##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
      Form 10-Q
 (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission File Number 1-14365
      El Paso
    Corporation
 (Exact Name of Registrant as
    Specified in its Charter)
  Delaware

76-0568816(State or Other Jurisdiction
    of Incorporation or Organization)

(I.R.S. Employer
    Identification No.)El Paso Building
    1001 Louisiana Street
    Houston, Texas(Address of Principal
    Executive Offices)

77002(Zip Code)   (713) 420-2600
   þ o
  Rule 12b-2
 þ o o
  Rule 12b-2 o þ




---



##### 



EL PASO
    CORPORATION
  TABLE OF
    CONTENTS
  Caption

PagePART I 
    Financial InformationItem 1.

Financial
    Statements


1Item 2.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


32Item 3.

Quantitative and
    Qualitative Disclosures About Market Risk


53Item 4.

Controls and
    Procedures


54PART II 
    Other InformationItem 1.

Legal
    Proceedings


55Item 1A.

Risk
    Factors


55Cautionary
    Statements for Purposes of the Safe Harbor
    Provisions of the Private Securities Litigation Reform Act of
    1995


55Item 2.

Unregistered Sales
    of Equity Securities and Use of Proceeds


56Item 3.

Defaults Upon
    Senior Securities


56Item 4.

Submission of
    Matters to a Vote of Security Holders


56Item 5.

Other
    Information


56Item 6.

Exhibits


56Signatures


58Eleventh Supplemental IndentureForm of Indemnification AgreementAmendment No.1 to Employee Stock Purchase PlanAmendment to Executive Award Plan of Sonat Inc.Amendment No.5 to Omnibus Plan for Management EmployeesAmendment No.5 to Strategic Stock PlanAmendment No.3 to 1999 Omnibus Incentive Compensation PlanAmendment No.3 to 1995 Omnibus Compensation PlanAmendment No.6 to 2001 Omnibus Incentive Compensation PlanAmendment No.3 to Stock Option Plan for Non-Employee DirectorsAmendment No.3 to 2001 Stock Option PlanAmendment No.1 to 2005 Compensation Plan for Non-Employee DirectorsAmendment No.2 to 2005 Omnibus Incentive Compensation PlanRatio of Earnings to Combined Fixed Charges & Preferred Stock DividendsCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906        /d

= per day

Mcfe

= thousand cubic feet of
    natural gas equivalentsBbl

= barrels

MMBtu

= million British thermal unitsBBtu

= billion British thermal units

MMcf

= million cubic feetBcfe

= billion cubic feet of
    natural gas equivalents

MMcfe

= million cubic feet of
    natural gas equivalentsLNG

= liquefied natural gas

NGL

= natural gas liquidsMBbls

= thousand barrels

TBtu

= trillion British thermal unitsMcf

= thousand cubic feet     and/or
 i




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION Item 1. Financial
    Statements  EL PASO
    CORPORATION
    CONDENSED CONSOLIDATED STATEMENTS OF INCOME
    (In millions, except per common share amounts)
    (Unaudited)
  Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Operating revenues

$
1,061


$
752


$
3,806


$
3,009Operating expensesCost of products and services


73



111



219



259Operation and maintenance


366



454



1,085



1,250Depreciation, depletion and
    amortization


282



270



832



823Loss on long-lived assets


15



3



15



10Taxes, other than income taxes


69



69



203



190805



907



2,354



2,532Operating income (loss)


256



(155
)


1,452



477Earnings from unconsolidated
    affiliates


69



13



166



184Other income, net


34



50



116



148Interest and debt expense


(310
)


(337
)


(990
)


(1,013
)Preferred interests of
    consolidated subsidiaries














(9
)Income (loss) before income taxes


49



(429
)


744



(213
)Income taxes


(86
)


(136
)


81



(100
)Income (loss) from continuing
    operations


135



(293
)


663



(113
)Discontinued operations, net of
    income taxes






(19
)


(22
)


(331
)Net income (loss)


135



(312
)


641



(444
)Preferred stock dividends


9



9



28



17Net income (loss) available to
    common stockholders

$
126


$
(321
)

$
613


$
(461
)Earnings (losses) per common shareBasicIncome (loss) from continuing
    operations

$
0.18


$
(0.47
)

$
0.94


$
(0.20
)Discontinued operations, net of
    income taxes






(0.03
)


(0.03
)


(0.52
)Net income (loss)

$
0.18


$
(0.50
)

$
0.91


$
(0.72
)DilutedIncome (loss) from continuing
    operations

$
0.18


$
(0.47
)

$
0.90


$
(0.20
)Discontinued operations, net of
    income taxes






(0.03
)


(0.03
)


(0.52
)Net income (loss)

$
0.18


$
(0.50
)

$
0.87


$
(0.72
)Dividends declared per common share

$
0.04


$
0.04


$
0.12


$
0.12    1




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##### Table of Contents



EL PASO
    CORPORATION
    CONDENSED CONSOLIDATED BALANCE SHEETS
    (In millions, except share amounts)
    (Unaudited)
  September 30,


December 31,2006


2005ASSETSCurrent assetsCash and cash equivalents

$
759


$
2,132Accounts and notes receivableCustomers, net of allowance of $33
    in 2006 and $67 in 2005


590



1,115Affiliates


163



58Other


454



141Assets from price risk management
    activities


302



641Margin and other deposits held by
    others


25



1,124Assets related to discontinued
    operations and held for sale


62



230Deferred income taxes


206



396Other


258



348Total current assets


2,819



6,185Property, plant and equipment, at
    costPipelines


20,693



19,965Natural gas and oil properties, at
    full cost


16,439



15,738Other


577



65137,709



36,354Less accumulated depreciation,
    depletion and amortization


18,085



17,567Total property, plant and
    equipment, net


19,624



18,787Other assetsInvestments in unconsolidated
    affiliates


2,081



2,473Assets from price risk management
    activities


551



1,368Other


2,324



3,0254,956



6,866Total assets

$
27,399


$
31,838    2




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##### Table of Contents



EL PASO
    CORPORATION
    CONDENSED CONSOLIDATED BALANCE SHEETS
    (In millions, except for share amounts)
    (Unaudited)
  September 30,


December 31,2006


2005LIABILITIES AND STOCKHOLDERS
    EQUITYCurrent liabilitiesAccounts payableTrade

$
457


$
864Affiliates


3



10Other


496



540Short-term financing obligations,
    including current maturities


885



986Liabilities from price risk
    management activities


380



1,418Liabilities related to
    discontinued operations


33



420Margin deposits held by us


294



497Accrued interest


297



290Other


1,067



687Total current liabilities


3,912



5,712Long-term financing obligations,
    less current maturities


14,294



17,023OtherLiabilities from price risk
    management activities


1,058



2,005Deferred income taxes


1,557



1,405Other


1,807



2,2734,422



5,683Commitments and contingenciesSecurities of subsidiaries


29



31Stockholders equityPreferred stock, par value
    $0.01 per share; authorized 50,000,000 shares; issued
    750,000 shares of 4.99% convertible perpetual stock;
    stated at liquidation value


750



750Common stock, par value
    $3 per share; authorized 1,500,000,000 shares; issued
    704,564,119 shares in 2006 and 667,082,043 shares in
    2005


2,114



2,001Additional paid-in capital


4,833



4,592Accumulated deficit


(2,774
)


(3,415
)Accumulated other comprehensive
    income (loss)


20



(332
)Treasury stock (at cost);
    8,576,078 shares in 2006 and 7,620,272 shares in 2005


(201
)


(190
)Unamortized compensation






(17
)Total stockholders equity


4,742



3,389Total liabilities and
    stockholders equity

$
27,399


$
31,838    3




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##### Table of Contents



EL PASO
    CORPORATION
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In millions)
 (Unaudited)
 Nine MonthsSeptember 30,2006


2005Cash flows from operating
    activitiesNet income (loss)

$
641


$
(444
)Loss from discontinued operations,
    net of income taxes


(22
)


(331
)Net income (loss) from continuing
    operations


663



(113
)Adjustments to reconcile net
    income (loss) to net cash from operating activitiesDepreciation, depletion and
    amortization


832



823Loss on long-lived assets


15



10Earnings from unconsolidated
    affiliates, adjusted for cash distributions


22



13Deferred income taxes


47



23Other non-cash items


67



34Change in margin and other deposits


896



(692
)Other asset and liability changes


(540
)


(485
)Cash provided by (used in)
    continuing operations


2,002



(387
)Cash provided by (used in)
    discontinued operations


10



(11
)Net cash provided by (used in)
    operating activities


2,012



(398
)Cash flows from investing
    activitiesCapital expenditures


(1,639
)


(1,260
)Net proceeds from the sale of
    assets and investments


501



1,113Cash paid for acquisitions, net of
    cash acquired






(1,023
)Net change in restricted cash


102



16Other


25



207Cash used in continuing operations


(1,011
)


(947
)Cash provided by discontinued
    operations


356



178Net cash used in investing
    activities


(655
)


(769
)Cash flows from financing
    activitiesPayments to retire long-term debt
    and other financing obligations


(2,992
)


(1,525
)Net proceeds from the issuance of
    long-term debt and other financing obligations


125



1,225Dividends paid


(108
)


(85
)Net proceeds from issuance of
    common stock


500



Net proceeds from issuance of
    preferred stock






723Redemption of preferred stock of
    subsidiary






(300
)Contributions from discontinued
    operations


136



70Other


(25
)


(4
)Cash provided by (used in)
    continuing operations


(2,364
)


104Cash used in discontinued
    operations


(366
)


(167
)Net cash used in financing
    activities


(2,730
)


(63
)Change in cash and cash equivalents


(1,373
)


(1,230
)Cash and cash equivalentsBeginning of period


2,132



2,117End of period

$
759


$
887    4




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##### Table of Contents



EL PASO
    CORPORATION
  CONDENSED
    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (In millions)
 (Unaudited)
  Nine MonthsQuarters Ended


EndedSeptember 30,


September 30,2006


2005


2006


2005Net income (loss)

$
135


$
(312
)

$
641


$
(444
)Foreign currency translation
    adjustments (net of income taxes of less than $1 in 2006 and $20
    and $13 in 2005)


3



(5
)


