##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

Form 10-K

|                                                |  |                                                                                             
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------
|(Mark One)                                      |  |                                                                                             
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
|                                               
|For the fiscal year ended December 31,
    2004
|                                               
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                               
|For the transition period
    from          to 

Commission File Number 333-106586

El Paso Production Holding
Company

(Exact name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 76-0659544                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|El Paso Building
    1001 Louisiana Street
    Houston, Texas      |  | 77002(Zip Code)                         
|(Address of Principal Executive Offices)                           |  |                                         

Telephone Number:
(713) 420-2600

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act: None

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o.

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ.

State the aggregate market value of the voting
and non-voting common equity held by non-affiliates of the
registrant: None

Indicate the number of shares outstanding of
each of the registrants classes of common stock, as of the
latest practicable date.

Common Stock, par value $1 per share. Shares
outstanding on March 31, 2005: 1,000

EL PASO
PRODUCTION HOLDING COMPANY MEETS THE CONDITIONS OF GENERAL
INSTRUCTION I(1)(a) AND (b) TO FORM 10-K AND IS
THEREFORE FILING THIS REPORT WITH A REDUCED DISCLOSURE FORMAT AS
PERMITTED BY SUCH INSTRUCTION.

Documents Incorporated by Reference:
None



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EL PASO PRODUCTION HOLDING COMPANY

TABLE OF CONTENTS

|                                             |  |                                                                                                                                                    |  |      |    | 
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|Caption                                      |  |                                                                                                                                                    |  | Page
|                                             |  |                                                                                                                                                    |  |     
|Part I                                      
|Item 1.                                      |  | Business                                                                                                                                           |  |      | 1  | 
|Item 2.                                      |  | Properties                                                                                                                                         |  |      | 6  | 
|Item 3.                                      |  | Legal Proceedings                                                                                                                                  |  |      | 6  | 
|Item 4.                                      |  | Submission of Matters to a Vote of Security
    Holders                                                                                            |  |      | *  | 
|Part II                                     
|Item 5.                                      |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities                               |  |      | 6  | 
|Item 6.                                      |  | Selected Financial Data                                                                                                                            |  |      | *  | 
|Item 7.                                      |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                          |  |      | 7  | 
|                                             |  | Risk Factors and Cautionary
    Statement for Purposes of the Safe Harbor Provisions
    of the Private Securities Litigation Reform Act of 1995 |  |      | 15 | 
|Item 7A.                                     |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                     |  |      | 23 | 
|Item 8.                                      |  | Financial Statements and Supplementary Data                                                                                                        |  |      | 24 | 
|Item 9.                                      |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure                                                           |  |      | 51 | 
|Item 9A.                                     |  | Controls and Procedures                                                                                                                            |  |      | 51 | 
|Item 9B.                                     |  | Other Information                                                                                                                                  |  |      | 52 | 
|Part III                                    
|Item 10.                                     |  | Directors and Executive Officers of the Registrant                                                                                                 |  |      | *  | 
|Item 11.                                     |  | Executive Compensation                                                                                                                             |  |      | *  | 
|Item 12.                                     |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters                                                 |  |      | *  | 
|Item 13.                                     |  | Certain Relationships and Related Transactions                                                                                                     |  |      | *  | 
|Item 14.                                     |  | Principal Accountant Fees and Services                                                                                                             |  |      | 52 | 
|Part IV                                     
|Item 15.                                     |  | Exhibits and Financial Statement Schedules                                                                                                         |  |      | 52 | 
|                                             |  | Signatures                                                                                                                                         |  |      | 55 | 
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906





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|  |                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | We have not included a response to this item in
    this document since no response is required pursuant to the
    reduced disclosure format permitted by General
    Instruction I to Form 10-K.

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

|       |  |   |  |                                               
|------ |  | - |  | ----------------------------------------------
|/d     |  | = |  | per day                                       
|Bbl    |  | = |  | barrels                                       
|BBtu   |  | = |  | billion British thermal units                 
|Bcf    |  | = |  | billion cubic feet                            
|Bcfe   |  | = |  | billion cubic feet of natural gas equivalents 
|MBbls  |  | = |  | thousand barrels                              
|Mcf    |  | = |  | thousand cubic feet                           
|Mcfe   |  | = |  | thousand cubic feet of natural gas equivalents
|MMBbls |  | = |  | million barrels                               
|MMBtu  |  | = |  | million British thermal units                 
|MMcf   |  | = |  | million cubic feet                            
|MMcfe  |  | = |  | million cubic feet of natural gas equivalents 
|TBtu   |  | = |  | trillion British thermal units                
|Tcfe   |  | = |  | trillion cubic feet of natural gas equivalents

When we refer to natural gas and oil in
equivalents, we are doing so to compare quantities
of oil with quantities of natural gas or to express these
different commodities in a common unit. In calculating
equivalents, we use a generally recognized standard in which one
Bbl of oil is equal to six Mcf of natural gas. Also, when we
refer to cubic feet measurements, all measurements are at a
pressure of 14.73 pounds per square inch.

When we refer to us, we,
our, ours, or El Paso
Production, we are describing El Paso Production
Holding Company and/or our subsidiaries.

i



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##### Table of Contents






PART I






|        |         
|------- | --------
|ITEM 1. | BUSINESS

General

We are a Delaware corporation formed in 1999 as a
wholly-owned direct subsidiary of El Paso Corporation
(El Paso). We are engaged in the exploration for, and the
acquisition, development and production of natural gas, oil,
condensate and natural gas liquids. We operate primarily in
Alabama, Louisiana, New Mexico, Oklahoma, Texas and the Gulf of
Mexico. During 2004, daily production averaged 456 MMcfe/d,
and our proved reserves at December 31, 2004, were
approximately 1.3 Tcfe.

We focus on developing production opportunities
around our asset base, which is solely in the United States.
This plan emphasizes strict capital discipline designed to
improve capital efficiency through the use of standardized risk
analysis and a heightened focus on cost control. We also
implemented a more rigorous process for booking proved natural
gas and oil reserves. Our plan is to stabilize production by
improving the production mix across our operating areas and to
generate more predictable returns. We intend to improve our
production mix by allocating more capital to long-life, slower
decline projects and to development projects in longer reserve
life areas. This is being accomplished through our more rigorous
capital review process and a more balanced allocation of our
capital to development and exploration projects, supplemented by
acquisition activities with low-risk development locations that
provide operating synergies with our existing operations. In
January 2005, we announced two acquisitions in east Texas and
south Texas for $211 million. In March 2005, we purchased
the interest held by one of the parties under a net profits
interest agreement for approximately $40 million. These
acquisitions added properties with approximately 131 Bcfe
of existing proved reserves and 48 MMcfe/d of current
production. More importantly, the Texas acquisitions offered
additional exploration upside in two of our key operating areas.

