##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to          .
 Commission File Number 1-2700
 El Paso Natural Gas Company
  Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    74-0608280
(I.R.S. Employer
Identification No.)El Paso Building1001 Louisiana StreetHouston, Texas
    
    77002(Address of Principal Executive Offices)
    
    (Zip Code)
 Telephone Number: (713) 420-2600
 Securities registered pursuant to Section 12(b) of the Act: None
 Securities registered pursuant to Section 12(g) of the Act: None
 o þ
 þ o
 þ o
 þ
  o o þ
 o þ
 State the aggregate market value of the voting stock held by non-affiliates of the
registrant: None
 Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
  EL PASO NATURAL GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION I (1) (a) AND (b) TO
FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH A REDUCED DISCLOSURE FORMAT AS PERMITTED BY SUCH
INSTRUCTION.
 Documents Incorporated by Reference: None




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##### 



EL PASO NATURAL GAS COMPANY
 TABLE OF CONTENTS
 Caption
    
    PagePART IItem 1.
    
    Business
    
    3Item 1A.
    
    Risk Factors
    
    6Item 1B.
    
    Unresolved Staff Comments
    
    10Item 2.
    
    Properties
    
    10Item 3.
    
    Legal Proceedings
    
    10Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    *PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    11Item 6.
    
    Selected Financial Data
    
    *Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    16Item 8.
    
    Financial Statements and Supplementary Data
    
    17Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    39Item 9A.
    
    Controls and Procedures
    
    39Item 9B.
    
    Other Information
    
    39PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    *Item 11.
    
    Executive Compensation
    
    *Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    *Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    *Item 14.
    
    Principal Accountant Fees and Services
    
    39PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    40Signatures
    
    41Amendment No.1 to Amended Credit AgreementCertification of PEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of PEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  
 *
    
    We have not included a response to this item in this document since no response is required
pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.  /d
    
    = per day
    
    
    
    LNG
    
    = liquefied natural gasBBtu
    
    = billion British thermal units
    
    
    
    MMcf
    
    = million cubic feetBcf
    
    = billion cubic feet
   2




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PART I
 
 ITEM 1. BUSINESS
 Overview and Strategy
    
    
    Successfully recontracting expiring transportation capacity;
    
    Developing storage capacity to serve our market area;
    
    Focusing on cost efficiencies, especially fuel use;
    
    Successfully completing expansion projects; and
    
    Attracting new supply and transporting natural gas to new markets.
  The EPNG System.
 The Mojave Pipeline Company (Mojave) System.
 Storage Facility.
 Markets and Competition
   3




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PipelineSystem
    
    Customer Information
    
    Contract Information
    
    CompetitionEPNG
    
    Approximately 160 firm and
    
    Approximately 190 firm
    
    EPNG faces competition in theinterruptible customers
    
    transportation contracts. Weighted
    
    west and southwest from otheraverage remaining contract term of
    
    existing and proposedapproximately four years.
    
    pipelines, from Californiastorage facilities, andalternative energy sources thatare used to generateelectricity such ashydroelectric, nuclear, wind,coal and fuel oil. In addition,construction of facilities tobring LNG into California andnorthern Mexico are underway.Major Customers:Southern California Gas
Company(SoCal)(101 BBtu/d)
    
    Expires in 2007.(187 BBtu/d)
    
    Expires in 2009.(561 BBtu/d)
    
    Expire in 2010-2011.Southwest Gas Corporation(11 BBtu/d)
    
    Expires in 2008.(476 BBtu/d)
    
    Expire in 2011-2015.Mojave
    
    Approximately 20 firm and
    
    Approximately six firm
    
    Mojave faces competition frominterruptible customers
    
    transportation contracts. Weighted
    
    other existing and proposedaverage remaining contract term of
    
    pipelines and alternativeapproximately seven years.
    
    energy sources that are used togenerate electricity such ashydroelectric, nuclear, wind,coal and fuel oil. In addition,construction of facilities tobring LNG into California andnorthern Mexico are underway.Major Customers:Los Angeles Department of
Water and Power(50 BBtu/d)
    
    Expires in 2007.EPNG(312 BBtu/d)
    
    Expires in 2015.
 4




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Regulatory Environment
  
    
    rates and charges for natural gas transportation and storage;
    
    certification and construction of new facilities;
    
    extension or abandonment of services and facilities;
    
    maintenance of accounts and records;
    
    relationships between pipelines and certain affiliates;
    
    terms and conditions of services;
    
    depreciation and amortization policies;
    
    acquisition and disposition of facilities; and
    
    initiation and discontinuation of services.
   Environmental
  Employees
  5




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ITEM 1A. RISK FACTORS
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
   Risks Related to Our Business
 Our success depends on factors beyond our control.
  
    
    service area competition;
    
    expiration or turn back of significant contracts;
    
    changes in regulation and actions of regulatory bodies;
    
    weather conditions that impact throughput and storage levels;
    
    price competition;
    
    drilling activity and availability of natural gas;
    
    continued development of additional sources of gas supply that can be accessed;
    
    decreased natural gas demand due to various factors, including increases in prices and
the increased availability or popularity of alternative energy sources such as
hydroelectric, nuclear, wind, coal and fuel oil;
    
    availability and increased cost of capital to fund ongoing maintenance and growth projects;
    
    opposition to energy infrastructure development, especially in environmentally sensitive areas;
    
    adverse general economic conditions;
    
    expiration or renewal of existing interests in real property including real property on Native American lands; and
    
    unfavorable movements in natural gas prices in supply and demand areas.
 