5



2Unrealized net gains (losses) from
    cash flow hedging activityUnrealized
    mark-to-market
    gains (losses) arising during period (net of income taxes of $51
    and $174 in 2006 and $180 and $269 in 2005)


92



(325
)


311



(497
)Reclassification adjustments for
    changes in initial value to the settlement date (net of income
    taxes of $3 and $18 in 2006 and $15 and $3 in 2005)


4



42



29



23Change in unrealized gains on
    available for sale securities, net of reclassification
    adjustments (net of income tax of $1 and $4 in 2006)


(2
)






7



Other comprehensive income (loss)


97



(288
)


352



(472
)Comprehensive income (loss)

$
232


$
(600
)

$
993


$
(916
)    5




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##### Table of Contents



EL PASO
    CORPORATION
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  1.
    Basis of
    Presentation and Significant Accounting Policies  Basis of
    Presentation
  Form 10-Q Form 10-Q Form 8-K Form 10-K Form 8-K
  Significant
    Accounting Policies
  Form 8-K
  Stock-Based Compensation. Share-Based Payment. Accounting for Stock Issued to Employees,
  Accounting for Pipeline Integrity Costs.
 6




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##### Table of Contents



New
    Accounting Pronouncements Issued But Not Yet Adopted
  Accounting for Uncertainty in Income Taxes. Accounting for Uncertainty in Income Taxes. Accounting for Income Taxes,
  Accounting for Pension and Other Postretirement
    Benefits. Employers Accounting for
    Defined Benefit Pension and Other Postretirement
    Plans 
    Fair Value Measurements. Fair Value
    Measurements
  Evaluation of Prior Period Misstatements in Current Financial
    Statements. Considering the Effects of Prior Year Misstatements When
    Quantifying Misstatements in Current Year Financial
    Statements.
  2.
    Acquisitions     7




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##### Table of Contents



Quarter Ended


Nine Months EndedSeptember 30, 2005


September 30, 2005(In millions, exceptper share amounts)Revenues

$
763


$
3,048Net loss available to common
    stockholders


(321
)


(451
)Basic and diluted net loss per
    share


(0.50
)


(0.70
)   3.
    Divestitures  Sales of
    Assets and Investments
    2006


2005(In millions)Continuing operationsPipelines

$
3


$
49Exploration and Production


86



Power


438



468Field Services






501Corporate


2



121Total continuing
    operations(1)


529



1,139Discontinued operations


364



87Total proceeds

$
893


$
1,226     (1)
    Proceeds exclude returns of invested capital and cash
    transferred with the assets sold and include costs incurred in
    preparing assets for disposal. These items increased our sales
    proceeds by $28 million and $26 million for the nine
    months ended September 30, 2006 and 2005.    2006

2005Pipelines

 Miscellaneous
    transmission lines and related measurement equipment

 Facilities located in
    the southeastern U.S.
     Interest in a gathering system in the western
    U.S.Exploration
    and
    Production

 Natural gas and oil
    properties primarily in south TexasPower

 Interests in power
    plants in Brazil, Asia, Central America, Hungary and Peru
     Cost basis investments
     Power turbine
     Interest in Midland Cogeneration Venture (MCV)

 Cedar Brakes I and II
    
     Interests in power plants in India, Korea, England
    and the U.S.
     Power turbinesField Services



 9.9% interest in
    general partner of Enterprise Products Partners, L.P.
     13.5 million common units in Enterprise
     Interest in Indian Springs natural gas gathering
    system and processing facilityCorporate



 Lakeside Technology
    Center 8




---



##### Table of Contents



2006

2005Discontinued

 Macae power facility
    in Brazil
     Power plant in the Philippines

 Interest in Paraxylene
    facility
     Methyl tertiary-butyl ether processing facility 
     International natural gas and oil production
    properties     Discontinued
    Operations
  Accounting for the Impairment
    or Disposal of Long-Lived Assets
  Macae and Other International Power
    Operations.
  South Louisiana Gathering and Processing
    Operations.
  International Natural Gas and Oil Production
    Operations.
  Petroleum Markets.
  9




---



##### Table of Contents



Macae and


South


InternationalOther


Louisiana


Natural GasInternational


Gathering and


and OilPower


Processing


Production


PetroleumOperations


Operations


Operations


Markets


Total(In millions)Quarter Ended
    September 30, 2006Revenues

$
28


$



$



$



$
28Costs and expenses


(28
)














(28
)Loss on long-lived assets


(5
)














(5
)Other income


2















2Interest and debt expense


(1
)














(1
)Loss before income taxes

$
(4
)

$



$



$




(4
)Income taxes


















(4
)Income from discontinued
    operations, net of income taxes

















$
Quarter Ended
    September 30, 2005Revenues

$
58


$
99


$



$
26


$
183Costs and expenses


(54
)


(89
)






(30
)


(173
)Gain on long-lived assets














1



1Other income


1











1



2Interest and debt expense


(7
)














(7
)Income (loss) before income taxes

$
(2
)

$
10


$



$
(2
)


6Income taxes


















25Loss from discontinued operations,
    net of income taxes

















$
(19
)Nine Months Ended
    September 30, 2006Revenues

$
131


$



$



$



$
131Costs and expenses


(139
)














(139
)Gain (loss) on long-lived assets


(10
)


5











(5
)Other income


4















4Interest and debt expense


(14
)














(14
)Income (loss) before income taxes

$
(28
)

$
5


$



$




(23
)Income taxes


















(1
)Loss from discontinued operations,
    net of income taxes

















$
(22
)Nine Months Ended
    September 30, 2005Revenues

$
167


$
276


$
2


$
100


$
545Costs and expenses


(185
)


(246
)


(2
)


(116
)


(549
)Gain (loss) on long-lived assets


(374
)






(5
)


4



(375
)Other income


7











12



19Interest and debt expense


(21
)














(21
)Income (loss) before income taxes

$
(406
)

$
30


$
(5
)

$




(381
)Income taxes


















(50
)Loss from discontinued operations,
    net of income taxes

















$
(331
)    10




---



##### Table of Contents



4.
    Full Cost
    Ceiling Test      5.
    Loss on
    Long-Lived Assets    6.
    Income
    Taxes   Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions, except rates)Income taxes

$
(86
)

$
(136
)

$
81


$
(100
)Effective tax rate


(176
)%


32
%


11
%


47
%   year-to-date
     11




---



##### Table of Contents



Other Tax Matters.
  7.
    Earnings
    Per Share    2006


2005Basic


Diluted


Basic


Diluted(In millions, except per share amounts)Quarter Ended
    September 30,Income (loss) from continuing
    operations

$
135


$
135


$
(293
)

$
(293
)Convertible preferred stock
    dividends


(9
)






(9
)


(9
)Income (loss) from continuing
    operations available to common stockholders


126



135



(302
)


(302
)Discontinued operations










(19
)


(19
)Net income (loss) available to
    common stockholders

$
126


$
135


$
(321
)

$
(321
)Weighted average common shares
    outstanding


693



693



648



648Effect of dilutive securities:Options and restricted stock






4







Convertible preferred stock






57







Weighted average common shares
    outstanding and dilutive potential common shares


693



754



648



648Earnings per common share:Income (loss) from continuing
    operations

$
0.18


$
0.18


$
(0.47
)

$
(0.47
)Discontinued operations, net of
    income taxes










(0.03
)


(0.03
)Net income (loss)

$
0.18


$
0.18


$
(0.50
)

$
(0.50
)  12




---



##### Table of Contents



2006


2005Basic


Diluted


Basic


DilutedNine Months Ended
    September 30,Income (loss) from continuing
    operations

$
663


$
663


$
(113
)

$
(113
)Convertible preferred stock
    dividends


(28
)






(17
)


(17
)Income (loss) from continuing
    operations available to common stockholders


635



663



(130
)


(130
)Discontinued operations


(22
)


(22
)


(331
)


(331
)Net income (loss) available to
    common stockholders

$
613


$
641


$
(461
)

$
(461
)Weighted average common shares
    outstanding


673



673



643



643Effect of dilutive securities:Options and restricted stock






4







Convertible preferred stock






57







Weighted average common shares
    outstanding and dilutive potential common shares


673



734



643



643Earnings per common share:Income (loss) from continuing
    operations

$
0.94


$
0.90


$
(0.20
)

$
(0.20
)Discontinued operations, net of
    income taxes


(0.03
)


(0.03
)


(0.52
)


(0.52
)Net income (loss)

$
0.91


$
0.87


$
(0.72
)

$
(0.72
)   Form 8-K
  8.
    Price
    Risk Management Activities      13




---



##### Table of Contents



September 30,


December 31,2006


2005(In millions)Net assets (liabilities)Derivatives designated as hedges

$
52


$
(653
)Other commodity-based derivative
    contracts


(653
)


(763
)Total commodity-based
    derivatives(1)


(601
)


(1,416
)Interest rate and foreign currency
    derivatives


16



2Net liabilities from price risk
    management
    activities(2)

$
(585
)

$
(1,414
)     (1)
    
    The decrease in the net liability
    during the nine months ended September 30, 2006 is
    primarily due to a decline in natural gas prices.(2)
    
    Included in both current and
    non-current assets and liabilities on the balance sheet.  9.
    Debt,
    Other Financing Obligations and Other Credit
    Facilities    September 30,


December 31,2006


2005(In millions)Short-term financing obligations,
    including current
    maturities(1)

$
885


$
986Long-term financing obligations


14,294



17,023Total

$
15,179


$
18,009     (1)
    
    Excludes Macae project debt of
    $225 million in 2005, which was reported in liabilities
    related to discontinued operations.   14




---



##### Table of Contents



Long-Term
    Financing Obligations
    CashBook Value

Received/Company

Type

Interest Rate

Increase (Decrease)

(Paid)(In millions)IssuancesEl Paso
    Exploration &
    Production Company

Revolving credit facility due 2010

LIBOR + 1.25%

$
125


$
125Increases through
    September 30, 2006



$
125


$
125Repayments, repurchases,
    retirements and otherCoastal Finance I

Trust originated preferred
    securities

8.375%

$
(300
)

$
(300
)El Paso

Zero coupon convertible debentures




(615
)


(615
)El Paso

Euro notes

5.75%


(26
)


(26
)El Paso
    Exploration &
    Production Company

Revolving credit facility

LIBOR + 1.875%


(500
)