Our operations are divided into the following
areas:

|                             |  |                                                          |  |                                                                                                                                               
|---------------------------- |  | -------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Area                         |  | Operating Regions                                        |  | Major Fields                                                                                                                                  
|                             |  |                                                          |  |                                                                                                                                               
|Onshore                      |  | Central (primarily in north Louisiana)                   |  | Holly, Bear Creek, Shangaloo and Ada/ Sibbley/
    West Bryceland                                                                             
|                             |  | Black Warrior Basin in Alabama                           |  | White Oak Creek, Short Creek, Blue Creek West,
    and Brookwood                                                                              
|                             |  | Arkoma Basin in Oklahoma                                 |  | Oklahoma                                                                                                                                      
|                             |  | Raton Basin in New Mexico                                |  | Vermejo Park Ranch                                                                                                                            
|                            
|Texas Gulf Coast             |  | South Texas                                              |  | North Monte Christo and Samano                                                                                                                
|                            
|Offshore and south Louisiana |  | Gulf of Mexico (Texas and Louisiana)
    South Louisiana |  | South Timbalier 189/204, Ewing Bank 1003, East
    Cameron 81/84, Jim Bob Mountain and Mound Point, West Delta 137,
    and West Cameron 46/47



| |                             
| | ----------------------------
| | Natural Gas and Oil Reserves

The tables below detail our proved reserves at
December 31, 2004. Information in these tables is based on
our internal reserve report. Ryder Scott Company, an
independent petroleum engineering firm, prepared an estimate of
our natural gas and oil reserves for 92 percent of our
properties by volume. The total estimate of proved reserves
prepared by Ryder Scott was within five percent of our
internally prepared estimates presented in these tables. This
information is consistent with estimates of reserves filed with
other federal agencies except for differences of less than
five percent resulting from actual production,
acquisitions, property sales, necessary reserve revisions and
additions to reflect actual experience. Ryder Scott was
retained by and reports to the Audit Committee of
El Pasos Board of Directors. The properties reviewed
by Ryder Scott represented 90 percent of our proved
properties based on value.

1



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##### Table of Contents



Our estimated proved reserves at
December 31, 2004, and our 2004 production are as follows:

|                             |       |                        |           |            |  |               |       |         |  |            |       |         |  |  |           |           |  |  |    |     |  |  |        |         | 
|---------------------------- | ----- | ---------------------- | --------- | ---------- |  | ------------- | ----- | ------- |  | ---------- | ----- | ------- |  |  | --------- | --------- |  |  | -- | --- |  |  | ------ | ------- | 
|                             |       |                        |           |           
|                             |       | Net Proved Reserves(1) |           |           
|                             |       |                        |           |           
|                             |       | Natural                |           | Oil/       |  | Natural Gas   |       |         |  | 2004      
|                             |       | Gas                    |           | Condensate |  | Liquids (NGL) |       | Total   |  | Production
|                             |       |                        |           |            |  |               |       |         |  |           
|                             |       |                        |           |            |  |               |       |         |  |            |       |        
|                             |       | (MMcf)                 |           | (MBbls)    |  | (MBbls)       |       | (MMcfe) |  | (Percent)  |       | (MMcfe)
|Onshore                      |       |                        | 1,065,421 |            |  |               | 1,926 |         |  |            | 1,233 |         |  |  | 1,084,375 |           |  |  | 84 |     |  |  | 78,708 |        
|Texas Gulf Coast             |       |                        | 54,991    |            |  |               | 338   |         |  |            | 1,505 |         |  |  | 66,049    |           |  |  | 5  |     |  |  | 17,476 |        
|Offshore and south Louisiana |       |                        | 91,895    |            |  |               | 5,708 |         |  |            | 1,864 |         |  |  | 137,322   |           |  |  | 11 |     |  |  | 70,714 |        
|                             |       |                        |           |            |  |               |       |         |  |            |       |         |  |  |           |           |  |  |    |     |  |  |        |        
|                             | Total |                        |           | 1,212,307  |  |               |       | 7,972   |  |            |       | 4,602   |  |  |           | 1,287,746 |  |  |    | 100 |  |  |        | 166,898 | 
|                             |       |                        |           |            |  |               |       |         |  |            |       |         |  |  |           |           |  |  |    |     |  |  |        |        



---



|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net proved reserves exclude royalties and
    interests owned by others and reflect contractual arrangements
    and royalty obligations in effect at the time of the estimate.

The table below summarizes our estimated proved
producing reserves, proved non-producing reserves, and proved
undeveloped reserves at December 31, 2004:

|              |              |                        |         |            |  |         |       |         |  |           |       |       |  |  |         |           |  |  |    |     | 
|------------- | ------------ | ---------------------- | ------- | ---------- |  | ------- | ----- | ------- |  | --------- | ----- | ----- |  |  | ------- | --------- |  |  | -- | --- | 
|              |              |                       
|              |              | Net Proved Reserves(1)
|              |              |                       
|              |              |                        |         | Oil/       |  |         |       |        
|              |              | Natural Gas            |         | Condensate |  | NGL     |       | Total  
|              |              |                        |         |            |  |         |       |        
|              |              |                        |         |            |  |         |       |         |  |          
|              |              | (MMcf)                 |         | (MBbls)    |  | (MBbls) |       | (MMcfe) |  | (Percent)
|Producing     |              |                        | 758,858 |            |  |         | 3,895 |         |  |           | 3,278 |       |  |  | 801,896 |           |  |  | 62 |    
|Non-Producing |              |                        | 109,499 |            |  |         | 1,774 |         |  |           | 981   |       |  |  | 126,023 |           |  |  | 10 |    
|Undeveloped   |              |                        | 343,950 |            |  |         | 2,303 |         |  |           | 343   |       |  |  | 359,827 |           |  |  | 28 |    
|              |              |                        |         |            |  |         |       |         |  |           |       |       |  |  |         |           |  |  |    |    
|              | Total proved |                        |         | 1,212,307  |  |         |       | 7,972   |  |           |       | 4,602 |  |  |         | 1,287,746 |  |  |    | 100 | 
|              |              |                        |         |            |  |         |       |         |  |           |       |       |  |  |         |           |  |  |    |    



---



|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net proved reserves exclude royalties and
    interests owned by others and reflect contractual arrangements
    and royalty obligations in effect at the time of the estimate.

Recovery of proved undeveloped reserves requires
significant capital expenditures and successful drilling
operations. The reserve data assumes that we can and will make
these expenditures and conduct these operations successfully,
but future events, including commodity price changes, may cause
these assumptions to change. In addition, estimates of proved
undeveloped reserves and proved non-producing reserves are
subject to greater uncertainties than estimates of proved
producing reserves.