 6




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The revenues of our pipeline businesses are generated under contracts that must be renegotiated
periodically, some of which are for a substantial portion of our firm transportation capacity.
   Fluctuations in energy commodity prices could adversely affect our business.
  
    
    regional, domestic and international supply and demand;
    
    availability and adequacy of transportation facilities;
    
    energy legislation;
    
    federal and state taxes, if any, on the transportation and storage of natural gas;
    
    abundance of supplies of alternative energy sources; and
    
    political unrest among oil producing countries.
 The agencies that regulate us and our customers affect our profitability.
   7




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Environmental compliance and remediation costs and the costs of environmental liabilities could
exceed our estimates.
  
    
    The uncertainties in estimating pollution control and clean up costs, including sites
where preliminary site investigation or assessments have been completed;
    
    The discovery of new sites or additional information at existing sites;
    
    The uncertainty in quantifying liability under environmental laws that impose joint and
several liability on all potentially responsible parties; and
    
    The nature of environmental laws and regulations, including the interpretation and
enforcement thereof.
   Our operations are subject to operational hazards and uninsured risks.
   The expansion of our business by constructing new facilities subjects us to construction and other
risks that may adversely affect our financial results.
  
    
    our ability to obtain necessary approvals and permits by regulatory agencies on a timely
basis and on terms that are acceptable to us;
    
    the ability to obtain continued access to sufficient capital to fund expansion projects;
 
 8




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
    
    potential changes in federal, state and local statutes and regulations, including
environmental requirements, that prevent a project from proceeding or increase the
anticipated cost of the project;
    
    impediments on our ability to acquire rights-of-way or land rights on a timely basis on
terms that are acceptable to us;
    
    our ability to construct projects within anticipated costs, including the risk that we
may incur cost overruns resulting from inflation or increased costs of equipment, materials
or labor, or other factors beyond our control, that may be material;
    
    lack of anticipated future growth in natural gas supply; and
    
    lack of transportation, storage or throughput commitments.
  Our business requires the retention and recruitment of a skilled workforce and the loss of
employees could result in the failure to implement our business plan.
  Risks Related to Our Affiliation with El Paso
  Our relationship with El Paso and its financial condition subjects us to potential risks that are
beyond our control.
   We may be subject to a change of control if an event of default occurs under El Pasos credit
agreement.
  A default under El Pasos $1.75 billion credit agreement by any party could accelerate our future
borrowings, if any, under the credit agreement and our long-term debt, which could adversely affect
our liquidity position.
  9




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We are an indirect wholly owned subsidiary of El Paso.
  
    
    our payment of dividends;
    
    decisions on our financing and capital raising activities;
    
    mergers or other business combinations;
    
    our acquisitions or dispositions of assets; and
    
    our participation in El Pasos cash management program.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  10




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER                PURCHASES OF
EQUITY SECURITIES
   
 ITEM 6. SELECTED FINANCIAL DATA
  11




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Percent of Total RevenuesType
    
    Description
    
    in 2006Reservation
    
    Reservation revenues are
from customers (referred to
as firm customers) that
reserve capacity on our
pipeline systems and
storage facilities. These
firm customers are
obligated to pay a monthly
reservation or demand
charge, regardless of the
amount of natural gas they
transport or store, for the
term of their contracts.
    
    
    90Usage
and Other
    
    Usage revenues are from
both firm customers and interruptible customers
(those without reserved capacity) who pay charges based on the volume
of gas actually transported, injected or withdrawn.
    
    
    10
    12




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Percent of Total
    
    
    
    
    
    Percent of TotalBBtu/d(1)
    
    
    Contracted Capacity
    
    
    Reservation Revenue
    
    
    Reservation Revenue(In millions)2007
    
    
    1,055
    
    
    
    20
    
    
    $
    71
    
    
    
    152008
    
    
    1,079
    
    
    
    21
    
    
    
    85
    
    
    
    182009
    
    
    434
    
    
    
    8
    
    
    
    71
    
    
    
    152010
    
    
    341
    
    
    
    7
    
    
    
    37
    
    
    
    72011
    
    
    1,275
    
    
    
    25
    
    
    
    62
    
    
    
    132012 and beyond
    
    
    974
    
    
    
    19
    
    
    