(500
)El Paso

Notes

6.50%


(110
)


(110
)Macae(1)

Non-recourse notes

Variable


(229
)


(229
)El Paso

Term Loan

LIBOR + 2.75%


(1,225
)


(1,225
)El Paso

Senior Notes

7.50%


(183
)


(183
)El Paso

Notes

7.50%


(22
)


(22
)Other

Long-term debt

Various


26



(11
)Decreases through
    September 30, 2006



$
(3,184
)

$
(3,221
)     (1)
    
    Included in liabilities related to
    discontinued operations on our balance sheet at
    December 31, 2005.    Credit
    Facilities and Letters of Credit
  Available Capacity Under Credit Agreements.
  Credit Agreement Restructuring.
   15




---



##### Table of Contents



(a)
    Our ratio of Debt to Consolidated EBITDA, each as defined in the
    credit agreement, shall not exceed 5.75 to 1 at anytime prior to
    June 30, 2007. Thereafter it shall not exceed 5.5 to 1
    until June 29, 2008 and 5.25 to 1 from June 30, 2008
    until maturity and;  (b)
    Our ratio of Consolidated EBITDA, as defined in the credit
    agreement, to interest expense plus dividends paid shall not be
    less than 1.75 to 1 at anytime prior to December 31, 2006.
    Thereafter it shall not be less than 1.80 to 1 until
    June 29, 2008, and 2.00 to 1 from June 30, 2008 until
    maturity.    Unsecured revolving credit facility.
  Letters of Credit.
  10.
    Commitments
    and Contingencies  Legal
    Proceedings
  Shareholder/
    Derivative/ ERISA Litigation
  Shareholder Litigation.
  Derivative Litigation.
  ERISA Class Action Suits. William H.
    Lewis, III v. El Paso Corporation, et al.
 16




---



##### Table of Contents



Cash Balance Plan Lawsuit. Tomlinson,
    et al. v. El Paso Corporation and El Paso
    Corporation Pension Plan
  Retiree Medical Benefits Matters. Yolton
    et al. v. El Paso Tennessee Pipeline Co. and Case
    Corporation.
  Natural Gas Commodities Litigation. In re: Gas Commodity
    Litigation.
  In re Western States
    Wholesale Natural Gas Antitrust Litigation Leggett
    et al. v. Duke Energy Corporation et al. Ever-Bloom Inc. v. AEP Energy Services Inc.
    et al. Farmland Industries,
    Inc. v. Oneok Inc. Learjet, Inc. v. Oneok
    Inc. Breckenridge, et al v. Oneok Inc.,
    et al. Missouri Public Service
    Commission v. El Paso Corporation et al Leggett Breckenridge
 17




---



##### Table of Contents



Gas Measurement Cases. and/or In re: Natural Gas Royalties Qui Tam Litigation,
  Will Price, et al. v. Gas Pipelines and Their
    Predecessors, et al.,
  Hurricane Litigation. George Barasich,
    et al. v. Columbia Gulf Transmission Company,
    et al., Charles Villa Jr., et al. v. Columbia
    Gulf Transmission Company, et al. Henry and Hattie Bands et al. v.
    Columbia Gulf Transmission Company 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.
  MTBE.
 18




---



##### Table of Contents



Government
    Investigations and Inquiries
  Reserve Revisions.
  Iraq Oil Sales.
  Other Government Investigations.
  Other
    Contingencies
  EPNG Rate Case.
  CIG Rate Case.
  Iraq Imports.
  Navajo Nation. rights-of-way
 19




---



##### Table of Contents



rights-of-way rights-of-way rights-of-way rights-of-way
  and/or
  Environmental
    Matters
     20




---



##### Table of Contents



September 30, 2006Sites

Expected


High(In millions)Operating

$
66


$
72Non-operating


259



446Superfund


37



64Total

$
362


$
582     Balance as of January 1, 2006

$
379Additions/adjustments for
    remediation activities


33Payments for remediation activities


(50
)Balance as of September 30,
    2006

$
362   clean-up
  Polychlorinated Biphenyls (PCB) Cost
    Recoveries.
  CERCLA Matters. clean-up
   21




---



##### Table of Contents



Guarantees
  Form 8-K
  Retiree
    Medical Benefits Matters
  11.
    Retirement
    Benefits    Quarters Ended September 30,


Nine Months Ended September 30,Other





OtherPension


Postretirement


Pension


PostretirementBenefits


Benefits


Benefits


Benefits2006


2005


2006


2005


2006


2005


2006


2005(In millions)Service cost

$
4


$
5


$



$



$
12


$
17


$



$
Interest cost


29



29



7



7



87



87



21



22Expected return on plan assets


(44
)


(42
)


(4
)


(3
)


(132
)


(126
)


(12
)


(9
)Amortization of net actuarial loss


14



16











42



48







Amortization of transition
    obligation














2















6Amortization of prior service
    cost(1)






















(2
)






Net benefit cost

$
3


$
8


$
3


$
6


$
9


$
24


$
9


$
19     (1)
    As permitted, the amortization of any prior service cost is
    determined using a straight-line amortization of the cost over
    the average remaining service period of employees expected to
    receive benefits under the plan.   22




---



##### Table of Contents



12.
    Capital
    Stock    ConvertibleCommon Stock

Preferred Stock($0.04/share)

(4.99%/year)Amount paid through
    September 30, 2006

$80

$28Amount paid in October 2006

$27

$9Declared subsequent to
    September 30, 2006:Date of declaration

October 26, 2006

October 26, 2006Date payable

January 2, 2007

January 2, 2007Payable to shareholders of record

December 1, 2006

December 15, 2006   paid-in-capital Form 8-K
  13.
    Stock-Based
    Compensation       23




---



##### Table of Contents



Nine MonthsQuarter Ended


EndedSeptember 30, 2005


September 30, 2005Net loss available to common
    stockholders, as reported

$
(321
)

$
(461
)Add: Stock-based employee
    compensation expense included in reported net loss, net of taxes


3



8Deduct: Total stock-based
    compensation expense, determined under fair-value based method
    for all awards, net of taxes


4



14Net loss available to common
    stockholders, pro forma

$
(322
)

$
(467
)Basic and Diluted loss per share:As reported

$
(0.50
)

$
(0.72
)Pro forma

$
(0.50
)

$
(0.73
)     Non-Qualified
    Stock Options
    WeightedAverageWeighted


Remaining# Shares


Average


Contractual


AggregateUnderlying


Exercise Price


Term


Intrinsic ValueOptions


Per Share


(In years)


(In millions)Outstanding at December 31,
    2005


28,083,485


$
37.12Granted


2,311,708


$
12.30Exercised


(413,507
)

$
7.57Forfeited or canceled


(900,193
)

$
11.11Expired


(3,319,033
)

$
40.56Outstanding at September 30,
    2006


25,762,460


$
35.83



4.96


$
41Vested at September 30, 2006
    or expected to vest in the future


25,426,715


$
36.17



4.91


$
40Exercisable at September 30,
    2006


19,047,555


$
44.87



3.71


$
18     Fair Value Assumptions.
 24




---



##### Table of Contents



Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Expected Term in Years


6.0



4.8



6.0



4.8Expected Volatility


37
%


39
%


38
%


42
%Expected Dividends


1.2
%


1.4
%


1.3
%


1.5
%Risk-Free Interest Rate


4.9
%


4.2
%


5.0
%


3.7
%     Restricted
    Stock
    WeightedAverageGrant DateFair ValueNonvested Shares

# Shares


Per ShareNonvested at December 31, 2005


3,916,030


$
10.83Granted


1,283,533


$
12.61Vested


(1,847,952
)

$
12.29Forfeited


(351,553
)

$
10.13Nonvested at September 30,
    2006


3,000,058


$
10.77      25




---



##### Table of Contents



Employee
    Stock Purchase Plan








|    |                                 
|--- | --------------------------------
|14. | Business
    Segment Information











|                                                     |  |                |      |   |                   |   |      |      |  |   |       |   |  |   |        |  
|---------------------------------------------------- |  | -------------- | ---- | - | ----------------- | - | ---- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                     |  | Quarters Ended |      |   | Nine Months Ended |  
|                                                     |  | September 30,  |      |   | September 30,     |  
|                                                     |  | 2006           |      |   | 2005              |   |      | 2006 |  |   | 2005  |  
|                                                     |  |                |      |   | (In millions)     |   |      |      | 
|                                                    
|Total EBIT                                           |  | $              | 359  |   |                   | $ | (92  | )    |  | $ | 1,734 |   |  | $ | 809    |  
|Interest and debt expense                            |  |                | (310 | ) |                   |   | (337 | )    |  |   | (990  | ) |  |   | (1,013 | )
|Preferred interests of
    consolidated subsidiaries |  |                |     |   |                   |   |     |      |  |   |      |   |  |   | (9     | )
|Income taxes                                         |  |                | 86   |   |                   |   | 136  |      |  |   | (81   | ) |  |   | 100    |  
|                                                     |  |                |      |   |                   |   |      |      |  |   |       |   |  |   |        |  
|Income (loss) from continuing
    operations         |  | $              | 135  |   |                   | $ | (293 | )    |  | $ | 663   |   |  | $ | (113   | )
|                                                     |  |                |      |   |                   |   |      |      |  |   |       |   |  |   |        |  