There are numerous uncertainties inherent in
estimating quantities of proved reserves, projecting future
rates of production and projecting the timing of development
expenditures, including many factors beyond our control. The
reserve data represents only estimates. Reservoir engineering is
a subjective process of estimating underground accumulations of
natural gas and oil that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological
interpretations and judgment. All estimates of proved reserves
are determined according to the rules prescribed by the
Securities and Exchange Commission (SEC). These rules indicate
that the standard of reasonable certainty be applied
to proved reserve estimates. This concept of reasonable
certainty implies that as more technical data becomes available,
a positive, or upward, revision is more likely than a negative,
or downward, revision. Estimates are subject to revision based
upon a number of factors, including reservoir performance,
prices, economic conditions and government restrictions. In
addition, results of drilling, testing and production subsequent
to the date of an estimate may justify revision of that
estimate. Reserve estimates are often different from the
quantities of natural gas and oil that are ultimately recovered.
The meaningfulness of reserve estimates is highly dependent on
the accuracy of the assumptions on which they were based. In
general, the volume of production from natural gas and oil
properties we own declines as reserves are depleted. Except to
the extent we conduct successful exploration and development
activities or acquire additional properties containing proved
reserves, or both, our proved reserves will decline as reserves
are produced. For a further discussion of our reserves, see
Part II, Item 8, Financial Statements and
Supplementary Data, under the heading Supplemental Natural Gas
and Oil Operations.

2



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##### Table of Contents





| |                  
| | -----------------
| | Acreage and Wells

The following table details our gross and net
interest in developed and undeveloped acreage at
December 31, 2004. Any acreage in which our interest is
limited to owned royalty, overriding royalty and other similar
interests is excluded.

|                             |       |           |         |             |  |          |         |         |  |          |           |           |  |  |           |           |  |  |           |           |  |  |           |           | 
|---------------------------- | ----- | --------- | ------- | ----------- |  | -------- | ------- | ------- |  | -------- | --------- | --------- |  |  | --------- | --------- |  |  | --------- | --------- |  |  | --------- | --------- | 
|                             |       |           |         |             |  |         
|                             |       | Developed |         | Undeveloped |  | Total   
|                             |       |           |         |             |  |         
|                             |       | Gross(1)  |         | Net(2)      |  | Gross(1) |         | Net(2)  |  | Gross(1) |           | Net(2)   
|                             |       |           |         |             |  |          |         |         |  |          |           |          
|Onshore                      |       |           | 408,087 |             |  |          | 281,057 |         |  |          | 1,199,686 |           |  |  | 1,019,526 |           |  |  | 1,607,773 |           |  |  | 1,300,583 |          
|Texas Gulf Coast             |       |           | 83,159  |             |  |          | 6,657   |         |  |          | 36,419    |           |  |  | 9,104     |           |  |  | 119,578   |           |  |  | 15,761    |          
|Offshore and south Louisiana |       |           | 346,982 |             |  |          | 251,959 |         |  |          | 649,520   |           |  |  | 610,554   |           |  |  | 996,502   |           |  |  | 862,513   |          
|                             |       |           |         |             |  |          |         |         |  |          |           |           |  |  |           |           |  |  |           |           |  |  |           |          
|                             | Total |           |         | 838,228     |  |          |         | 539,673 |  |          |           | 1,885,625 |  |  |           | 1,639,184 |  |  |           | 2,723,853 |  |  |           | 2,178,857 | 
|                             |       |           |         |             |  |          |         |         |  |          |           |           |  |  |           |           |  |  |           |           |  |  |           |          






|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(1) | Gross interest reflects the total acreage we
    participated in, regardless of our ownership interests in the
    acreage.
|(2) | Net interest is the aggregate of the fractional
    working interest that we have in our gross acreage.                    

Our net developed acreage is concentrated
primarily in the Gulf of Mexico (47 percent), Oklahoma
(14 percent), Louisiana (12 percent), New Mexico
(11 percent), and Alabama (9 percent). Our net
undeveloped acreage is concentrated primarily in New Mexico
(31 percent), the Gulf of Mexico (23 percent),
Louisiana (16 percent) and Indiana (11 percent).
Approximately 20 percent, 7 percent and
13 percent of our total net undeveloped acreage is held
under leases that have remaining primary terms expiring in 2005,
2006 and 2007.

The following table details our working interests
in natural gas and oil wells at December 31, 2004:

|                             |       |             |       |                |  |                  |       |                 |  |          |    |        |  |          |    |        |  |  |       |       |  |  |       |       |  |  |    |    |  |  |    |    | 
|---------------------------- | ----- | ----------- | ----- | -------------- |  | ---------------- | ----- | --------------- |  | -------- | -- | ------ |  | -------- | -- | ------ |  |  | ----- | ----- |  |  | ----- | ----- |  |  | -- | -- |  |  | -- | -- | 
|                             |       |             |       |                |  |                  |       |                 |  |          |    |        |  |         
|                             |       | Productive  |       |                |  |                  |       |                
|                             |       | Natural Gas |       | Productive Oil |  | Total Productive |       | Number of Wells
|                             |       | Wells       |       | Wells          |  | Wells            |       | Being Drilled  
|                             |       |             |       |                |  |                  |       |                
|                             |       | Gross(1)    |       | Net(2)         |  | Gross(1)         |       | Net(2)          |  | Gross(1) |    | Net(2) |  | Gross(1) |    | Net(2)
|                             |       |             |       |                |  |                  |       |                 |  |          |    |        |  |          |    |       
|Onshore                      |       |             | 2,829 |                |  |                  | 2,082 |                 |  |          | 5  |        |  |          | 3  |        |  |  | 2,834 |       |  |  | 2,085 |       |  |  | 59 |    |  |  | 48 |   
|Texas Gulf Coast             |       |             | 97    |                |  |                  | 89    |                 |  |          |   |        |  |          |   |        |  |  | 97    |       |  |  | 89    |       |  |  |   |    |  |  |   |   
|Offshore and south Louisiana |       |             | 132   |                |  |                  | 74    |                 |  |          | 41 |        |  |          | 14 |        |  |  | 173   |       |  |  | 88    |       |  |  | 2  |    |  |  | 1  |   
|                             |       |             |       |                |  |                  |       |                 |  |          |    |        |  |          |    |        |  |  |       |       |  |  |       |       |  |  |    |    |  |  |    |   
|                             | Total |             |       | 3,058          |  |                  |       | 2,245           |  |          |    | 46     |  |          |    | 17     |  |  |       | 3,104 |  |  |       | 2,262 |  |  |    | 61 |  |  |    | 49 | 
|                             |       |             |       |                |  |                  |       |                 |  |          |    |        |  |          |    |        |  |  |       |       |  |  |       |       |  |  |    |    |  |  |    |   



---



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross interest reflects the total number of wells
    we participated in, regardless of our ownership interests in the
    wells.
|(2) | Net interest is the aggregate of the fractional
    working interest that we have in our gross wells.                            

At December 31, 2004, we operated 2,028 of
the 2,262 net productive wells.