    153
    
    
    
    32Total
    
    
    5,158
    
    
    
    100
    
    
    $
    479
    
    
    
    100
 
 (1)
    
    Excludes EPNG capacity on the Mojave system. Results of Operations
  2006
    
    
    2005(In millions,except volumes)Operating revenues
    
    $
    588
    
    
    $
    497Operating expenses
    
    
    (305
    )
    
    
    (335
    )Operating income
    
    
    283
    
    
    
    162Other income, net
    
    
    3
    
    
    
    8EBIT
    
    
    286
    
    
    
    170Interest and debt expense
    
    
    (95
    )
    
    
    (92
    )Affiliated interest income, net
    
    
    53
    
    
    
    32Income taxes
    
    
    (92
    )
    
    
    (46
    )Net income
    
    $
    152
    
    
    $
    64Throughput volumes (BBtu/d)(1)
    
    
    4,255
    
    
    
    4,214
 
 (1)
    
    Throughput volumes exclude throughput transported by Mojave on behalf of EPNG.  EBITRevenue
    
    
    Expense
    
    
    Other
    
    
    ImpactFavorable/(Unfavorable)(In millions)EPNG reservation and other services revenues
    
    $
    77
    
    
    $
    
    
    
    $
    
    
    
    $
    77Lower litigation accruals
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    42Enron bankruptcy settlement
    
    
    14
    
    
    
    3
    
    
    
    
    
    
    
    17Lower general and administrative expense
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Higher depreciation expense
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )Higher rights-of-way expense
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )Other(1)
    
    
    
    
    
    
    5
    
    
    
    (5
    )
    
    
    Total impact on EBIT
    
    $
    91
    
    
    $
    30
    
    
    $
    (5
    )
    
    $
    116
 
 (1)
    
    Consists of individually insignificant items. 13




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EPNG Reservation and Other Services Revenues.
   Lower Litigation Accruals.
 Enron Bankruptcy Settlement.
 Lower General and Administrative Expense.
 Higher Depreciation Expense.
 Higher Rights-Of-Way Expense.
 Affiliated Interest Income, Net
  Income Taxes
 Year EndedDecember 31,2006
    
    2005(In millions,except for rates)Income taxes
    
    $
    92
    
    
    $
    46Effective tax rate
    
    
    38
    %
    
    
    42
    %
  14




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Liquidity and Capital Expenditures
 Liquidity Overview
    Capital Expenditures
  2006
    
    
    2005(In millions)Maintenance
    
    $
    94
    
    
    $
    106Expansion/Other
    
    
    49
    
    
    
    34Total
    
    $
    143
    
    
    $
    140
  Commitments and Contingencies
  New Accounting Pronouncements Issued But Not Yet Adopted
 New Accounting
Pronouncements Issued But Not Yet Adopted
 15




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  December 31, 2006
    
    December 31, 2005Expected Fiscal Year ofMaturity of Carrying AmountsFair
    
    Carrying2010
    
    Thereafter
    
    Total
    
    Value
    
    Amount
    
    Fair Value(In millions, except for rates)Liabilities:Long-term debt  fixed rate
    
    $
    352
    
    
    $
    759
    
    
    $
    1,111
    
    
    $
    1,273
    
    
    $
    1,110
    
    
    $
    1,220Average effective interest rate
    
    
    7.9
    %
    
    
    8.3
    %
 16




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
     Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans  An Amendment of FASB Statements No. 87, 88, 106, and 132(R).
  
 17




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Report of Independent Registered Public Accounting Firm
 
   
 18




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EL PASO NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Operating revenues
    
    $
    588
    
    
    $
    497
    
    
    $
    508Operating expensesOperation and maintenance
    
    
    183
    
    
    
    232
    
    
    
    166Depreciation, depletion and amortization
    
    
    92
    
    
    
    74
    
    
    
    72Taxes, other than income taxes
    
    
    30
    
    
    
    29
    
    
    
    28305
    
    
    
    335
    
    
    
    266Operating income
    
    
    283
    
    
    
    162
    
    
    
    242Other income, net
    
    
    3
    
    
    
    8
    
    
    
    7Interest and debt expense
    
    
    (95
    )
    
    
    (92
    )
    
    
    (92
    )Affiliated interest income, net
    
    
    53
    
    
    
    32
    
    
    
    19Income before income taxes
    
    
    244
    
    
    
    110
    
    
    
    176Income taxes
    
    
    92
    
    
    
    46
    
    
    
    58Net income
    
    $
    152
    
    
    $
    64
    
    
    $
    118
  19




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EL PASO NATURAL GAS COMPANY
 CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
 December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    
    
    
    $
    Accounts and notes receivableCustomer, net of allowance of $5 in 2006 and $18 in 2005
    
    
    81
    
    
    
    114Affiliates
    
    
    5
    
    
    
    4Materials and supplies
    
    
    40
    
    
    