26



---



##### Table of Contents







|                                             |  |           |     |             |  |               |     |       |  |              |      |       |  |   |    |  |  |   |     |   |  |   |       | 
|-------------------------------------------- |  | --------- | --- | ----------- |  | ------------- | --- | ----- |  | ------------ | ---- | ----- |  | - | -- |  |  | - | --- | - |  | - | ----- | 
|                                             |  | Segments  |     |             |  |              
|                                             |  |           |     | Exploration |  | Marketing     |     |       |  |              |      |      
|                                             |  |           |     | and         |  | and           |     |       |  |              |      |      
|Quarter Ended September 30,                  |  | Pipelines |     | Production  |  | Trading       |     | Power |  | Corporate(1) |      | Total
|                                             |  |           |     |             |  | (In millions) |     |       |  |             
|                                            
|2006                                         |  |           |     |             |  |               |     |       |  |              |      |       |  |   |    |  |  |   |     |   |  |   |       | 
|Revenues from external customers             |  | $         | 686 |             |  | $             | 186 | (2)   |  | $            | 162  |       |  | $ | 1  |  |  | $ | 26  |   |  | $ | 1,061 | 
|Intersegment revenues                        |  |           | 15  |             |  |               | 270 | (2)   |  |              | (267 | )     |  |   | 2  |  |  |   | (20 | ) |  |   |      | 
|Operation and maintenance                    |  |           | 230 |             |  |               | 109 |       |  |              | 6    |       |  |   | 14 |  |  |   | 7   |   |  |   | 366   | 
|Depreciation, depletion and
    amortization |  |           | 114 |             |  |               | 163 |       |  |              | 1    |       |  |   |   |  |  |   | 4   |   |  |   | 282   | 
|Loss on long-lived assets                    |  |           | 15  |             |  |               |    |       |  |              |     |       |  |   |   |  |  |   |    |   |  |   | 15    | 
|Earnings from unconsolidated
    affiliates  |  |           | 39  |             |  |               | 2   |       |  |              |     |       |  |   | 28 |  |  |   |    |   |  |   | 69    | 
|EBIT                                         |  |           | 305 |             |  |               | 141 |       |  |              | (108 | )     |  |   | 38 |  |  |   | (17 | ) |  |   | 359   | 





|                                                     |  |               |     |             |  |           |     |       |  |          |      |              |  |       |     |   |  |   |     |   |  |   |     |   |  |   |     |    
|---------------------------------------------------- |  | ------------- | --- | ----------- |  | --------- | --- | ----- |  | -------- | ---- | ------------ |  | ----- | --- | - |  | - | --- | - |  | - | --- | - |  | - | --- | ---
|                                                     |  | Segments      |     |             |  |          
|                                                     |  |               |     | Exploration |  | Marketing |     |       |  |          |      |              |  |      
|                                                     |  |               |     | and         |  | and       |     |       |  | Field    |      |              |  |      
|                                                     |  | Pipelines     |     | Production  |  | Trading   |     | Power |  | Services |      | Corporate(1) |  | Total
|                                                     |  | (In millions)
|                                                    
|2005                                                 |  |               |     |             |  |           |     |       |  |          |      |              |  |       |     |   |  |   |     |   |  |   |     |   |  |   |     |    
|Revenues from external customers                     |  | $             | 630 |             |  | $         | 155 | (2)   |  | $        | (95  | )            |  | $     | (12 | ) |  | $ | 38  |   |  | $ | 15  |   |  | $ | 731 |    
|Intersegment revenues                                |  |               | 16  |             |  |           | 294 | (2)   |  |          | (294 | )            |  |       | 14  |   |  |   | 7   |   |  |   | (16 | ) |  |   | 21  | (3)
|Operation and maintenance                            |  |               | 218 |             |  |           | 94  |       |  |          | 14   |              |  |       | 19  |   |  |   | 29  |   |  |   | 80  |   |  |   | 454 |    
|Depreciation, depletion and
    amortization         |  |               | 108 |             |  |           | 153 |       |  |          | 1    |              |  |       | 1   |   |  |   | 1   |   |  |   | 6   |   |  |   | 270 |    
|Loss on long-lived assets                            |  |               |    |             |  |           |    |       |  |          |     |              |  |       |    |   |  |   | 3   |   |  |   |    |   |  |   | 3   |    
|Earnings (losses) from
    unconsolidated affiliates |  |               | 51  |             |  |           |    |       |  |          |     |              |  |       | (42 | ) |  |   | 4   |   |  |   |    |   |  |   | 13  |    
|EBIT                                                 |  |               | 272 |             |  |           | 169 |       |  |          | (398 | )            |  |       | (46 | ) |  |   | (22 | ) |  |   | (67 | ) |  |   | (92 | )  









|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes eliminations of intercompany transactions. Our
    intersegment revenues, along with our intersegment operating
    expenses, were incurred in the normal course of business between
    our operating segments. For the quarters ended
    September 30, 2006 and 2005, we recorded an intersegment
    revenue elimination of $18 million and $13 million and
    operation and maintenance expense eliminations of
    $12 million and $1 million, which are included in the
    Corporate column, to remove intersegment
    transactions.
|(2) | Revenues from external customers include gains and losses
    related to our hedging of price risk associated with our natural
    gas and oil production. Intersegment revenues represent
    commodity sales to our Marketing and Trading segment, which is
    responsible for marketing our production.                                                                                                                                                                                                                                              
|(3) | Relates to intercompany activities between our continuing and
    our discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                           

27



---



##### Table of Contents



|                                                     |  |               |       |             |  |           |     |       |  |              |       |       |  |   |    |  |  |   |     |   |  |   |       | 
|---------------------------------------------------- |  | ------------- | ----- | ----------- |  | --------- | --- | ----- |  | ------------ | ----- | ----- |  | - | -- |  |  | - | --- | - |  | - | ----- | 
|                                                     |  | Segments      |       |             |  |          
|                                                     |  |               |       | Exploration |  | Marketing |     |       |  |              |       |      
|                                                     |  |               |       | and         |  | and       |     |       |  |              |       |      
|Nine Months Ended September 30,                      |  | Pipelines     |       | Production  |  | Trading   |     | Power |  | Corporate(1) |       | Total
|                                                     |  | (In millions)
|2006                                                 |  |               |       |             |  |           |     |       |  |              |       |       |  |   |    |  |  |   |     |   |  |   |       | 
|Revenues from external customers                     |  | $             | 2,197 |             |  | $         | 501 | (2)   |  | $            | 1,015 |       |  | $ | 4  |  |  | $ | 89  |   |  | $ | 3,806 | 
|Intersegment revenues                                |  |               | 46    |             |  |           | 883 | (2)   |  |              | (897  | )     |  |   | 2  |  |  |   | (34 | ) |  |   |      | 
|Operation and maintenance                            |  |               | 668   |             |  |           | 295 |       |  |              | 18    |       |  |   | 44 |  |  |   | 60  |   |  |   | 1,085 | 
|Depreciation, depletion and
    amortization         |  |               | 344   |             |  |           | 465 |       |  |              | 3     |       |  |   | 1  |  |  |   | 19  |   |  |   | 832   | 
|Loss on long-lived assets                            |  |               | 15    |             |  |           |    |       |  |              |      |       |  |   |   |  |  |   |    |   |  |   | 15    | 
|Earnings (losses) from
    unconsolidated affiliates |  |               | 114   |             |  |           | 10  |       |  |              |      |       |  |   | 43 |  |  |   | (1  | ) |  |   | 166   | 
|EBIT                                                 |  |               | 1,118 |             |  |           | 503 |       |  |              | 113   |       |  |   | 51 |  |  |   | (51 | ) |  |   | 1,734 | 





|                                                     |  |               |       |             |  |           |     |       |  |          |      |              |  |       |      |   |  |   |     |  |  |   |      |   |  |   |       |    
|---------------------------------------------------- |  | ------------- | ----- | ----------- |  | --------- | --- | ----- |  | -------- | ---- | ------------ |  | ----- | ---- | - |  | - | --- |  |  | - | ---- | - |  | - | ----- | ---
|                                                     |  | Segments      |       |             |  |          
|                                                     |  |               |       | Exploration |  | Marketing |     |       |  |          |      |              |  |      
|                                                     |  |               |       | and         |  | and       |     |       |  | Field    |      |              |  |      
|                                                     |  | Pipelines     |       | Production  |  | Trading   |     | Power |  | Services |      | Corporate(1) |  | Total
|                                                     |  | (In millions)
|2005                                                 |  |               |       |             |  |           |     |       |  |          |      |              |  |       |      |   |  |   |     |  |  |   |      |   |  |   |       |    
|Revenues from external customers                     |  | $             | 2,012 |             |  | $         | 457 | (2)   |  | $        | 238  |              |  | $     | 70   |   |  | $ | 103 |  |  | $ | 66   |   |  | $ | 2,946 |    
|Intersegment revenues                                |  |               | 55    |             |  |           | 883 | (2)   |  |          | (823 | )            |  |       | 9    |   |  |   | 18  |  |  |   | (79  | ) |  |   | 63    | (3)
|Operation and maintenance                            |  |               | 635   |             |  |           | 277 |       |  |          | 33   |              |  |       | 64   |   |  |   | 32  |  |  |   | 209  |   |  |   | 1,250 |    
|Depreciation, depletion and
    amortization         |  |               | 327   |             |  |           | 456 |       |  |          | 3    |              |  |       | 2    |   |  |   | 3   |  |  |   | 32   |   |  |   | 823   |    
|(Gain) loss on long-lived assets                     |  |               | (10   | )           |  |           |    |       |  |          |     |              |  |       | 14   |   |  |   | 10  |  |  |   | (4   | ) |  |   | 10    |    
|Earnings (losses) from
    unconsolidated affiliates |  |               | 127   |             |  |           |    |       |  |          |     |              |  |       | (129 | ) |  |   | 186 |  |  |   |     |   |  |   | 184   |    
|EBIT                                                 |  |               | 993   |             |  |           | 528 |       |  |          | (613 | )            |  |       | (87  | ) |  |   | 157 |  |  |   | (169 | ) |  |   | 809   |    









|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes eliminations of intercompany transactions. Our
    intersegment revenues, along with our intersegment operating
    expenses, were incurred in the normal course of business between
    our operating segments. For the nine months ended
    September 30, 2006 and 2005, we recorded an intersegment
    revenue elimination of $32 million and $76 million and
    operation and maintenance expense eliminations of
    $13 million and $1 million, which are included in the
    Corporate column, to remove intersegment
    transactions.
|(2) | Revenues from external customers include gains and losses
    related to our hedging of price risk associated with our natural
    gas and oil production. Intersegment revenues represent
    commodity sales to our Marketing and Trading segment, which is
    responsible for marketing our production.                                                                                                                                                                                                                                                 
|(3) | Relates to intercompany activities between our continuing and
    our discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                              





|                           |  |               |        |  |              |   |        | 
|-------------------------- |  | ------------- | ------ |  | ------------ | - | ------ | 
|                           |  | September 30, |        |  | December 31, |  
|                           |  | 2006          |        |  | 2005         |  
|                           |  | (In millions) |       
|                          
|Pipelines                  |  | $             | 16,899 |  |              | $ | 16,447 | 
|Exploration and Production |  |               | 6,188  |  |              |   | 5,570  | 
|Marketing and Trading      |  |               | 1,027  |  |              |   | 3,819  | 
|Power                      |  |               | 745    |  |              |   | 1,176  | 
|Field Services             |  |               |       |  |              |   | 99     | 
|                           |  |               |        |  |              |   |        | 
|Total segment assets       |  |               | 24,859 |  |              |   | 27,111 | 
|Corporate                  |  |               | 2,506  |  |              |   | 4,144  | 
|Discontinued operations    |  |               | 34     |  |              |   | 583    | 
|                           |  |               |        |  |              |   |        | 
|Total consolidated assets  |  | $             | 27,399 |  |              | $ | 31,838 | 
|                           |  |               |        |  |              |   |        | 





|    |                                                                                
|--- | -------------------------------------------------------------------------------
|15. | Investments
    in Unconsolidated Affiliates and Related Party
    Transactions