The following table details our net exploratory
and development wells drilled during the years 2002 through 2004:

|           |       |                  |   |                  |  |      |    |      |  |      |   |      |  |  |     |     |  |  |     |     |  |  |     |     | 
|---------- | ----- | ---------------- | - | ---------------- |  | ---- | -- | ---- |  | ---- | - | ---- |  |  | --- | --- |  |  | --- | --- |  |  | --- | --- | 
|           |       |                  |   |                 
|           |       | Net Exploratory  |   | Net Development 
|           |       | Wells Drilled(1) |   | Wells Drilled(1)
|           |       |                  |   |                 
|           |       | 2004             |   | 2003             |  | 2002 |    | 2004 |  | 2003 |   | 2002
|           |       |                  |   |                  |  |      |    |      |  |      |   |     
|Productive |       |                  | 1 |                  |  |      | 35 |      |  |      | 9 |      |  |  | 288 |     |  |  | 219 |     |  |  | 334 |    
|Dry        |       |                  | 7 |                  |  |      | 13 |      |  |      | 6 |      |  |  | 2   |     |  |  |    |     |  |  | 4   |    
|           |       |                  |   |                  |  |      |    |      |  |      |   |      |  |  |     |     |  |  |     |     |  |  |     |    
|           | Total |                  |   | 8                |  |      |    | 48   |  |      |   | 15   |  |  |     | 290 |  |  |     | 219 |  |  |     | 338 | 
|           |       |                  |   |                  |  |      |    |      |  |      |   |      |  |  |     |     |  |  |     |     |  |  |     |    



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | Net interest is the aggregate of the fractional
    working interest that we have in our gross wells drilled.

The information above should not be considered
indicative of future drilling performance, nor should it be
assumed that there is any correlation between the number of
productive wells drilled and the amount of natural gas and oil
that may ultimately be recovered.

3



---



##### Table of Contents





| |                                                                      
| | ---------------------------------------------------------------------
| | Net Production, Sales Prices, Transportation
    and Production Costs

The following table details our net production
volumes, average sales prices received, average transportation
costs and average production costs associated with the sale of
natural gas and oil for each of the three years ended
December 31:

|                                                                     |                                 |                        |   |         |         |      |   |         |         |  |   |         |         | 
|-------------------------------------------------------------------- | ------------------------------- | ---------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                     |                                 | 2004                   |   | 2003    |         | 2002
|                                                                     |                                 |                        |   |         |         |     
|Net Production Volumes                                               |                                 |                        |   |         |         |      |   |         |         |  |   |        
|                                                                     | Natural gas (MMcf)              |                        |   | 142,368 |         |      |   | 191,400 |         |  |   | 214,529 |        
|                                                                     | Oil, condensate and NGL (MBbls) |                        |   | 4,088   |         |      |   | 5,719   |         |  |   | 9,629   |        
|                                                                     |                                 | Total (MMcfe)          |   |         | 166,898 |      |   |         | 225,713 |  |   |         | 272,305 | 
|                                                                    
|Natural Gas Average Realized Sales Price
    ($/Mcf)(1)              |                                 |                        |   |         |         |      |   |         |         |  |   |        
|                                                                     | Price including hedges(2)       |                        | $ | 4.40    |         |      | $ | 3.83    |         |  | $ | 3.02    |        
|                                                                     | Price excluding hedges          |                        | $ | 6.01    |         |      | $ | 5.56    |         |  | $ | 3.25    |        
|                                                                    
|Oil, Condensate, and NGL Average Realized Sales
    Price ($/Bbl)(1) |                                 |                        |   |         |         |      |   |         |         |  |   |        
|                                                                     | Price including hedges(2)       |                        | $ | 33.58   |         |      | $ | 26.67   |         |  | $ | 21.87   |        
|                                                                     | Price excluding hedges          |                        | $ | 33.58   |         |      | $ | 28.08   |         |  | $ | 22.06   |        
|                                                                    
|Average Transportation Costs                                         |                                 |                        |   |         |         |      |   |         |         |  |   |        
|                                                                     | Natural gas ($/Mcf)             |                        | $ | 0.21    |         |      | $ | 0.19    |         |  | $ | 0.19    |        
|                                                                     | Oil, condensate and NGL ($/Bbl) |                        | $ | 1.26    |         |      | $ | 1.23    |         |  | $ | 1.23    |        
|                                                                    
|Average Production Costs ($/Mcfe)(3)                                 |                                 |                        |   |         |         |      |   |         |         |  |   |        
|                                                                     | Average lease operating costs   |                        | $ | 0.51    |         |      | $ | 0.36    |         |  | $ | 0.33    |        
|                                                                     | Average production taxes        |                        |   | 0.11    |         |      |   | 0.12    |         |  |   | 0.07    |        
|                                                                     |                                 |                        |   |         |         |      |   |         |         |  |   |        
|                                                                     |                                 | Total production costs |   | $       | 0.62    |      |   | $       | 0.48    |  |   | $       | 0.40    | 
|                                                                     |                                 |                        |   |         |         |      |   |         |         |  |   |        



---



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | Prices are stated before transportation costs.                                                                                 
|(2) | Our hedging activities are conducted with our
    affiliate, El Paso Marketing, L.P. (El Paso Marketing).                      
|(3) | Production costs include lease operating costs
    and production related taxes (including ad valorem and severance
    taxes).

4



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##### Table of Contents





| |                                                          
| | ---------------------------------------------------------
| | Acquisition, Development and Exploration
    Expenditures

The following table details information regarding
the costs incurred in our acquisition, development and
exploration activities for each of the three years ended
December 31:

|                                |                                      |                                   |     |      |     |      |     |     |     |  |     |     |       | 
|------------------------------- | ------------------------------------ | --------------------------------- | --- | ---- | --- | ---- | --- | --- | --- |  | --- | --- | ----- | 
|                                |                                      | 2004                              |     | 2003 |     | 2002
|                                |                                      |                                   |     |      |     |     
|                                |                                      |                                  
|                                |                                      | (In millions)                    
|Acquisition Costs:              |                                      |                                   |     |      |     |      |     |     |     |  |     |    
|                                | Proved                               |                                   | $   | 27   |     |      | $   | 37  |     |  | $   | 339 |      
|                                | Unproved                             |                                   |     | 28   |     |      |     | 26  |     |  |     | 16  |      
|Development Costs               |                                      |                                   | 245 |      |     |      | 398 |     |     |  | 695 |    
|Exploration Costs:              |                                      |                                   |     |      |     |      |     |     |     |  |     |    
|                                | Delay Rentals                        |                                   |     | 4    |     |      |     | 3   |     |  |     | 3   |      
|                                | Seismic Acquisition and Reprocessing |                                   |     | 29   |     |      |     | 55  |     |  |     | 33  |      
|                                | Drilling                             |                                   |     | 65   |     |      |     | 194 |     |  |     | 290 |      
|Asset Retirement Obligations(1) |                                      |                                   | 19  |      |     |      | 47  |     |     |  |    |    
|                                |                                      |                                   |     |      |     |      |     |     |     |  |     |    
|                                |                                      | Total full cost pool expenditures |     |      | 417 |      |     |     | 760 |  |     |     | 1,376 | 
|                                |                                      | Non-full cost pool expenditures   |     |      | 8   |      |     |     | 13  |  |     |     | 29    | 
|                                |                                      |                                   |     |      |     |      |     |     |     |  |     |    
|                                |                                      | Total capital expenditures        |     | $    | 425 |      |     | $   | 773 |  |     | $   | 1,405 | 
|                                |                                      |                                   |     |      |     |      |     |     |     |  |     |    



---



|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes an increase to our property, plant and
    equipment of approximately $41 million in 2003 associated
    with our adoption of Statement of Financial Accounting Standards
    No. 143.