    41Deferred income taxes
    
    
    42
    
    
    
    14Restricted cash
    
    
    
    
    
    
    17Other
    
    
    6
    
    
    
    3Total current assets
    
    
    174
    
    
    
    193Property, plant and equipment, at cost
    
    
    3,557
    
    
    
    3,417Less accumulated depreciation, depletion and amortization
    
    
    1,251
    
    
    
    1,193Total property, plant and equipment, net
    
    
    2,306
    
    
    
    2,224Other assetsNote receivable from affiliate
    
    
    1,070
    
    
    
    872Other
    
    
    81
    
    
    
    891,151
    
    
    
    961Total assets
    
    $
    3,631
    
    
    $
    3,378LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payableTrade
    
    $
    59
    
    
    $
    84Affiliates
    
    
    17
    
    
    
    6Other
    
    
    9
    
    
    
    17Taxes payable
    
    
    87
    
    
    
    27Accrued interest
    
    
    27
    
    
    
    25Accrued liabilities
    
    
    84
    
    
    
    50Other
    
    
    21
    
    
    
    12Total current liabilities
    
    
    304
    
    
    
    221Long-term debt
    
    
    1,111
    
    
    
    1,110Other liabilitiesDeferred income taxes
    
    
    405
    
    
    
    364Other
    
    
    85
    
    
    
    105490
    
    
    
    469Commitments and contingenciesStockholders equityCommon stock, par value $1 per share; 1,000 shares authorized, issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    1,268
    
    
    
    1,268Retained earnings
    
    
    462
    
    
    
    310Accumulated other comprehensive loss
    
    
    (4
    )
    
    
    Total stockholders equity
    
    
    1,726
    
    
    
    1,578Total liabilities and stockholders equity
    
    $
    3,631
    
    
    $
    3,378
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EL PASO NATURAL GAS COMPANY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    152
    
    
    $
    64
    
    
    $
    118Adjustments to reconcile net income to net cash from operating activitiesDepreciation, depletion and amortization
    
    
    92
    
    
    
    74
    
    
    
    72Deferred income taxes
    
    
    15
    
    
    
    7
    
    
    
    155Other non-cash income items
    
    
    (1
    )
    
    
    
    
    
    
    Asset and liabilities changesWestern Energy Settlement liability
    
    
    
    
    
    
    
    
    
    
    (538
    )Accounts receivable
    
    
    35
    
    
    
    (34
    )
    
    
    (5
    )Accounts payable
    
    
    (17
    )
    
    
    41
    
    
    
    4Taxes receivable
    
    
    
    
    
    
    102
    
    
    
    (102
    )Taxes payable
    
    
    55
    
    
    
    16
    
    
    
    (93
    )Other, net
    
    
    (9
    )
    
    
    34
    
    
    
    (47
    )Net cash provided by (used in) operating activities
    
    
    322
    
    
    
    304
    
    
    
    (436
    )Cash flows from investing activitiesAdditions to property, plant and equipment
    
    
    (143
    )
    
    
    (141
    )
    
    
    (148
    )Net change in note receivable from affiliate
    
    
    (198
    )
    
    
    (142
    )
    
    
    49Net change in restricted cash
    
    
    17
    
    
    
    (17
    )
    
    
    443Proceeds from the sale of assets
    
    
    2
    
    
    
    2
    
    
    
    1Other
    
    
    
    
    
    
    
    
    
    
    (7
    )Net cash provided by (used in) investing activities
    
    
    (322
    )
    
    
    (298
    )
    
    
    338Cash flows from financing activitiesPayments to retire debt
    
    
    
    
    
    
    (7
    )
    
    
    Capital contributions
    
    
    
    
    
    
    
    
    
    
    73Net cash provided by (used in) financing activities
    
    
    
    
    
    
    (7
    )
    
    
    73Net change in cash and cash equivalents
    
    
    
    
    
    
    (1
    )
    
    
    (25
    )Cash and cash equivalentsBeginning of period
    
    
    
    
    
    
    1
    
    
    
    26End of period
    
    $
    
    
    
    $
    
    
    
    $
    1
  21




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EL PASO NATURAL GAS COMPANY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In millions, except share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    other
    
    
    TotalCommon stock
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    stockholdersShares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    equityJanuary 1, 2004
    
    
    1,000
    
    
    $
    
    
    
    $
    1,194
    
    
    $
    128
    
    
    $
    
    
    
    $
    1,322Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    118Western Energy Settlement contribution
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73December 31, 2004
    
    
    1,000
    
    
    
    
    
    
    
    1,267
    
    
    
    246
    
    
    
    
    
    
    
    1,513Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    64Allocated tax benefit of El Paso equity plans
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1December 31, 2005
    
    
    1,000
    
    
    
    
    
    
    
    1,268
    
    
    
    310
    
    
    
    
    
    
    
    1,578Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    152Adoption of SFAS No. 158, net of income taxes of $3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )December 31, 2006
    