Investments
    in Unconsolidated Affiliates






28



---



##### Table of Contents



Earnings (Losses) fromNet


Unconsolidated AffiliatesOwnership


Quarters


Nine MonthsInterest


Ended


EndedSeptember 30,


September 30,


September 30,2006


2006


2005


2006


2005(Percent)


(In millions)Domestic:Citrus Corporation


50


$
19


$
19


$
48


$
52Great Lakes Gas Transmission
    Company


50



14



15



44



46Four Star Oil & Gas
    Company(1)


43



2







10



Midland Cogeneration Venture






13



(159
)


13



(162
)Enterprise Products Partners,
    L.P.(2)


















183Other Domestic Investments


various



(2
)


16



3



22Total domestic






46



(109
)


118



141Foreign:Asia
    Investments(3)


various



2



110



(2
)


64Central American
    Investments(4)


various











(1
)


(49
)Other Foreign Investments


various



21



12



51



28Total foreign






23



122



48



43Total earnings from unconsolidated
    affiliates





$
69


$
13


$
166


$
184     (1)
    
    We acquired our interest in Four
    Star in connection with our acquisition of Medicine Bow in the
    third quarter of 2005. Amortization of our purchase cost in
    excess of the underlying net assets of Four Star was
    $13 million and $40 million during the quarter and
    nine months ended September 30, 2006 and $5 million
    during each of the same periods in 2005.(2)
    
    In January 2005, we sold all of our
    remaining interests to Enterprise.(3)
    
    As of September 30, 2006,
    consists of our investments in four power plants, one of which
    was sold in October 2006.(4)
    
    As of September 30, 2006,
    consists of our investment in a power plant in Nicaragua, which
    is under a sales contract.    Quarters


Nine MonthsEnded


EndedSeptember 30,


September 30,Investment or Group

2006


2005


2006


2005(In millions)Asian power investments

$
1


$



$
(6
)

$
(71
)Central American power investments










(2
)


(57
)Enterprise














183Midland Cogeneration Venture


13



(159
)


13



(162
)KIECO






109







109Other foreign investments










2



(17
)Other






11







8$
14


$
(39
)

$
7


$
(7
)  29




---



##### Table of Contents



Quarters


Nine MonthsEnded


EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions)Operating results dataRevenues

$
308


$
453


$
993


$
1,205Operating expenses


153



738



662



1,156Income from continuing operations


101



(352
)


152



(143
)Net
    income(1)


101



(352
)


152



(143
)     (1)
    
    Includes net income of
    $2 million and $8 million for the quarters ended
    September 30, 2006 and 2005, and $11 million and
    $22 million for the nine months ended September 30,
    2006 and 2005, related to our proportionate share of affiliates
    in which we hold a greater than 50 percent interest.    Related
    Party Transactions
    QuartersEnded


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions)Operating revenue

$
2


$
26


$
63


$
118Cost of sales


3



4



7



10Reimbursement for operating
    expenses






1



2



2Other income


13



13



39



42   Accounts Receivable Sales Program. Accounting for
    Transfers and Servicing of Financial Assets and Extinguishments
    of Liabilities
  Matters
    that Could Impact Our Investments
  Domestic Power.
 30




---



##### Table of Contents



mark-to-market
    Investments in Asia and Central America.
  Investment in Brazil.
  Investment in Bolivia.
  Investment in Argentina.
  Citrus.
 31




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 8-K Form 10-Q.
  Overview
  Financial Update.
  Credit Metrics Update.
  What to Expect Going Forward.
      Segment
    Results
   32




---



##### Table of Contents



Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions)Pipelines

$
305


$
272


$
1,118


$
993Exploration and Production


141



169



503



528Marketing and Trading


(108
)


(398
)


113



(613
)Power


38



(46
)


51



(87
)Field Services






(22
)






157Segment EBIT


376



(25
)


1,785



978Corporate


(17
)


(67
)


(51
)


(169
)Consolidated EBIT from continuing
    operations


359



(92
)


1,734



809Interest and debt expense


(310
)


(337
)


(990
)


(1,013
)Preferred interests of
    consolidated subsidiaries














(9
)Income taxes


86



136



(81
)


100Income from continuing operations


135



(293
)


663



(113
)Discontinued operations, net of
    income taxes






(19
)


(22
)


(331
)Net income (loss)

$
135


$
(312
)

$
641


$
(444
)   Pipelines
    Segment
  Operating
    Results
    Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions)Operating revenues

$
701


$
646


$
2,243


$
2,067Operating expenses


(442
)


(439
)


(1,262
)


(1,236
)Operating income


259



207



981



831Other income


46



65



137



162EBIT

$
305


$
272


$
1,118


$
993Throughput volumes (BBtu/d)


22,375



20,900



21,907



21,260   33




---



##### Table of Contents



Quarter Ended September 30,


Nine Months Ended September 30,Variance


VarianceRevenue


Expense


Other


EBIT


Revenue


Expense


Other


EBITImpact


Impact


Impact


Impact


Impact


Impact


Impact


ImpactFavorable/(Unfavorable)(In millions)Higher reservation and services
    revenues

$
37


$



$



$
37


$
140


$



$



$
140Gas not used in operations,
    revaluations, processing revenues and other natural gas sales


(15
)


27







12



13



36







49Pipeline expansions


19



(1
)


(5
)


13



57



(6
)


(8
)


43Contract restructurings/settlements






(2
)






(2
)


(43
)


(2
)


(1
)


(46
)Impact of hurricanes Katrina and
    Rita






(9
)






(9
)






(28
)






(28
)Impairment of pipeline development
    projects






(16
)






(16
)






(18
)






(18
)Higher depreciation expense






(5
)






(5
)






(12
)






(12
)Higher pipeline integrity expense






(7
)






(7
)






(14
)






(14
)Enron bankruptcy settlement


14



4







18



14



4







18Sale of interest in gathering
    system










(11
)


(11
)










(11
)


(11
)Other(1)






6



(3
)


3



(5
)


14



(5
)


4Total impact on EBIT

$
55


$
(3
)

$
(19
)

$
33


$
176


$
(26
)

$
(25
)

$
125     (1)
    Consists of individually insignificant items on several of our
    pipeline systems.  Higher Reservation and Other Services
    Revenues.
  Gas Not Used in Operations, Revaluations, Processing Revenues
    and Other Natural Gas Sales. Form 8-K
 34




---



##### Table of Contents



Pipeline Expansions.
  
    Expansion Projects in Service.  In January
    2005, Phase I of the Cheyenne Plains Gas Pipeline Company,
    L.L.C. system was fully placed in service and Phase II of
    this project was placed in service in December 2005. As a
    result, our revenues increased by $6 million and
    $21 million and overall EBIT increased by $5 million
    and $20 million during the quarter and nine months ended
    September 30, 2006 compared to the same periods in 2005.      
    Expansion Projects Not Yet Completed.  In May
    2006, the FERC granted certificate authorization for TGPs
    proposed Northeast ConneXion-New England project. This project
    will add 108 MMcf/d of incremental firm transportation
    capacity to the New England region from Gulf of Mexico supply
    sources. Estimated costs to complete the project are
    approximately $111 million and the anticipated in-service
    date is November 2007. The expansion is estimated to increase
    our revenues by $6 million in 2007 and $37 million
    annually thereafter.      Contract Restructurings/Settlements.
  Hurricanes Katrina and Rita.
  Impairment of Pipeline Development
    Projects.
  Higher Depreciation Expense.
  Pipeline Integrity Costs.
 35




---



##### Table of Contents







Enron Bankruptcy Settlement.




Other Regulatory Matter.




Exploration
    and Production Segment




| |         
| | --------
| | Overview











Significant
    Developments Since December 31, 2005




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Realized commodity prices.  During the first
    half of 2006, we benefited from a strong commodity pricing
    environment. However, during the third quarter natural gas
    prices decreased from those experienced during the first half of
    the year.                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Drilling Results / Average Daily
    Production.  Our average daily production through
    September 30, 2006, was approximately 719 MMcfe/d
    (excluding 67 MMcfe/d from our equity investment in Four
    Star). Our production levels have grown in each of the first
    three quarters of this year, as well as from the third quarter
    of 2005. However, our average daily production was lower than
    originally expected primarily due to events in our Gulf of
    Mexico and Onshore regions as further discussed below. Our
    drilling and production results by region were as follows during
    the first nine months of 2006:



Onshore. year-to-date




Gulf of Mexico and south Louisiana.


36



---



##### Table of Contents



Texas Gulf Coast.




International.