We spent approximately $139 million in 2004,
$160 million in 2003 and $150 million in 2002 to
develop proved undeveloped reserves that were included in our
reserve report as of January 1 of each year.

Regulatory and Operating Environment

Our natural gas and oil activities are regulated
at the federal, state and local levels. These regulations
include, but are not limited to, the drilling and spacing of
wells, conservation, forced pooling and protection of
correlative rights among interest owners. We are also subject to
governmental safety regulations in the jurisdictions in which we
operate.

Our operations under federal natural gas and oil
leases are regulated by the statutes and regulations of the
U.S. Department of the Interior that currently impose
liability upon lessees for the cost of environmental impacts
resulting from their operations. Royalty obligations on all
federal leases are regulated by the Minerals Management Service,
which has promulgated valuation guidelines for the payment of
royalties by producers. These laws and regulations relating to
the protection of the environment affect our natural gas and oil
operations through their effect on the construction and
operation of facilities, water disposal rights, drilling
operations, production or the delay or prevention of future
offshore lease sales. We believe that our operations are in
material compliance with the applicable requirements. In
addition, El Paso maintains insurance on our behalf to
limit exposure to potential losses resulting from sudden and
accidental spills and oil pollution.

Our business has operating risks normally
associated with the exploration for and production of natural
gas and oil, including blowouts, cratering, pollution and fires,
each of which could result in damage to property or injury to
people. Offshore operations may encounter usual marine perils,
including hurricanes and other adverse weather conditions,
damage from collisions with vessels, governmental regulations
and interruption or termination by governmental authorities
based on environmental and other considerations. Customary with
industry practices, El Paso maintains insurance coverage on
our behalf to limit exposure to potential losses resulting from
these operating hazards.

5



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##### Table of Contents



Markets and Competition

We primarily sell our natural gas and oil to
third parties through El Paso Marketing at spot market
prices, subject to customary adjustments. We sell our natural
gas liquids at market prices under monthly or long-term
contracts subject to customary adjustments. We also engage in
hedging activities with El Paso Marketing on a portion of
our natural gas and oil production to stabilize our cash flows
and reduce the risk of downward commodity price movements on
sales of our production. This is achieved through natural gas
and oil swaps.

The natural gas and oil business is highly
competitive in the search for and acquisition of additional
reserves and in the sale of natural gas, oil and natural gas
liquids. Our competitors include major and intermediate sized
natural gas and oil companies, independent natural gas and oil
operators and individual producers or operators with varying
scopes of operations and financial resources. Competitive
factors include price and contract terms and our ability to
access drilling and other equipment on a timely and cost
effective basis. Ultimately, our future success in the
production business will be dependent on our ability to find or
acquire additional reserves at costs that allow us to remain
competitive.

Environmental

A description of our environmental activities is
included in Part II, Item 8, Financial Statements and
Supplementary Data, Note 7, and is incorporated herein by
reference.

Employees

As of March 24, 2005 we had approximately
796 full-time employees, none of whom are subject to
collective bargaining arrangements.






|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

A description of our properties is included in
Item 1, Business, and is incorporated herein by reference.

We believe that we have satisfactory title to the
properties owned and used in our business, subject to liens for
taxes not yet payable, liens incident to minor encumbrances,
liens for credit arrangements and easements and restrictions
that do not materially detract from the value of these
properties, our interests in these properties, or the use of
these properties in our business. We believe that our properties
are adequate and suitable for the conduct of our business in the
future.






|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

A description of our legal proceedings is
included in Part II, Item 8, Financial Statements and
Supplementary Data, Note 7, and is incorporated herein by
reference.






|        |                                                        
|------- | -------------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS

Item 4, Submission of Matters to a Vote of
Security Holders, has been omitted from this report pursuant to
the reduced disclosure format permitted by General
Instruction I to Form 10-K.




PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES

All of our common stock, par value $1 per
share, is owned by El Paso and, accordingly, our stock is
not publicly traded. Subject to certain limitations, we pay
dividends on our common stock from time to time from legally
available funds that have been approved for payment by our Board
of Directors. During 2003 and 2002, we declared and paid to
El Paso dividends of $1.6 billion and
$298 million, of which $320 million in 2003 were
non-cash dividends. There were no dividends declared or paid on
our common stock in 2004.

6



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##### Table of Contents








|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

Item 6, Selected Financial Data has been
omitted from this report pursuant to the reduced disclosure
format permitted by General Instruction I to Form 10-K.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this Item is
presented in a reduced disclosure format pursuant to General
Instruction I to Form 10-K. The notes to our
consolidated financial statements contain information that is
pertinent to the following analysis, including a discussion of
our significant accounting policies.

Overview

We conduct natural gas and oil exploration and
production activities. Our operating results are driven by a
variety of factors including the ability to locate and develop
economic natural gas and oil reserves, extract those reserves
with minimal production costs, sell the products at attractive
prices, and minimize our total administrative costs.

Our long-term strategy includes developing
production opportunities in the United States. We emphasize
strict capital discipline designed to improve capital
efficiencies through the use of standardized risk analysis and a
heightened focus on cost control. We also implemented a more
rigorous process for booking proved natural gas and oil
reserves, which includes multiple layers of reviews by personnel
independent of the reserve estimation process. Our plan is to
stabilize production by improving the production mix across our
operating areas and to generate more predictable returns. We
intend to improve our production mix by allocating more capital
to long-life, slower decline projects and to development
projects in longer reserve life areas. This is being
accomplished through our more rigorous capital review process
and a more balanced allocation of our capital to development and
exploration projects, supplemented by acquisition activities
with low-risk development locations that provide operating
synergies with our existing operations. In January 2005, we
announced two acquisitions in east Texas and south Texas for
$211 million. In March 2005, we purchased the interest held
by one of the parties under a net profits interest agreement for
approximately $40 million. See Item 8, Financial
Statements and Supplementary Data, under the heading
Supplemental Natural Gas and Oil Operations, for a further
discussion of our net profits interest agreements. These
acquisitions added properties with approximately 131 Bcfe
of existing proved reserves and 48 MMcfe/d of current
production. More importantly, the Texas acquisitions offered
additional exploration upside in two of our key operating areas.

