         |       |
| Average realized prices including hedges                  |       | $          | 7.19       |       | $          | 5.49         |       | 31 | % |
| Average realized prices excluding hedges                  |       | $          | 6.46       |       | $          | 7.77         |       | (17 | )% |
| Average transportation costs ($/Mcf)                      |       | $          | 0.31       |       | $          | 0.24         |       | 29 | % |
| Oil, condensate  and NGL                                  |       |       |       |       |       |         |       |
| Volumes (MBbls)                                           |       | 1,788      |       | 1,745      |       | 2            | %          |
| Prices ($/Bbl)                                            |       |       |       |       |       |         |       |
| Average realized prices including hedges                  |       | $          | 49.32      |       | $          | 51.25        |       | (4 | )% |
| Average realized prices excluding hedges                  |       | $          | 50.07      |       | $          | 52.60        |       | (5 | )% |
| Average transportation costs ($/Bbl)                      |       | $          | 0.76       |       | $          | 1.25         |       | (39 | )% |
| Total equivalent  volumes                                 |       |       |       |       |       |         |       |
| MMcfe                                                     |       | 67,442     |       | 62,500     |       | 8            | %          |
| MMcfe/d                                                   |       | 750        |       | 694        |       | 8            | %          |
| Production costs  and other cash operating costs ($/Mcfe) |       |       |       |       |       |         |       |
| Average lease operating costs                             |       | $          | 0.95       |       | $          | 0.73         |       | 30 | % |
| Average production taxes                                  |       | 0.32       |       | 0.29       |       | 10           | %          |
| Total production costs(1)                                 |       | 1.27       |       | 1.02       |       | 25           | %          |
| Average general and administrative expenses               |       | 0.69       |       | 0.67       |       | 3            | %          |
| Average taxes, other than production and income           |       | 0.03       |       | 0.02       |       | 50           | %          |
| Total cash operating costs                                |       | $          | 1.99       |       | $          | 1.71         |       | 16 | % |
| Unit of  production depletion cost ($/Mcfe)               |       | $          | 2.49       |       | $          | 2.31         |       | 8 | % |
| *Unconsolidated  affiliate volumes (Four Star)*           |       |       |       |       |       |         |       |
| Natural gas  (MMcf)                                       |       | 4,941      |       | 4,507      |       |         |       |
| Oil, condensate  and NGL (MBbls)                          |       | 233        |       | 309        |       |         |       |
| Total equivalent  volumes                                 |       |       |       |       |       |         |       |
| MMcfe                                                     |       | 6,338      |       | 6,360      |       |         |       |
| MMcfe/d                                                   |       | 70         |       | 71         |       |         |       |

----

(1)                   Production costs include lease operatingcosts and production related taxes (including ad valorem and severance taxes).

19

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### *Quarter Ended March 31, 2007 Compared to Quarter EndedMarch 31, 2006*

The table below outlines the variances in ouroperating results for the quarter ended March 31, 2007 as compared to the sameperiod in 2006:
| ** **                                                    | ** ** | **Variances**               | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **Operating**               | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Revenues**                | ** ** | **Expenses** | ** ** | **Other** | ** ** | **EBIT** | ** ** |
| ** **                                                    | ** ** | **Favorable/(Unfavorable)** | ** ** |
| ** **                                                    | ** ** | **(In millions)**      | ** ** |
| *Natural Gas Revenues*                                        |       |                        |       |   |   |   |   |   |   |
| Lower realized  prices in 2007                                |       | $                           | (74        | ) | $ | — |   | $ | — |   | $ | (74 | ) |
| Impact of hedges                                              |       | 161                         |       | — |   | — |   | 161 |   |
| Higher  production volumes in 2007                            |       | 36                          |       | — |   | — |   | 36 |   |
| *Oil, Condensate and NGL  Revenues*                           |       |                        |       |   |   |   |   |   |   |
| Lower realized  prices in 2007                                |       | (5                          | )          | — |   | — |   | (5 | ) |
| Impact of hedges                                              |       | 1                           |       | — |   | — |   | 1 |   |
| Higher  production volumes in 2007                            |       | 2                           |       | — |   | — |   | 2 |   |
| *Other Revenues*                                              |       |                        |       |   |   |   |   |   |   |
| Change in fair  value of derivatives not designated as hedges |       | 2                           |       | — |   | — |   | 2 |   |
| Other                                                         |       | (3                          | )          | — |   | — |   | (3 | ) |
| *Depreciation, Depletion and  Amortization Expense*           |       |                        |       |   |   |   |   |   |   |
| Higher depletion  rate in 2007                                |       | —                      |       | (13 | ) | — |   | (13 | ) |
| Higher  production volumes in 2007                            |       | —                      |       | (11 | ) | — |   | (11 | ) |
| *Production Costs*                                            |       |                        |       |   |   |   |   |   |   |
| Higher lease  operating costs in 2007                         |       | —                      |       | (18 | ) | — |   | (18 | ) |
| Higher  production taxes in 2007                              |       | —                      |       | (4 | ) | — |   | (4 | ) |
| *General and Administrative  Expenses*                        |       | —                      |       | (4 | ) | — |   | (4 | ) |
| *Other*                                                       |       | —                      |       | (3 | ) | (6 | ) | (9 | ) |
| *Total Variances*                                             |       | $                           | 120        |   | $ | (53 | ) | $ | (6 | ) | $ | 61 |   |