    
    1,000
    
    
    $
    
    
    
    $
    1,268
    
    
    $
    462
    
    
    $
    (4
    )
    
    $
    1,726
  22




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##### Table of Contents



EL PASO NATURAL GAS COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Basis of Presentation and Principles of Consolidation
  Use of Estimates
  Regulated Operations
 Accounting
for the Effects of Certain Types of Regulation
 Cash and Cash Equivalents
   Allowance for Doubtful Accounts
  Materials and Supplies
  23




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Natural Gas Imbalances
   Property, Plant and Equipment
       Asset Impairments
  24




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##### Table of Contents



Revenue Recognition
  Environmental Costs and Other Contingencies
 Environmental Costs.
  Other Contingencies
 Income Taxes
   25




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##### Table of Contents



Accounting for Asset Retirement Obligations
 Accounting
for Asset Retirement Obligations and , Accounting for Conditional Asset Retirement Obligations.
   Pension and Other Postretirement Benefits
 Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  An Amendment of FASB Statements No. 87, 88, 106,
and 132(R).
 Evaluation of Prior Period Misstatements in Current Financial Statements
 Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements.
 New Accounting Pronouncements Issued But Not Yet Adopted
  Accounting for Uncertainty in Income Taxes. Accounting for Uncertainty in Income Taxes. Accounting for
Income Taxes,
 Fair Value Measurements. Fair Value
Measurements
 26




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##### Table of Contents



Measurement Date of Other Postretirement Benefits
 2. Income Taxes
 Components of Income Taxes.
 2006
    
    
    2005
    
    
    2004(In millions)CurrentFederal
    
    $
    66
    
    
    $
    35
    
    
    $
    (99
    )State
    
    
    11
    
    
    
    4
    
    
    
    277
    
    
    
    39
    
    
    
    (97
    )DeferredFederal
    
    
    13
    
    
    
    5
    
    
    
    159State
    
    
    2
    
    
    
    2
    
    
    
    (4
    )15
    
    
    
    7
    
    
    
    155Total income taxes
    
    $
    92
    
    
    $
    46
    
    
    $
    58
 Effective Tax Rate Reconciliation.
 2006
    
    
    2005
    
    
    2004(In millions, except for rates)Income taxes at the statutory federal rate of 35%
    
    $
    85
    
    
    $
    39
    
    
    $
    62Increase (decrease)State income taxes, net of federal income tax effect
    
    
    8
    
    
    
    4
    
    
    
    6State tax valuation allowance  Western Energy Settlement
    
    
    
    
    
    
    
    
    
    
    (6
    )Non-deductible expenses
    
    
    
    
    
    
    3
    
    
    
    Other
    
    
    (1
    )
    
    
    
    
    
    
    (4
    )Income taxes
    
    $
    92
    
    
    $
    46
    
    
    $
    58Effective tax rate
    
    
    38
    %
    
    
    42
    %
    
    
    33
    %
 Deferred Tax Assets and Liabilities.
 2006
    
    
    2005(In millions)Deferred tax liabilitiesProperty, plant and equipment
    
    $
    448
    
    
    $
    427Employee benefits and deferred compensation obligations
    
    
    20
    
    
    
    27Regulatory and other assets
    
    
    41
    
    
    
    45Total deferred tax liability
    
    
    509
    
    
    
    499Deferred tax assetsU.S. net operating loss and tax credit carryovers
    
    
    80
    
    
    
    81Other liabilities
    
    
    66
    
    
    
    68Total deferred tax asset
    
    
    146
    
    
    
    149Net deferred tax liability
    
    $
    363
    
    
    $
    350
 Tax Credits and Carryovers.
 Valuation Allowances.
 27




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##### Table of Contents



3. Financial Instruments
  2006
    
    2005Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair Value(In millions)Balance sheet financial instruments:Long-term debt(1)
    
    $
    1,111
    
    
    $
    1,273
    
    
    $
    1,110
    
    
    $
    1,220
 
 (1)
    
    We estimated the fair value of our debt with fixed interest rates based on
quoted market prices for the same or similar issues.  4. Regulatory Assets and Liabilities
  Description
    
    2006
    
    
    2005(In millions)Non-current regulatory assetsGross-up of deferred taxes on capitalized funds used during construction
    
    $
    20
    
    
    $
    19Unamortized loss on reacquired debt
    
    
    16
    
    
    
    18Postretirement benefits
    
    
    9
    
    
    
    9Deferred fuel variance
    
    
    6
    
    
    
    Under-collected state income taxes
    
    
    3
    
    
    
    7Other
    
    
    4
    
    
    
    3Total non-current regulatory assets(1)
    
    $
    58
    
    
    $
    56Current regulatory liabilities
    
    $
    3
    
    
    $
    1Non-current regulatory liabilitiesProperty and plant depreciation
    
    
    47
    
    
    