Operational Factors Affecting the Year Ended
December 31, 2004

During 2004 we experienced the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Higher realized
    prices.Realized natural gas prices,
    which include the impact of hedges, increased 15 percent
    and oil, condensate and NGL prices increased 26 percent
    compared to 2003.                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Average daily production of
    456 MMcfe/d.We achieved our
    projected volume despite the impact of hurricanes in the Gulf of
    Mexico.                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Capital expenditures of
    $425 million.During the first
    quarter of 2004, we experienced disappointing drilling results.
    As a result, we significantly reduced our drilling activities
    and instituted a new, more rigorous, risk analysis program, with
    an emphasis on strict capital discipline. After implementing
    this new program, we increased our drilling activities in the
    third and fourth quarters of 2004 with improved drilling
    results. During 2004, we drilled 298 wells with a
    97 percent success rate.

Reserves, Production and Costs

Our estimate of proved natural gas and oil
reserves as of December 31, 2004 reflects
1.3 Tcfe of proved reserves in the United States. These
estimates were prepared internally by us. Ryder Scott Company, an

7



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##### Table of Contents



independent petroleum engineering firm, prepared
an estimate of our natural gas and oil reserves for
92 percent of our properties by volume. The total estimate
of proved reserves prepared by Ryder Scott is within
five percent of our internally prepared estimates. Ryder
Scott was retained by and reports to the Audit Committee of
El Pasos Board of Directors. The properties reviewed
by Ryder Scott represented 90 percent of our properties
based on value. For additional information on our estimated
proved reserves and the processes by which they are developed,
see Part I, Item 1, Business, Item 7, Risk
Factors and Item 8, Financial Statements and Supplementary
Data, under the heading Supplemental Natural Gas and Oil
Operations.


For 2004, our total equivalent production
declined 59 Bcfe or 26 percent as compared to 2003.
The decrease was due to production declines in our Texas Gulf
Coast and offshore Gulf of Mexico regions, the sale of
properties in Oklahoma and Texas at the end of the first quarter
of 2003, and a significantly reduced capital expenditure program
in 2004 compared to 2003. We began to see our production
stabilize in the third and fourth quarters of 2004 as we
instituted our more rigorous capital review process and a more
balanced allocation of our capital described above. In addition,
in February 2005, we announced a deep shelf discovery off West
Cameron Block 75 in the Gulf of Mexico.

Our depletion rate is determined under the full
cost method of accounting. Due to disappointing drilling
performance in 2004 that resulted in higher finding and
development costs, we expect our unit of production depletion
rate to increase from $1.87/Mcfe in the fourth quarter of 2004
to $2.09/Mcfe in the first quarter of 2005. Our future trends in
production and depletion rates will be dependent upon the amount
of capital allocated to us from El Paso, the level of
success in our drilling programs and any future sale or
acquisition activities relating to our proved reserves.

Production Hedge Position

As part of our overall strategy, we hedge our
natural gas and oil production to stabilize cash flows, reduce
the risk of downward commodity price movements on our sales and
to protect the economic assumptions associated with our capital
investment programs. We have historically engaged in hedging
activities with El Paso Marketing, primarily through
natural gas and oil swaps. Because only a portion of our
expected production is hedged, this strategy only partially
reduces our exposure to downward movements in commodity prices.
As a result, our reported results of operations, financial
position and cash flows can be impacted significantly by
movements in commodity prices from period to period.

In December 2004, we replaced our existing hedges
on approximately 154 TBtu of natural gas with new hedge
transactions at the same volume and over the same time period.
The combination of our original hedges and the new transactions
did not change the average price at which we are hedged and will
not have an impact on our future realized prices. As a result,
these transactions will have the same impact on our accumulated
other comprehensive income balances, cash flow and income
statement as our original derivative positions that existed
prior to December 1, 2004. However, these transactions
locked in a loss of approximately
$520 million in accumulated other comprehensive income that
will be recognized in earnings as our original hedged
transactions settle through 2005 and 2006. We have also entered
into a service agreement with El Paso that provides for a
reimbursement of 2.5 cents per MMBtu in 2005 and 2006 for our
expected administrative costs associated with these transactions.

Below are the hedging positions on our
anticipated natural gas production as of December 31, 2004:

|                  |  |               |        |              |  |              |      |              |  |        |        |              |  |        |      |              |  |        |        |              |  |   |      |  |  |  |        |  |  |   |      |  |  |  |        |  |  |   |      | 
|----------------- |  | ------------- | ------ | ------------ |  | ------------ | ---- | ------------ |  | ------ | ------ | ------------ |  | ------ | ---- | ------------ |  | ------ | ------ | ------------ |  | - | ---- |  |  |  | ------ |  |  | - | ---- |  |  |  | ------ |  |  | - | ---- | 
|                  |  |               |        |              |  |             
|                  |  | Quarter Ended |        |              |  |             
|                  |  |               |        |              |  |             
|                  |  |               |        |              |  |              |      |              |  |       
|                  |  | March 31      |        | June 30      |  | September 30 |      | December 31  |  | Total 
|                  |  |               |        |              |  |              |      |              |  |       
|                  |  | Volume        |        | Hedged Price |  | Volume       |      | Hedged Price |  | Volume |        | Hedged Price |  | Volume |      | Hedged Price |  | Volume |        | Hedged Price
|                  |  | (BBtu)        |        | (per MMBtu)  |  | (BBtu)       |      | (per MMBtu)  |  | (BBtu) |        | (per MMBtu)  |  | (BBtu) |      | (per MMBtu)  |  | (BBtu) |        | (per MMBtu) 
|                  |  |               |        |              |  |              |      |              |  |        |        |              |  |        |      |              |  |        |        |             
|2005              |  |               | 20,269 |              |  | $            | 3.21 |              |  |        | 20,287 |              |  | $      | 3.21 |              |  |        | 20,305 |              |  | $ | 3.22 |  |  |  | 20,305 |  |  | $ | 3.22 |  |  |  | 81,166 |  |  | $ | 3.22 | 
|2006              |  |               | 21,349 |              |  | $            | 3.32 |              |  |        | 21,367 |              |  | $      | 3.32 |              |  |        | 21,385 |              |  | $ | 3.33 |  |  |  | 21,385 |  |  | $ | 3.33 |  |  |  | 85,486 |  |  | $ | 3.32 | 
|2007              |  |               | 1,579  |              |  | $            | 3.79 |              |  |        | 1,447  |              |  | $      | 3.64 |              |  |        | 1,155  |              |  | $ | 3.35 |  |  |  | 1,155  |  |  | $ | 3.35 |  |  |  | 5,336  |  |  | $ | 3.56 | 
|2008 through 2012 |  |               | 20,620 |              |  | $            | 3.67 |             

8



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##### Table of Contents



Results of Operations

Our management, as well as El Pasos
management, uses earnings before interest expense and income
taxes (EBIT) to assess the operating results and
effectiveness of our business. We define EBIT as net income
adjusted for (i) items that do not impact our income from
continuing operations, such as the impact of accounting changes,
(ii) income taxes, (iii) interest and debt expense and
(iv) affiliated interest income. Our business consists of
consolidated operations as well as investments in unconsolidated
affiliates. We exclude interest and debt expense from this
measure so that our management can evaluate our operating
results without regard to our financing methods. We believe the
discussion of our results of operations based on EBIT is useful
to our investors because it allows them to more effectively
evaluate the operating performance of both our consolidated
business and our unconsolidated investments using the same
performance measure analyzed internally by our management. EBIT
may not be comparable to measurements used by other companies.
Additionally, EBIT should be considered in conjunction with net
income and other performance measures such as operating income
or operating cash flow.