 

*Operating revenues.*  In 2007, our revenues increased as compared to 2006 primarily due to thesuccess in our drilling program which resulted in higher production volumes aspreviously discussed.  Offsetting thepositive impact of higher production volumes were reduced prices as compared to2006.  However, the effect of our hedgingprogram somewhat mitigated the impact of price declines as gains on hedgingsettlements were $40 million during the first quarter of 2007 as compared tolosses of $122 million in the first quarter of 2006.

*Depreciation, depletion andamortization expense.*  During the first quarter of2007, our depletion rate increased as compared to the same period in 2006 as aresult of higher finding and development costs due to service cost inflation,mechanical problems in executing our drilling program during 2006 and downwardrevisions in previous estimates of reserves due to lower commodity prices.

*Production costs.*  Inthe first quarter of 2007, our lease operating costs increased as compared tothe same period in 2006 due to higher workover activity levels, industryinflation in services, labor and material costs and lower severance taxcredits.

*General and administrative expenses.*  Ourgeneral and administrative expenses increased during 2007 as compared to thesame period in 2006, primarily due to higher labor costs.

*Other.*  During the first quarter of 2007, Four Star’s equity earnings decreased by $8million as compared to the same period in 2006 due to lower natural gas prices,higher production costs and higher depreciation, depletion and amortizationexpense.

**Interest Expense**

Third party interest expense for the first quarter of2007 decreased $3 million compared to the same period in 2006 due to loweraverage amounts borrowed under our $500 million revolving credit facility.

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**IncomeTaxes**

Income taxes included in our net income and oureffective tax rates for the quarters ended March 31 were as follows:
| ** **         | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|--------------------|------------|---------------------------------------------------------|------------|----------|------------|
| ** **         | ** ** | **(In millions, except for rates)** | ** ** |
| Income taxes       |       | $                                                       | 51         |     | $          | 28 |   |
| Effective tax rate |       | 34                                                      | %          | 33       | %          |
|                    |            |                                                         |            |          |            |  |  |

 

Our effective tax rates for each period differed fromthe federal statutory rate of 35 percent, primarily due to earnings fromunconsolidated affiliates where we anticipate receiving dividends that qualifyfor the dividend received deduction, and from state income taxes.

**Liquidity**

Our primary sources of liquidity are cash generatedfrom operations, advances from El Paso through its cash management program andour $500 million revolving credit facility. Other sources may include capital contributions from El Paso and accessto the capital markets. Under El Paso’s cash management program, depending onwhether we have short-term cash surpluses or requirements, we either providecash to El Paso, subject to limitations under our financing arrangements, or ElPaso provides cash to us. Changes in overall amounts borrowed from El Pasounder the cash management program are reflected as financing activities andchanges in overall advances to El Paso are reflected as investing activities inour statement of cash flows. As of March 31, 2007, we had borrowed $8 millionfrom El Paso under El Paso’s cash management program.  As of December 31, 2006, we had advanced $59million to El Paso under El Paso’s cash management program.

In March 2007, Moody’s Investor Services confirmed oursenior unsecured debt rating of B1 with a positive outlook and upgraded El Paso’ssenior unsecured debt rating to Ba3 while maintaining a positive outlook.  Additionally, in March 2007, (i) Standard andPoor’s upgraded our senior unsecured debt rating to BB and upgraded El Paso’ssenior unsecured debt rating to BB- maintaining a positive outlook, and (ii)Fitch Ratings initiated coverage on us and assigned a rating on our seniorunsecured debt of BB and on El Paso’s senior unsecured debt of BB+.

During 2007 weentered into new derivative option contracts on our 2008 natural gasproduction. These contracts were executed under agreements that will notrequire us to post any incremental net cash margin in future periods since theyare collateralized by the same natural gas and oil properties thatcollateralize our $500 million revolving credit facility. As of March 31, 2007and December 31, 2006, we had $200 million and $145 million outstanding underthe revolving credit facility. Based on our expected capital spending program,and forecasted operating cash flows using current projections of the amounts ofhedged production and current commodity price levels, we may be required todraw on our revolving credit facility or obtain advances from El Paso throughthe cash management program to fund a portion of our capital expenditures, andmeet working capital and debt service needs. In addition, during the firstquarter of 2007, El Paso billed us $88 million for certain tax attributespreviously reflected as deferred income taxes. These amounts will be settled inthe second quarter of 2007.