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cash Operating Costs.  In the third quarter of
    2006, cash operating costs increased to $1.95/MMcfe from
    $1.86/MMcfe in the second quarter of 2006. Our operating cost
    increases were primarily a result of inflation in the cost of
    fuel, power, and other services, increases in subsurface
    maintenance in certain Onshore fields and unrecoverable
    hurricane repair costs, among other items. We do not expect a
    significant amount of unrecoverable costs related to the
    hurricanes in the fourth quarter.



| |                     
| | --------------------
| | Outlook
    for 2006







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Average daily production volumes for the year of approximately
    725 MMcfe/d to 735 MMcfe/d, which excludes
    approximately 65 MMcfe/d from our equity interest in Four
    Star. Average daily production volumes for the year are lower
    than originally anticipated due to slower than expected recovery
    of lost hurricane volumes, production delays in the Gulf of
    Mexico and tightness in the supply of rigs and other services
    onshore;
|
| |  | Capital expenditures for the year between $1.1 billion and
    $1.2 billion including accrued capital expenditures;                                                                                                                                                                                                                                                                                                                                              
|
| |  | Average cash operating costs which include production costs,
    general and administrative expenses and other expenses of
    approximately $1.82/Mcfe to $1.87/Mcfe for the year; and                                                                                                                                                                                                                                                                          
|
| |  | A unit of production depletion rate of between $2.40/Mcfe and
    $2.50/Mcfe in the fourth quarter of 2006 compared with
    $2.27/Mcfe in the third quarter of 2006 due to higher finding
    and development costs and the effects of low quarter end prices
    on reserves.                                                                                                                                                                                  



| |                                     
| | ------------------------------------
| | Price
    Risk Management Activities





37



---



##### Table of Contents



Fixed PriceSwaps(1)


Floors(1)


Ceilings(1)


Basis
    Swaps(1)(3)Volumes


Price


Volumes


Price


Volumes


Price


VolumesNatural
    Gas(2)2006


21


$
6.28



















232007


5


$
3.56



130


$
8.00



130


$
16.02



1102008


5


$
3.42



















2009-2012


16


$
3.74



















Oil2006


96


$
35.15



















2007


192


$
35.15



















     (1)
    Volumes presented are TBtu for natural gas and MBbl for oil.
    Prices presented are per MMBtu of natural gas and per Bbl of oil.(2)
    The hedged natural gas prices in the table represent the price
    on the hedge contract when it was entered into, or the price on
    the day it was designated as a hedge. In 2006, the average cash
    price under our fixed price natural gas swaps when they settle
    is approximately $3.95 per MMBtu.(3)
    Our basis swaps effectively lock-in locational price
    differences on a portion of our natural gas production in Texas
    and Oklahoma.  marked-to-market
  Operating
    Results and Variance Analysis
    Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions)Operating Revenues:Natural gas

$
357


$
354


$
1,049


$
1,061Oil, condensate and NGL


119



105



327



286Other


(20
)


(10
)


8



(7
)Total other operating revenues


456



449



1,384



1,340Operating Expenses:Depreciation, depletion and
    amortization


(163
)


(153
)


(465
)


(456
)Production
    costs(1)


(92
)


(72
)


(235
)


(186
)Cost of products and
    services(2)


(23
)


(11
)


(67
)


(36
)General and administrative expenses


(38
)


(45
)


(121
)


(129
)Other


(2
)


(1
)


(6
)


(11
)Total operating expenses


(318
)


(282
)


(894
)


(818
)Operating income


138



167



490



522Other
    income(3)


3



2



13



6EBIT

$
141


$
169


$
503


$
528   38




---



##### Table of Contents



Quarters Ended September 30,


Nine Months Ended September 30,Percent








Percent2006


2005


Variance


2006


2005


VarianceConsolidated volumes, prices and
    costs per unit:Natural gasVolumes (MMcf)


56,736



55,280



3
%


162,403



169,228



(4
)%Average realized prices including
    hedges
    ($/Mcf)(4)

$
6.30


$
6.40



(2
)%

$
6.46


$
6.27



3
%Average realized prices excluding
    hedges
    ($/Mcf)(4)

$
6.31


$
7.74



(18
)%

$
6.79


$
6.59



3
%Average transportation costs ($/Mcf)

$
0.23


$
0.18



28
%

$
0.23


$
0.18



28
%Oil, condensate and NGLVolumes (MBbls)


1,959



2,068



(5
)%


5,662



6,464



(12
)%Average realized prices including
    hedges
    ($/Bbl)(4)

$
60.81


$
50.77



20
%

$
57.81


$
44.23



31
%Average realized prices excluding
    hedges
    ($/Bbl)(4)

$
60.81


$
51.88



17
%

$
58.22


$
44.94



30
%Average transportation costs ($/Bbl)

$
0.71


$
0.60



18
%

$
0.91


$
0.64



42
%Total equivalent volumesMMcfe


68,490



67,684



1
%


196,376



208,011



(6
)%MMcfe/d


744



736



1
%


719



762



(6
)%Production Costs ($/Mcfe)Average lease operating cost

$
1.03


$
0.74



39
%

$
0.89


$
0.71



25
%Average production taxes


0.32



0.32




%


0.31



0.19



63
%Total production
    cost(1)

$
1.35


$
1.06



27
%

$
1.20


$
0.90



33
%Average general and administrative
    cost ($/Mcfe)

$
0.57


$
0.65



(12
)%

$
0.62


$
0.62




%Unit of production depletion cost
    ($/Mcfe)

$
2.27


$
2.11



8
%

$
2.24


$
2.05



9
%Unconsolidated affiliate volumes
    (Four Star)Natural gas (MMcf)


4,379



1,605







13,342



1,605Oil, condensate and NGL (MBbls)


278



92







847



92Total equivalent volumesMMcfe


6,049



2,156







18,424



2,156MMcfe/d


66



23







67



8     (1)
    
    Production costs include lease
    operating costs and production related taxes (including ad
    valorem and severance taxes).(2)
    
    Includes transportation costs.(3)
    
    Includes equity earnings for our
    investment in Four Star acquired in connection with our
    acquisition of Medicine Bow in the third quarter 2005.(4)
    
    Prices are stated before
    transportation costs. 39




---



##### Table of Contents



Operating
    Results and Variance Analysis (contd)
 Quarter Ended September 30,


Nine Months Ended September 30,2006


2006Variance


VarianceOperating


Operating








Operating


OperatingRevenue


Expense


Other


EBIT


Revenue


Expense


Other


EBITFavorable/(Unfavorable)(In millions)Natural Gas Revenue(Lower) higher realized prices in
    2006

$
(81
)

$



$



$
(81
)

$
32


$



$



$
32Impact of hedges


73











73



1











1Higher (lower) volumes in 2006


11











11



(45
)










(45
)Oil, Condensate and NGL
    RevenueHigher realized prices in 2006


19











19



75











75Impact of hedges


2











2



2











2Lower volumes in 2006


(7
)










(7
)


(36
)










(36
)Depreciation, Depletion and
    Amortization ExpenseHigher depletion rate in 2006






(13
)






(13
)






(37
)






(37
)Lower production volumes in 2006






















25







25Production CostsHigher lease operating costs in 2006






(21
)






(21
)






(28
)






(28
)Lower (higher) production taxes in
    2006






1







1







(21
)






(21
)General and Administrative
    Expenses






7







7







8







8OtherChange in fair value of oil and
    basis swaps


(32
)










(32
)


(30
)










(30
)Earnings from investment in Four
    Star










2



2











10



10Processing plants


11



(8
)






3



34



(24
)






10Other


11



(2
)


(1
)


8



11



1



(3
)


9Total Variances

$
7


$
(36
)

$
1


$
(28
)

$
44


$
(76
)

$
7


$
(25
)   Operating revenues.
    Depreciation, depletion and amortization
    expense.
  Production costs.
 40




---



##### Table of Contents



General and administrative expenses.
  Other.
  Marketing
    and Trading Segment
  Overview. Form 8-K
  
    Legacy natural gas derivative contracts.  In
    September 2006, we sold or entered into offsetting derivative
    transactions to eliminate the price risk associated with a
    substantial portion of our remaining legacy natural gas
    derivatives. These transactions are expected to substantially
    reduce our future earnings exposure to changes in natural gas
    prices on our legacy natural gas contracts. We continue to
    evaluate potential opportunities to assign or otherwise divest
    of the remainder of our legacy natural gas positions, which
    could impact our future cash flows and financial results.
    Natural gas transportation related
    contracts.  In the third quarter of 2006 we
    entered into agreements to release a portion of the capacity
    from August 2006 through April 2009 that we hold on a pipeline
    serving California. In addition, in October 2006, we assigned
    three transportation contracts with our affiliate, TGP to a
    third party. We continue to evaluate potential opportunities to
    assign or otherwise divest of other transportation-related
    contracts, which could impact our future cash flows and
    financial results.
    Option contracts and basis swaps.  In the
    second quarter of 2006, we entered into contracts to effectively
    eliminate the price risk on certain existing option contracts
    entered into related to our 2007 natural gas production. These
    transactions substantially reduced any significant future
    earnings volatility related to these derivative contracts. In
    conjunction with these transactions, our Exploration and
    Production segment entered into new option contracts.  Operating Results. mark-to-market
 41




---



##### Table of Contents



Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions)Overall EBIT:Gross
    margin(1)

$
(105
)

$
(389
)

$
118


$
(585
)Operating expenses


(8
)


(15
)


(23
)


(37
)Operating income (loss)


(113
)


(404
)


95



(622
)Other income,
    net(2)


5



6



18



9EBIT

$
(108
)

$
(398
)

$
113


$
(613
)Gross Margin by Significant
    Contract Type:Production-Related Natural Gas
    and Oil Derivative Contracts:Changes in fair value of swaps and
    options

$
67


$
(390
)

$
256


$
(508
)Contracts Related to Legacy
    Trading Operations:Natural gas
    contracts:Transportation-related contracts:Demand charges


(28
)


(39
)


(97
)


(118
)Settlements


15



36



52



84Changes in fair value of other
    natural gas derivative
    contracts(3)


(186
)


(67
)


(157
)


52Power contracts:Change in fair value of power
    derivatives, excluding Cordova


27



20



64



(52
)Changes in fair value of Cordova
    tolling
    agreement(4)






45







(66
)Other(5)






6







23Total gross margin

$
(105
)

$
(389
)

$
118


$
(585
)     (1)
    
    Gross margin for our Marketing and
    Trading segment consists of revenues from commodity trading less
    the costs of commodities sold, including changes in the fair
    value of derivative contracts.(2)
    
    Primarily represents interest on
    cash margin deposits.(3)
    
    Amounts for 2006 include a loss on
    natural gas supply agreements with MCV.(4)
    
    In the fourth quarter of 2005, we
    completed the assignment of this agreement to Constellation
    Energy Commodities Group Inc. (Constellation). During the first
    nine months of 2005, forecasted natural gas prices increased
    relative to power prices, resulting in a decrease in the fair
    value of the contract, while in the third quarter of 2005,
    natural gas prices decreased relative to power prices, resulting
    in an increase in the fair value of the contract.(5)
    