The following is a reconciliation of EBIT to our
net income for the years ended December 31:

|                                                                 |                  |               |      |      |  |   |      |     | 
|---------------------------------------------------------------- | ---------------- | ------------- | ---- | ---- |  | - | ---- | --- | 
|                                                                 |                  | 2004          |      | 2003
|                                                                 |                  |               |      |     
|                                                                 |                  |              
|                                                                 |                  | (In millions)
|Operating revenues                                               |                  | $             | 765  |      |  | $ | 895  |    
|Operating expenses                                               |                  |               | (576 | )    |  |   | (629 | )  
|                                                                 |                  |               |      |      |  |   |      |    
|                                                                 | Operating income |               |      | 189  |  |   |      | 266 | 
|Earnings from unconsolidated affiliates                          |                  |               |     |      |  |   | 9    |    
|Other income, net                                                |                  |               | 1    |      |  |   |     |    
|                                                                 |                  |               |      |      |  |   |      |    
|                                                                 | EBIT             |               |      | 190  |  |   |      | 275 | 
|Affiliated interest income                                       |                  |               | 15   |      |  |   | 13   |    
|Interest expense                                                 |                  |               | (78  | )    |  |   | (70  | )  
|Income taxes                                                     |                  |               | (49  | )    |  |   | (88  | )  
|                                                                 |                  |               |      |      |  |   |      |    
|Income from continuing operations                                |                  |               | 78   |      |  |   | 130  |    
|Cumulative effect of accounting changes, net of
    income taxes |                  |               |     |      |  |   | 1    |    
|                                                                 |                  |               |      |      |  |   |      |    
|Net income                                                       |                  | $             | 78   |      |  | $ | 131  |    
|                                                                 |                  |               |      |      |  |   |      |    

9



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##### Table of Contents



Below are our operating results and an analysis
of these results for the years ended December 31:

|                                              |                         |                             |      |      |      |   |      |     |      |  
|--------------------------------------------- | ----------------------- | --------------------------- | ---- | ---- | ---- | - | ---- | --- | ---- | -
|                                              |                         | 2004                        |      | 2003
|                                              |                         |                             |      |     
|                                              |                         |                            
|                                              |                         | (In millions,              
|                                              |                         | except volumes             
|                                              |                         | and prices)                
|Operating revenues:                           |                         |                             |      |      |      |   |      |    
|                                              | Natural gas             |                             | $    | 627  |      |   | $    | 734 |     
|                                              | Oil, condensate and NGL |                             |      | 137  |      |   |      | 152 |     
|                                              | Other                   |                             |      | 1    |      |   |      | 9   |     
|                                              |                         |                             |      |      |      |   |      |    
|                                              |                         | Total operating revenues    |      |      | 765  |   |      |     | 895  |  
|Transportation and net product costs          |                         |                             | (40  | )    |      |   | (50  | )  
|                                              |                         |                             |      |      |      |   |      |    
|                                              |                         | Total operating margin      |      |      | 725  |   |      |     | 845  |  
|Depreciation, depletion and amortization      |                         |                             | (326 | )    |      |   | (379 | )  
|Production costs(1)                           |                         |                             | (104 | )    |      |   | (109 | )  
|General and administrative expenses           |                         |                             | (83  | )    |      |   | (79  | )  
|Taxes, other than production and income taxes |                         |                             | (2   | )    |      |   | (6   | )  
|Other charges(2)                              |                         |                             | (21  | )    |      |   | (6   | )  
|                                              |                         |                             |      |      |      |   |      |    
|                                              |                         | Total operating expenses(3) |      |      | (536 | ) |      |     | (579 | )
|                                              |                         |                             |      |      |      |   |      |    
|                                              | Operating income        |                             |      | 189  |      |   |      | 266 |     
|Earnings from unconsolidated affiliates       |                         |                             |     |      |      |   | 9    |    
|Other income, net                             |                         |                             | 1    |      |      |   |     |    
|                                              |                         |                             |      |      |      |   |      |    
|EBIT                                          |                         | $                           | 190  |      |      | $ | 275  |    
|                                              |                         |                             |      |      |      |   |      |    

10



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##### Table of Contents



|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |     |     |    |  
|----------------------------------- | -------------------------------------------------------- | ------------------------------------------------------- | ------------------------- | ------- | ------- | -------- | - | ------- | ------- | ---- |  | --- | --- | -- | -
|                                    |                                                          |                                                         |                           |         |         | Percent 
|                                    |                                                          | 2004                                                    |                           | 2003    |         | Variance
|                                    |                                                          |                                                         |                           |         |         |         
|Volumes, prices and costs per unit: |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    | Natural gas                                              |                                                         |                           |         |         |          |   |         |         |      |  |     |    
|                                    |                                                          | Volumes (MMcf)                                          |                           |         | 142,368 |          |   |         | 191,400 |      |  |     | (26 | )%
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    |                                                          | Average realized prices including
    hedges ($/Mcf)(4) |                           | $       | 4.40    |          |   | $       | 3.83    |      |  |     | 15  | % 
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    |                                                          | Average realized prices excluding
    hedges ($/Mcf)(4) |                           | $       | 6.01    |          |   | $       | 5.56    |      |  |     | 8   | % 
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    |                                                          | Average transportation costs ($/Mcf)                    |                           | $       | 0.21    |          |   | $       | 0.19    |      |  |     | 11  | % 
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    | Oil, condensate and NGL                                  |                                                         |                           |         |         |          |   |         |         |      |  |     |    
|                                    |                                                          | Volumes (MBbls)                                         |                           |         | 4,088   |          |   |         | 5,719   |      |  |     | (29 | )%
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    |                                                          | Average realized prices including
    hedges ($/Bbl)(4) |                           | $       | 33.58   |          |   | $       | 26.67   |      |  |     | 26  | % 
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    |                                                          | Average realized prices excluding
    hedges ($/Bbl)(4) |                           | $       | 33.58   |          |   | $       | 28.08   |      |  |     | 20  | % 
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    |                                                          | Average transportation costs ($/Bbl)                    |                           | $       | 1.26    |          |   | $       | 1.23    |      |  |     | 2   | % 
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    | Total equivalent volumes (MMcfe)                         |                                                         |                           | 166,898 |         |          |   | 225,713 |         |      |  | (26 | )% 
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    | Production costs ($/Mcfe)                                |                                                         |                           |         |         |          |   |         |         |      |  |     |    
|                                    |                                                          | Average lease operating costs                           |                           | $       | 0.51    |          |   | $       | 0.36    |      |  |     | 42  | % 
|                                    |                                                          | Average production taxes                                |                           |         | 0.11    |          |   |         | 0.12    |      |  |     | (8  | )%
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    |                                                          |                                                         | Total production costs(1) |         | $       | 0.62     |   |         | $       | 0.48 |  |     |     | 29 | %
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    | Average general and administrative
    expenses ($/Mcfe) |                                                         | $                         | 0.50    |         |          | $ | 0.35    |         |      |  | 43  | %  
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    
|                                    | Unit of production depletion cost ($/Mcfe)               |                                                         | $                         | 1.81    |         |          | $ | 1.59    |         |      |  | 14  | %  
|                                    |                                                          |                                                         |                           |         |         |          |   |         |         |      |  |    