    41Imbalance cashouts
    
    
    4
    
    
    
    Excess deferred federal income taxes
    
    
    2
    
    
    
    2Total regulatory liabilities(1)
    
    $
    56
    
    
    $
    44
 
 (1)
    
    Amounts are included as other non-current assets and other current and
non-current liabilities in our balance sheet. 28




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##### Table of Contents



5. Debt and Credit Facilities
 Debt
  2006
    
    
    2005(In millions)7.625% Notes due August 2010
    
    $
    355
    
    
    $
    3558.625% Debentures due January 2022
    
    
    260
    
    
    
    2607.50% Debentures due November 2026
    
    
    200
    
    
    
    2008.375% Notes due June 2032
    
    
    300
    
    
    
    3001,115
    
    
    
    1,115Less: Unamortized discount
    
    
    4
    
    
    
    5Total long-term debt
    
    $
    1,111
    
    
    $
    1,110
  Credit Facilities
    6. Commitments and Contingencies
 Legal Proceedings
 Sierra Pacific Resources and Nevada Power Company v. El Paso et al.
 29




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##### Table of Contents



Carlsbad.
 Baldonado et al. v. EPNG Baldonado
 Gas Measurement Cases. re: Natural Gas Royalties
Qui Tam Litigation,
 Will Price, et
al. v. Gas Pipelines and Their Predecessors, et al.,
 Bank of America. Bank of America, et al. v. El Paso Natural Gas
Company, et al., Deane W. Moore, et al. v. Burlington Northern, Inc., et al., Bank of America, et al. v. El Paso Natural Gas and Burlington Resources Oil and Gas Company, L.P., El Paso Natural Gas Company v. Burlington Resources, Inc. and Burlington Resources
Oil and Gas Company, L.P.
   30




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##### Table of Contents



Environmental Matters
   Balance at January 1, 2006
    
    $
    29Additions/adjustments for remediation activities
    
    
    (1
    )Payments for remediation activities
    
    
    (4
    )Balance at December 31, 2006
    
    $
    24
  Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) Matters.
 State of Arizona Chromium Review.
  Rates and Regulatory Matters
 Rate Case.
 31




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##### Table of Contents



Other Matters
 Navajo Nation.
  Enron Bankruptcy
 Capital Commitments
  Operating Leases
  Year EndingDecember 31,
    
    (In millions)2007
    
    $
    82008
    
    
    22009
    
    
    22010
    
    
    1Total
    
    $
    13
  32




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Other Commercial Commitments
  Guarantees
  7. Retirement Benefits
 Pension and Retirement Benefits.
 Postretirement Benefits.
  33




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##### Table of Contents



Change in Accumulated Postretirement Benefit Obligation, Plan Assets and Funded Status
 2006
    
    
    2005(In millions)Change in accumulated postretirement benefit obligation:Accumulated postretirement benefit obligation at beginning of period
    
    $
    93
    
    
    $
    85Interest cost
    
    
    5
    
    
    
    4Actuarial (gain) loss
    
    
    (4
    )
    
    
    10Benefits paid
    
    
    (6
    )
    
    
    (6
    )Accumulated postretirement benefit obligation at end of period
    
    $
    88
    
    
    $
    93Change in plan assets:Fair value of plan assets at beginning period
    
    $
    90
    
    
    $
    77Actual return on plan assets
    
    
    9
    
    
    
    8Employer contributions
    
    
    3
    
    
    
    11Benefits paid
    
    
    (6
    )
    
    
    (6
    )Fair value of plan assets at end of period
    
    $
    96
    
    
    $
    90Reconciliation of funded status:Fair value of plan assets at September 30
    
    $
    96
    
    
    $
    90Less: accumulated postretirement benefit obligation end of period
    
    
    88
    
    
    
    93Funded status at September 30
    
    
    8
    
    
    
    (3
    )Fourth quarter contributions
    
    
    
    
    
    
    3Unrecognized actuarial losses (1)
    
    
    
    
    
    
    15Net asset at December 31
    
    $
    8
    
    
    $
    15
 
 (1)
    
    Amounts were reclassified to accumulated other comprehensive income upon adoption
of SFAS No. 158 in 2006. Expected Payment of Future Benefits.
 Year EndingDecember 31,2007
    
    $
    92008
    
    
    92009
    
    
    92010
    
    
    82011
    
    
    82012 -2016
    
    
    37Total
    
    $
    80
 Components of Net Benefit Cost.
 2006
    
    
    2005
    
    
    2004(In millions)Interest cost
    
    $
    5
    
    
    $
    4
    
    
    $
    6Expected return on plan assets
    
    
    (6
    )
    
    
    (5
    )
    
    
    (5
    )Amortization of net actuarial loss
    
    
    1
    
    
    
    
    
    
    
    2Amortization of transition obligation
    
    
    
    
    
    
    8
    
    
    
    8Net postretirement benefit cost
    
    $
    
    
    