    During 2005, we received payment on
    Mohawk River Funding IIIs bankruptcy claim with USGen
    New England and recognized a gain of $17 million.  Production-Related
    Natural Gas and Oil Derivative Contracts
  marked-to-market
 42




---



##### Table of Contents



Contracts
    Related to Legacy Trading Operations
  Natural gas transportation-related
    contracts.
  Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Alliance:Demand charges

$
16


$
16


$
48


$
48Recovery


72
%


100
%


53
%


78
%Enterprise Texas:Demand charges

$
2


$
7


$
11


$
21Recovery






33
%


34
%


42
%Other:Demand charges

$
10


$
16


$
38


$
49Recovery


34
%


100
%


60
%


82
%   Other natural gas derivative contracts.
  mark-to-market
  Power Contracts.
  Power
    Segment
   43




---



##### Table of Contents



Brazil
  Bolivia-to-Brazil
  Other
    International Power
      Domestic
    Power
   44




---



##### Table of Contents



Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions)EBIT by AreaBrazilEBIT from operations

$
20


$
15


$
52


$
50Other International
    PowerAsiaImpairment related to anticipated
    sales










(7
)


(93
)Gain on sale of KEICO and PPN
    power plants






109



1



131EBIT from operations


1



(1
)


1



14Central and Other South AmericaImpairments related to anticipated
    sales,
    net(1)










(2
)


(70
)EBIT from operations


(1
)


(2
)


(1
)


8EBIT from other international
    plants and
    investments(2)






1



2



15Domestic PowerGain on sale of MCV and impairment
    of investment


13



(159
)


13



(162
)Favorable resolution of bankruptcy
    claim














53Other


(2
)


(2
)


(11
)


4Gain on sale of cost basis
    investment(3)


12







13



Other(4)


(5
)


(7
)


(10
)


(37
)EBIT

$
38


$
(46
)

$
51


$
(87
)     (1)
    
    Includes impairment charges and
    gains (losses) on the sales of investments.(2)
    
    EBIT from other international
    plants and investments includes a $17 million dividend on
    investment fund recorded in the second and third quarters of
    2005.(3)
    
    In October 2006, we sold our
    remaining shares in this investment and will record a gain of
    approximately $34 million in the fourth quarter of 2006.(4)
    
    Other consists of the indirect
    expenses and general and administrative costs associated with
    our domestic and international operations. Also included is a
    $15 million impairment of power turbines recorded in the
    first quarter of 2005.  Field
    Services Segment
    Corporate
   45




---



##### Table of Contents



Favorable (Unfavorable)


Favorable (Unfavorable)Quarter Impact


Nine Months Impact(In millions)Western Energy Settlement charge
    in 2005

$



$
72Lease termination in 2005






27Foreign currency fluctuations on
    Euro-denominated debt






(46
)Decrease in litigation,
    environmental and other charges


45



9(Higher) lower losses on
    extinguishment or restructuring of debt facilities


(17
)


3Other


22



53Total impact on EBIT

$
50


$
118     Interest
    and Debt Expense
    Nine MonthsQuarters Ended


EndedSeptember


September2006


2005


2006


2005(In millions)Long-term debt, including current
    maturities

$
303


$
325


$
965


$
986Other


7



12



25



27$
310


$
337


$
990


$
1,013     Income
    Taxes
    Quarters Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(In millions, except for rates)Income taxes

$
(86
)

$
(136
)

$
81


$
(100
)Effective tax rate


(176
)%


32
%


11
%


47
%    46




---



##### Table of Contents



Discontinued
    Operations
    Commitments
    and Contingencies
   47




---



##### Table of Contents



Capital
    Resources and Liquidity
  Debt Obligations.
  Available Liquidity.
  Available cash

$
0.6Available capacity under our
    credit agreements


1.0Net available liquidity at
    September 30, 2006

$
1.6   Expected 2006 Cash Flows.
    Significant
    Factors That Could Impact Our Liquidity.
  
    Cash Margining Requirements on Derivative
    Contracts.  A substantial portion of our natural
    gas fixed price swap contracts are at prices below current
    market prices, which resulted in us posting significant cash
    margin deposits and letters of credit with the counterparties
    for the value of these instruments. During the first nine months
    of 2006, approximately $0.9 billion of posted cash margins
    were returned to us, with $0.5 billion resulting from
    decreases in commodity prices and settlement of certain of these
    contracts and an additional $0.4 billion related to the
    assignment of our power portfolio. As a result, a substantial
    portion of our remaining margin consists of letters of credit.
    In the fourth quarter of 2006, based on current prices, we
    expect approximately $0.2 billion in collateral to be
    returned to us in the form of both cash margin deposits and
    letters of credit.    
    Hurricanes.  We continue to repair the damage
    caused by Hurricanes Katrina and Rita. We are part of a mutual
    insurance company, and are subject to certain individual and
    aggregate loss limits by event. The mutual insurance company has
    indicated that the aggregate losses for both Hurricanes Katrina
    and Rita will exceed the per event limits allowed under the
    program, and that we will not receive insurance recoveries on
    some of the costs we incur, which will impact our liquidity and
    financial results. In addition, the timing of our replacements
    of the damaged property and equipment may differ from the
    related insurance reimbursement, which could impact our
    liquidity from period to period. Currently, we estimate that the
    total repair costs related to these hurricanes will be
    approximately $600 million, of which we estimate 48




---



##### Table of Contents



approximately $340 million will be unrecoverable from
    insurance. Of the unrecoverable amount, we estimate that
    approximately $260 million will be capital related
    expenditures. We have incurred capital costs of approximately
    $180 million through September 30, 2006 that are not
    recoverable through insurance.    
    Price Risk Management Activities.  Our
    Exploration and Production and Marketing and Trading segments
    enter into derivative contracts to provide price protection on a
    portion of our anticipated natural gas and oil production.
    During 2006, we entered into additional derivative contracts
    related to our 2006 and 2007 natural gas production. The
    following table shows as of September 30, 2006, the
    contracted volumes and the minimum, maximum and average cash
    prices that we will receive under these contracts when combined
    with the sale of the underlying production. These cash prices
    may differ from the income impacts of our derivative contracts,
    depending on whether the contracts are designated as hedges for
    accounting purposes or not. For additional information on the
    income impacts of our derivative contracts, see the individual
    segment discussions.  Fixed Price
    Swaps(1)


Floors(1)


Ceilings(1)Average





Average





Average


Basis
    Swaps(1)(2)Volumes


Price


Volumes


Price


Volumes


Price


VolumesNatural Gas2006


28


$
4.89



30


$
7.00



15


$
9.50



252007


5


$
3.56



130


$
8.00



130


$
16.02



1102008


5


$
3.42



18


$
6.00



18


$
10.00



2009-2012


16


$
3.74



17


$
6.00



17


$
8.75



Oil2006


357


$
52.45



















2007


192


$
35.15



1,009


$
55.00



1,009


$
60.38



2008





$




930


$
55.00



930


$
57.03



     (1)
    Volumes presented are TBtu for natural gas and MBbl for oil.
    Prices presented are per MMBtu of natural gas and per Bbl of oil.(2)
    These contracts effectively lock-in locational price
    differences on a portion of our natural gas production in Texas
    and Oklahoma.  Overview
    of Cash Flow Activities for 2006 Compared to 2005
    2006


2005(In billions)Cash Flow from
    OperationsContinuing operating
    activitiesNet income before discontinued
    operations

$
0.7


$
(0.1
)Non-cash income adjustments


0.9



0.9Change in broker margin and other
    deposits(1)


0.9



(0.7
)Change in other assets and
    liabilities


(0.5
)


(0.5
)Total cash flow from operations

$
2.0


$
(0.4
)Other Cash InflowsContinuing investing
    activitiesNet proceeds from the sale of
    assets and investments

$
0.5


$
1.1Other


0.1



0.30.6



1.4 49




---



##### Table of Contents



2006


2005(In billions)Continuing financing
    activitiesNet proceeds from the issuance of
    long-term debt


0.1



1.2Proceeds from issuance of common
    and preferred stock


0.5



0.7Contribution from discontinued
    operations(2)


0.1



0.10.7



2.0Total other cash inflows

$
1.3


$
3.4Cash OutflowsContinuing investing
    activitiesCapital
    expenditures(3)

$
1.6


$
1.3Net cash paid for acquisition






1.01.6



2.3Continuing financing
    activitiesPayments to retire long-term debt
    and redeem preferred interests


3.0



1.5Redemption of preferred stock of a
    subsidiary






0.3Dividends and other


0.1



0.13.1



1.9Total other cash outflows

$
4.7


$
4.2Net change in cash

$
(1.4
)

$
(1.2
)     (1)
    Primarily due to the return of margin in 2006. This amount
    includes $0.4 billion collected in conjunction with the
    sale of certain of our power derivatives and $0.5 billion
    collected as commodity prices decreased and contracts were
    settled.(2)
    Amounts contributed from discontinued operations above are net
    of approximately $0.2 billion of debt repayments associated
    with the Macae power facility.(3)
    Includes $0.8 billion related to production activities and
    $0.8 billion related to pipeline expansion and maintenance
    projects for 2006. 50




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##### Table of Contents



Commodity-based
    Derivative Contracts
    Maturity


Maturity


Maturity


Maturity


Maturity


TotalLess Than


1 to 3


4 to 5


6 to 10


Beyond 10


Fair1 year


Years


Years


Years


Years


Value(In millions)Derivatives designated as hedgesAssets

$
139


$
38


$



$



$



$
177Liabilities


(53
)


(36
)


(28
)


(8
)






(125
)Total derivatives designated as
    hedges


86



2



(28
)


(8
)






52Other commodity-based derivativesExchange-traded
    positions(1)Assets


55



220



66











341Liabilities


(8
)


(10
)














(18
)Non-exchange-traded positionsAssets


106



95



60



47



10



318Liabilities


(319
)


(459
)


(275
)


(234
)


(7
)


(1,294
)Total other commodity-based
    derivatives


(166
)


(154
)


(149
)


(187
)


3



(653
)Total commodity-based derivatives

$
(80
)

$
(152
)

$
(177
)

$
(195
)

$
3


$
(601
)     (1)
    Exchange-traded positions are those traded on active exchanges
    such as the New York Mercantile Exchange, the International
    Petroleum Exchange and the London Clearinghouse.  Other