**Commitmentsand Contingencies**

For a discussion of our commitments and contingencies,see Part I, Item 1, Financial Statements, Note 4, incorporated herein byreference.

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

Omitted from this report pursuant to the reduceddisclosure format permitted by General Instruction H to Form 10-Q.

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**Item 4T.  Controls and Procedures**

**Evaluation ofDisclosure Controls and Procedures**

As of March 31, 2007, we carried out an evaluationunder the supervision and with the participation of our management, includingour President and our Chief Financial Officer (CFO), as to the effectiveness,design and operation of our disclosure controls and procedures as defined bythe Securities Exchange Act of 1934, as amended. This evaluation considered thevarious processes carried out under the direction of El Paso’s disclosurecommittee in an effort to ensure that information required to be disclosed inthe U.S. Securities and Exchange Commission (SEC) reports we file or submitunder the Exchange Act is accurate, complete and timely. Our management,including our President and CFO, does not expect that our disclosure controlsand procedures or our internal controls will prevent and/or detect all errorand all fraud. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within our company havebeen detected. Based on the results of this evaluation, our President and CFOconcluded that our disclosure controls and procedures are effective at March31, 2007.

**Changes in Internal Control overFinancial Reporting**

There has been no change in our internal control overfinancial reporting that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting during thefirst quarter of 2007.

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**PART II — OTHERINFORMATION**

**Item 1.  Legal Proceedings**

See Part I, Item 1, Financial Statements, Note 5,which is incorporated herein by reference. Additional information about ourlegal proceedings can be found in Part I, Item 3 of our 2006 Annual Report onForm 10-K filed with the SEC.

**Item 1A.  Risk Factors**

**CAUTIONARYSTATEMENTS FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995**

This report contains forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995. Where anyforward-looking statement includes a statement of the assumptions or basesunderlying the forward-looking statement, we caution that, while we believethese assumptions or bases to be reasonable and to be made in good faith,assumed facts or bases almost always vary from the actual results, and thedifferences between assumed facts or bases and actual results can be material,depending upon the circumstances. Where, in any forward-looking statement, weor our management express an expectation or belief as to future results, thatexpectation or belief is expressed in good faith and is believed to have areasonable basis. We cannot assure you, however, that the statement ofexpectation or belief will result or be achieved or accomplished. The words “believe,”“expect,” “estimate,” “anticipate” and similar expressions will generallyidentify forward-looking statements. Our forward-looking statements, whetherwritten or oral, are expressly qualified by these cautionary statements and anyother cautionary statements that may accompany those statements. In addition,we disclaim any obligation to update any forward-looking statements to reflectevents or circumstances after the date of this report.

Important factors that could cause actual results todiffer materially from estimates or projections contained in forward-lookingstatements are described in our 2006 Annual Report on Form 10-K. There havebeen no material changes in these risk factors since that report.

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

Omitted from this report pursuant to the reduceddisclosure format permitted by General Instruction H to Form 10-Q.

**Item 3.  Defaults Upon Senior Securities**

Omitted from this report pursuant to the reduceddisclosure format permitted by General Instruction H to Form 10-Q.

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

Omitted from this report pursuant to the reduceddisclosure format permitted by General Instruction H to Form 10-Q.

**Item 5.  Other Information**

None.

**I**tem 6.  Exhibits

The Exhibit Index is incorporated herein by referenceand lists the exhibits required to be filed by this report by Item601(b)(10)(iii) of Regulation S-K.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, El Paso Exploration & ProductionCompany has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                    | **EL PASO  EXPLORATION & PRODUCTION COMPANY** |
|--------------------|---------------------------------------------------|
|               |                                              |   |   |
|               |                                              |   |   |
| Date: May 8,  2007 |                                              | By: | /s/  Brent  J. Smolik |
|               |                                              |   | Brent J. Smolik |
|               |                                              |   | President |
| * *           |                                              |   | (Principal  Executive Officer) |
|               |                                              |   |   |
|               |                                              |   |   |
| Date: May 8,  2007 |                                              | By: | /s/  Dane  E. Whitehead |
|               |                                              |   | Dane E.  Whitehead |
|               |                                              |   | Senior Vice  President and  Chief Financial Officer |
|               |                                              |   | (Principal  Financial Officer) |

 

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**EXHIBIT INDEX**

Each exhibit identified below is a part of thisReport.
| Exhibit  Number | ** ** | **Description**                                                                                           |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------|
| 31.A            |       | Certification of  Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
| 31.B            |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      |
| 32.A            |       | Certification of  Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |
| 32.B            |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      |

 

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