    $
    7
    
    
    $
    11
 34




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Actuarial Assumptions and Sensitivity Analysis.
 2006
    
    2005
    
    2004(Percent)Assumptions related to benefit obligations at September 30:Discount rate
    
    
    5.50
    
    
    
    5.25Assumptions related to benefit costs at December 31:Discount rate
    
    
    5.25
    
    
    
    5.75
    
    
    
    6.00Expected return on plan assets(1)
    
    
    8.00
    
    
    
    7.50
    
    
    
    7.50
 
 (1)
    
    The expected return on plan assets is a pre-tax rate (before a tax rate
ranging from 15 percent to 16 percent on postretirement benefits) that is primarily based on an
expected risk-free investment return, adjusted for historical risk premiums and specific risk
adjustments associated with our debt and equity securities. These
expected returns were then weighted based on the target asset allocations of our investment
portfolio.  2006
    
    2005(In millions)One percentage point increase:Accumulated postretirement benefit obligation
    
    $
    6
    
    
    $
    7One percentage point decrease:Accumulated postretirement benefit obligation
    
    $
    (5
    )
    
    $
    (6
    )
 Plan Assets
 Actual
    
    
    ActualAsset Category
    
    2006
    
    
    2005(Percent)Equity securities
    
    
    65
    
    
    
    65Debt securities
    
    
    35
    
    
    
    34Other
    
    
    
    
    
    
    1Total
    
    
    100
    
    
    
    100
   8. Transactions with Major Customers
  2006(1)
    
    2005
    
    2004(In millions)SoCal
    
    $
    145
    
    
    $
    156
    
    
    $
    157Southwest Gas Corporation
    
    
    66
    
    
    
    51
    
    
    
    51
 
 (1)
    
    Revenues reflect rates subject to refund. 35




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##### Table of Contents



9. Supplemental Cash Flow Information
  2006
    
    2005
    
    2004(In millions)Interest paid, net of capitalized interest
    
    $
    93
    
    
    $
    93
    
    
    $
    92Income tax payments (refunds)
    
    
    22
    
    
    
    (93
    )
    
    
    98
 10. Transactions with Affiliates
 Cash Management Program.
 Taxes.
 Other Affiliate Balances.
 Affiliate Revenues and Expenses.
   2006
    
    2005
    
    2004(In millions)Revenues from affiliates
    
    $
    17
    
    
    $
    17
    
    
    $
    18Operation and maintenance expenses from affiliates
    
    
    52
    
    
    
    67
    
    
    
    62Reimbursements of operating expenses charged to affiliates
    
    
    16
    
    
    
    16
    
    
    
    14
 36




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##### Table of Contents



11. Supplemental Selected Quarterly Financial Information (Unaudited)
  Quarters EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    Total(In millions)2006Operating revenues
    
    $
    153
    
    
    $
    142
    
    
    $
    155
    
    
    $
    138
    
    
    $
    588Operating income
    
    
    72
    
    
    
    62
    
    
    
    80
    
    
    
    69
    
    
    
    283Net income
    
    
    38
    
    
    
    33
    
    
    
    45
    
    
    
    36
    
    
    
    1522005Operating revenues
    
    $
    123
    
    
    $
    123
    
    
    $
    125
    
    
    $
    126
    
    
    $
    497Operating income
    
    
    47
    
    
    
    57
    
    
    
    19
    
    
    
    39
    
    
    
    162Net income
    
    
    19
    
    
    
    27
    
    
    
    5
    
    
    
    13
    
    
    
    64
 37




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##### Table of Contents



SCHEDULE II
 EL PASO NATURAL GAS COMPANY
VALUATION AND QUALIFYING ACCOUNTS
 Years Ended December 31, 2006, 2005 and 2004
(In millions)
 Balance at
    
    
    Charged to
    
    
    
    
    
    
    BalanceBeginning
    
    
    Costs and
    
    
    
    
    
    
    at EndDescription
    
    of Period
    
    
    Expenses
    
    
    Deductions
    
    
    of Period2006Allowance for doubtful accounts
    
    $
    18
    
    
    $
    (4
    )
    
    $
    (9
    )
    
    $
    5Legal reserves
    
    
    45
    
    
    
    1
    
    
    
    (30
    )
    
    
    16Environmental reserves
    
    
    29
    
    
    
    (1
    )
    
    
    (4
    )
    
    
    24Regulatory reserves
    
    
    
    
    
    
    65
    (1)
    
    
    
    
    
    
    652005Allowance for doubtful accounts
    
    $
    18
    
    
    $
    
    
    
    $
    
    
    
    $
    18Legal reserves
    
    
    3
    
    
    
    42
    (1)
    
    
    
    
    
    
    45Environmental reserves
    
    
    32
    
    
    
    1
    
    
    
    (4
    )
    
    
    292004Allowance for doubtful accounts
    
    $
    18
    
    
    $
    
    
    