TotalDerivatives


Commodity-


Commodity-Designated


Based


Basedas Hedges


Derivatives


DerivativesIn millionsFair value of contracts outstanding
    at January 1, 2006

$
(653
)

$
(763
)

$
(1,416
)Fair value of contract settlements
    during the period


212



(33
)


179Change in fair value of contracts


481



129
(1)


610Reclassification of derivatives
    that no longer qualify as
    hedges(2)


6



(6
)


Option premiums paid (received)


6



(11
)


(5
)Assignment of certain natural gas
    contracts






31



31Net change in contracts outstanding
    during the period


705



110



815Fair value of contracts outstanding
    at September 30, 2006

$
52


$
(653
)

$
(601
)     (1)
    Includes a $49 million gain associated with the assignment
    of our contracts to supply natural gas to certain municipalities
    in Florida. Also includes a loss on natural gas supply
    agreements related to our MCV plant upon the sale of this
    facility in August 2006.(2)
    The loss of hedge accounting was a result of a reduction of
    anticipated production volumes in Brazil.  Fair Value of Contract Settlements.
 51




---



##### Table of Contents



Changes in Fair Value of Contracts.
  Assignment of Certain Natural Gas
    Contracts.
 52




---



##### Table of Contents



Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Form 8-K Form 10-Q.
  Form 8-K
  Commodity
    Price Risk
  Production-Related
    Derivatives
    10 Percent Increase


10 Percent DecreaseFair Value


Fair Value


(Decrease)


Fair Value


IncreaseImpact of changes in commodity
    prices on derivative commodity instrumentsSeptember 30, 2006

$
32


$
(81
)

$
(113
)

$
151


$
119December 31, 2005

$
(942
)

$
(1,175
)

$
(233
)

$
(713
)

$
229   Other
    Commodity-Based Derivatives
  Value-at-Risk Value-at-Risk. Value-at-Risk Value-at-Risk Value-at-Risk
  Value-at-Risk Value-at-Risk Value-at-Risk
 53




---



##### Table of Contents



Item 4.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
      Changes
    in Internal Control over Financial Reporting
   54




---



##### Table of Contents



PART II 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings  Form 10-K Form 10-Q
  Natural Buttes.
  Item 1A.
    Risk
    Factors CAUTIONARY
    STATEMENTS FOR PURPOSES OF THE SAFE HARBOR
    PROVISIONS
    OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
    1995    
    earnings per share;
    capital and other expenditures;
    dividends;
    financing plans;
    capital structure;
    liquidity and cash flow;
    pending legal proceedings, claims and governmental proceedings,
    including environmental matters;
    future economic and operating performance;
    operating income;
    managements plans; and
    goals and objectives for future operations.  Form 10-K.
 55




---



##### Table of Contents



Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds    Item 3.
    Defaults
    Upon Senior Securities    Item 4.
    Submission
    of Matters to a Vote of Security Holders    Item 5.
    Other
    Information    Item 6.
    Exhibits    ExhibitNumber

Description3
.B

By-laws effective as of
    October 26, 2006 (Exhibit 3.B to our Current Report on
    form 8-K
    filed October 26, 2006).*4
.A

Eleventh Supplemental Indenture
    dated as of August 31, 2006, between El Paso
    Corporation and HSBC Bank USA, National Association, as trustee.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, 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
.B

Amended and Restated Security
    Agreement dated as of July 31, 2006, made by El Paso
    Corporation, Colorado Interstate Gas Company, El Paso
    Natural Gas Company, Tennessee Gas Pipeline Company, the
    Subsidiary Grantors 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).10
.C

Amended and Restated Parent
    Guarantee Agreement dated as of July 31, 2006, made by
    El Paso Corporation, in favor of JPMorgan Chase Bank, N.A.,
    as Collateral Agent (Exhibit 10.C to our Current Report on
    Form 8-K,
    filed with the SEC on August 2, 2006).10
.D

Amended and Restated Subsidiary
    Guarantee Agreement dated as of July 31, 2006, made by each
    of the Subsidiary Guarantors in favor of JPMorgan Chase Bank,
    N.A., as Collateral Agent (Exhibit 10.D to our Current
    Report on
    Form 8-K,
    filed with the SEC on August 2, 2006).10
.E

Credit Agreement dated as of
    July 19, 2006 among El Paso Corporation, as Borrower,
    Deutsche Bank AG New York Branch, as Initial Lender, Issuing
    Bank, Administrative Agent and Collateral Agent
    (Exhibit 10.A to our Current Report on
    Form 8-K,
    filed with the SEC on July 20, 2006).*10
.F

Form of Indemnification Agreement
    executed by El Paso for the benefit of each officer and
    effective the date listed in Schedule A thereto.*10
.G

Amendment No. 1 to the
    El Paso Corporation Employee Stock Purchase Plan effective
    as of October 26, 2006.*10
.H

Amendment to the Executive Award
    Plan of Sonat Inc. effective as of October 26, 2006.*10
.I

Amendment No. 5 to the
    El Paso Corporation Omnibus Plan for Management Employees
    effective as of October 26, 2006. 56




---



##### Table of Contents



ExhibitNumber

Description*10
.J

Amendment No. 5 to the
    El Paso Corporation Strategic Stock Plan effective as of
    October 26, 2006.*10
.K

Amendment No. 3 to the
    El Paso Corporation 1999 Omnibus Incentive Compensation
    Plan effective as of October 26, 2006.*10
.L

Amendment No. 3 to the
    El Paso Corporation 1995 Omnibus Compensation Plan
    effective as of October 26, 2006.*10
.M

Amendment No. 6 to the
    El Paso Corporation 2001 Omnibus Incentive Compensation
    Plan effective as of October 26, 2006.*10
.N

Amendment No. 3 to the
    El Paso Corporation Stock Option Plan for Non-Employee
    Directors effective as of October 26, 2006.*10
.O

Amendment No. 3 to the 2001
    Stock Option Plan for Non-Employee Directors effective as of
    October 26, 2006.*10
.P

Amendment No. 1 to the
    El Paso Corporation 2005 Compensation Plan for Non-Employee
    Directors effective as of October 26, 2006.*10
.Q

Amendment No. 2 to the
    El Paso Corporation 2005 Omnibus Incentive Compensation
    Plan effective as of October 26, 2006.*12


Ratio of Earnings to Combined
    Fixed Charges and Preferred Stock Dividends.*31
.A

Certification of Chief 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 Chief 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.     Regulation S-K,
 57




---



##### Table of Contents



SIGNATURES       
 
 Executive Vice President and
  Chief Financial Officer
  (Principal Financial Officer)
   
 
 Senior Vice President and Controller
  (Principal Accounting Officer)
 58




---



##### Table of Contents



EL PASO
    CORPORATION
  EXHIBIT INDEX
    ExhibitNumber

Description3
.B

By-laws effective as of
    October 26, 2006 (Exhibit 3.B to our Current Report on
    form 8-K
    filed October 26, 2006).*4
.A

Eleventh Supplemental Indenture
    dated as of August 31, 2006, between El Paso
    Corporation and HSBC Bank USA, National Association, as trustee.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, 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
.B

Amended and Restated Security
    Agreement dated as of July 31, 2006, made by El Paso
    Corporation, Colorado Interstate Gas Company, El Paso
    Natural Gas Company, Tennessee Gas Pipeline Company, the
    Subsidiary Grantors 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).10
.C

Amended and Restated Parent
    Guarantee Agreement dated as of July 31, 2006, made by
    El Paso Corporation, in favor of JPMorgan Chase Bank, N.A.,
    as Collateral Agent (Exhibit 10.C to our Current Report on
    Form 8-K,
    filed with the SEC on August 2, 2006).10
.D

Amended and Restated Subsidiary
    Guarantee Agreement dated as of July 31, 2006, made by each
    of the Subsidiary Guarantors in favor of JPMorgan Chase Bank,
    N.A., as Collateral Agent (Exhibit 10.D to our Current
    Report on
    Form 8-K,
    filed with the SEC on August 2, 2006).10
.E

Credit Agreement dated as of
    July 19, 2006 among El Paso Corporation, as Borrower,
    Deutsche Bank AG New York Branch, as Initial Lender, Issuing
    Bank, Administrative Agent and Collateral Agent
    (Exhibit 10.A to our Current Report on
    Form 8-K,
    filed with the SEC on July 20, 2006).*10
.F

Form of Indemnification Agreement
    executed by El Paso for the benefit of each officer and
    effective the date listed in Schedule A thereto.*10
.G

Amendment No. 1 to the
    El Paso Corporation Employee Stock Purchase Plan effective
    as of October 26, 2006.*10
.H

Amendment to the Executive Award
    Plan of Sonat Inc. effective as of October 26, 2006.*10
.I

Amendment No. 5 to the
    El Paso Corporation Omnibus Plan for Management Employees
    effective as of October 26, 2006.*10
.J

Amendment No. 5 to the
    El Paso Corporation Strategic Stock Plan effective as of
    October 26, 2006.*10
.K

Amendment No. 3 to the
    El Paso Corporation 1999 Omnibus Incentive Compensation
    Plan effective as of October 26, 2006.*10
.L

Amendment No. 3 to the
    El Paso Corporation 1995 Omnibus Compensation Plan
    effective as of October 26, 2006.*10
.M

Amendment No. 6 to the
    El Paso Corporation 2001 Omnibus Incentive Compensation
    Plan effective as of October 26, 2006.*10
.N

Amendment No. 3 to the
    El Paso Corporation Stock Option Plan for Non-Employee
    Directors effective as of October 26, 2006.*10
.O

Amendment No. 3 to the 2001
    Stock Option Plan for Non-Employee Directors effective as of
    October 26, 2006.




---



##### Table of Contents



ExhibitNumber

Description*10
.P

Amendment No. 1 to the
    El Paso Corporation 2005 Compensation Plan for Non-Employee
    Directors effective as of October 26, 2006.*10
.Q

Amendment No. 2 to the
    El Paso Corporation 2005 Omnibus Incentive Compensation
    Plan effective as of October 26, 2006.*12


Ratio of Earnings to Combined
    Fixed Charges and Preferred Stock Dividends.*31
.A

Certification of Chief 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 Chief 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.