    $
    
    
    
    $
    18Valuation allowance on deferred tax assets
    
    
    6
    
    
    
    
    
    
    
    (6
    )
    
    
    Legal reserves
    
    
    541
    
    
    
    
    
    
    
    (538
    )(2)
    
    
    3Environmental reserves
    
    
    28
    
    
    
    7
    
    
    
    (3
    )
    
    
    32Regulatory reserves
    
    
    12
    
    
    
    
    
    
    
    (12
    )
    
    
    
 
 (1)
    
    For a discussion of these matters, see Item 8, Financial Statements and
Supplementary Data, Note 6.(2)
    
    Relates to payments made pursuant to the Western Energy Settlement. 38




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION
  
 PART III
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  All Other Fees
  39




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##### Table of Contents



Policy for Approval of Audit and Non-Audit Fees
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a) The following documents are filed as a part of this report:
   PageReports of Independent Registered Public Accounting Firms
    
    
    17Consolidated Statements of Income
    
    
    19Consolidated Balance Sheets
    
    
    20Consolidated Statements of Cash Flows
    
    
    21Consolidated Statements of Stockholders Equity
    
    
    22Notes to Consolidated Financial Statements
    
    
    232. Financial statement schedules.Schedule II  Valuation and Qualifying AccountsAll other schedules are omitted because they are not applicable, or
the required information is disclosed in the financial
statements or accompanying notes.3. Exhibits
  Undertaking
  40




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##### Table of Contents



SIGNATURES
 th
 EL PASO NATURAL GAS COMPANYBy:
    
    /S/ JAMES J. CLEARYJames J. ClearyPresident
  Signature
    
    Title
    
    Date/S/ JAMES J. CLEARY
    
    President and Director
    
    February 28, 2007James
J. Cleary
    
    (Principal Executive Officer)/S/ JOHN R. SULT
    
    Senior Vice President,
    
    February 28, 2007John
R. Sult
    
    Chief Financial Officer and Controller(Principal Accounting and Financial Officer)/S/ JAMES C. YARDLEY
    
    Chairman of the Board
    
    February 28, 2007James
C. Yardley/S/ DANIEL B. MARTIN
    
    Senior Vice President and Director
    
    February 28, 2007Daniel
B. Martin/S/ THOMAS L. PRICE
    
    Vice President and Director
    
    February 28, 2007Thomas
L. Price
 41




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##### Table of Contents



EL PASO NATURAL GAS COMPANY
 EXHIBIT INDEX
December 31, 2006
  ExhibitNumber
    
    Description3.A
    
    Restated Certificate of Incorporation dated April 8, 2003 (Exhibit 3.A to our 2003 Second Quarter Form 10-Q).3.B
    
    By-laws dated June 24, 2002 (Exhibit 3.B to our 2002 Form 10-K).4.A
    
    Indenture dated as of January 1, 1992, between El Paso Natural Gas Company and Wilmington Trust Company (as
successor to Citibank, N.A.), as Trustee, (Exhibit 4.A to our 2004 Form 10-K).4.B
    
    Indenture dated as of November 13, 1996, between El Paso Natural Gas Company and Wilmington Trust Company
(as successor to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, (Exhibit 4.B
to our 2004 Form 10-K).4.C
    
    Indenture dated as of July 21, 2003, between El Paso Natural Gas Company and Wilmington Trust Company, as
Trustee, (Exhibit 4.1 to our Form 8-K filed July 23, 2003).10.A
    
    Amended and Restated Credit Agreement dated as of July 31, 2006, among El Paso Corporation, Colorado
Interstate Gas Company, El Paso Natural Gas Company, Tennessee Gas Pipeline Company, the several banks and
other financial institutions from time to time parties thereto and JPMorgan Chase Bank, N.A., as
administrative agent and as collateral agent. (Exhibit 10.A to our Current Report on Form 8-K, filed with
the SEC on August 2, 2006.)*10.A.1
    
    Amendment No. 1 dated as of January 19, 2007 to the Amended and Restated Credit Agreement dated as of July
31, 2006 among El Paso Corporation, Colorado Interstate Gas Company, El Paso Natural Gas Company, Tennessee
Gas Pipeline Company, the several banks and other financial institutions from time to time parties thereto
and JPMorgan Chase Bank, N.A., as administrative agent and as collateral agent.10.B
    
    Amended and Restated Security Agreement dated as of July 31, 2006, among El Paso Corporation, Colorado
Interstate Gas Company, El Paso Natural Gas Company, Tennessee Gas Pipeline Company, the Subsidiary
Guarantors and certain other credit parties thereto and JPMorgan Chase Bank, N.A., not in its individual
capacity, but solely as collateral agent for the Secured Parties and as the depository bank. (Exhibit 10.B
to our Current Report on Form 8-K, filed with the SEC on August 2, 2006.)21
    
    Omitted pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.*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.
 42