---



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | Production costs include lease operating costs
    and production related taxes (including ad valorem and
    severance taxes).
|(2) | Includes restructuring costs and asset
    impairments.                                                                        
|(3) | Transportation costs are included in operating
    expenses on our consolidated statements of income.                          
|(4) | Prices are stated before transportation costs.                                                                                 



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to
    Year Ended December 31, 2003

Our EBIT for 2004 decreased $85 million as
compared to 2003. Despite an eight percent increase in natural
gas prices, excluding hedges, we experienced a significant
decrease in operating revenues due to lower production volumes
as a result of production declines, asset sales, a lower capital
spending program and

11



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##### Table of Contents



disappointing drilling results. The table below
lists the significant variances in our operating results in 2004
as compared to 2003:


|                                                      |                                                                    |                             |    |           |      |       |     |        |    |  |   |   |   |  |     |      |     |  
|----------------------------------------------------- | ------------------------------------------------------------------ | --------------------------- | -- | --------- | ---- | ----- | --- | ------ | -- |  | - | - | - |  | --- | ---- | --- | -
|                                                      |                                                                    | Operating                   |    | Operating |      |       |     | EBIT  
|                                                      |                                                                    | Revenue                     |    | Expense   |      | Other |     | Impact
|                                                      |                                                                    |                             |    |           |      |       |     |       
|                                                      |                                                                    |                            
|                                                      |                                                                    | Favorable/(Unfavorable)    
|                                                      |                                                                    | (In millions)              
|Natural Gas Revenue                                   |                                                                    |                             |    |           |      |       |     |        |    |  |   |   |   |  |     |     
|                                                      | Higher prices in 2004                                              |                             | $  | 64        |      |       | $   |       |    |  | $ |  |   |  | $   | 64   |    
|                                                      | Lower production volumes in 2004                                   |                             |    | (272      | )    |       |     |       |    |  |   |  |   |  |     | (272 | )  
|                                                      | Impact from hedge program in 2004 versus 2003                      |                             |    | 101       |      |       |     |       |    |  |   |  |   |  |     | 101  |    
|Oil, Condensate, and NGL Revenue                      |                                                                    |                             |    |           |      |       |     |        |    |  |   |   |   |  |     |     
|                                                      | Higher realized prices in 2004                                     |                             |    | 23        |      |       |     |       |    |  |   |  |   |  |     | 23   |    
|                                                      | Lower production volumes in 2004                                   |                             |    | (46       | )    |       |     |       |    |  |   |  |   |  |     | (46  | )  
|                                                      | Impact from hedge program in 2004 versus 2003                      |                             |    | 8         |      |       |     |       |    |  |   |  |   |  |     | 8    |    
|Depreciation, Depletion, and Amortization
    Expense |                                                                    |                             |    |           |      |       |     |        |    |  |   |   |   |  |     |     
|                                                      | Higher depletion rate in 2004                                      |                             |    |          |      |       |     | (36    | )  |  |   |  |   |  |     | (36  | )  
|                                                      | Lower production volumes in 2004                                   |                             |    |          |      |       |     | 94     |    |  |   |  |   |  |     | 94   |    
|                                                      | Non-full cost depreciation, depletion and
    amortization expense |                             |    |          |      |       |     | (5     | )  |  |   |  |   |  |     | (5   | )  
|Production Costs                                      |                                                                    |                             |    |           |      |       |     |        |    |  |   |   |   |  |     |     
|                                                      | Higher lease operating costs in 2004                               |                             |    |          |      |       |     | (4     | )  |  |   |  |   |  |     | (4   | )  
|                                                      | Lower production taxes in 2004                                     |                             |    |          |      |       |     | 9      |    |  |   |  |   |  |     | 9    |    
|Other                                                 |                                                                    |                             | (8 | )         |      |       | (15 | )      |    |  | 2 |   |   |  | (21 | )   
|                                                      |                                                                    |                             |    |           |      |       |     |        |    |  |   |   |   |  |     |     
|                                                      |                                                                    | Total variance 2004 to 2003 |    | $         | (130 | )     |     | $      | 43 |  |   | $ | 2 |  |     | $    | (85 | )
|                                                      |                                                                    |                             |    |           |      |       |     |        |    |  |   |   |   |  |     |     

Operating Revenues.In 2004, we experienced a significant decrease in production
volumes. The decline in our production volumes was due to
production declines in the offshore Gulf of Mexico and Texas
Gulf Coast regions, the impact of hurricanes in the Gulf of
Mexico, asset sales in Oklahoma and Texas, lower capital
expenditures and disappointing drilling results. These declines
were partially offset by increased natural gas production in our
coal seam operations in the Raton, Arkoma, and Black Warrior
basins. In addition, we experienced higher average realized
prices for natural gas and oil, condensate and NGL and a
favorable impact from our hedging program as our hedging losses
were $229 million in 2004 as compared to $338 million
in 2003.

Depreciation, depletion, and amortization
expense.Lower production volumes in
2004 due to the production declines discussed above reduced our
depreciation, depletion, and amortization expense. Partially
offsetting this decrease were higher depletion rates due to
higher finding and development costs from our 2004 drilling
program.

Production costs.In
2004, we experienced higher utility expenses and higher salt
water disposal costs in the onshore region. More than offsetting
these increases were lower production taxes as a result of
higher tax credits taken in 2004 on high cost natural gas wells.
The cost per unit increased due to the higher lease operating
costs and lower production volumes discussed above.

Other.In 2004, we
recorded an $8 million impairment on fixed assets related
to our office relocation in the fourth quarter of 2004 and
incurred $13 million in employee severance costs. In 2003,
we incurred $6 million in employee severance costs. General
and administrative expenses were slightly higher in 2004
compared to 2003, due to higher labor costs and lower
allocations to affiliates, partially offset by lower corporate
overhead allocations from El Paso and higher capitalized
costs. We are allocated a portion of El Pasos
corporate overhead in addition to the general and administrative
expenses we incur. We also allocate to our affiliates a portion
of El Pasos corporate overhead allocated to us and a
portion of our general corporate overhead. The increase in our
gross general and administrative expenses and the amounts we
capitalized in 2004 compared to prior periods is primarily due
to the relative contribution of our activities relative to those
of our affiliates.

12



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##### Table of Contents



Outlook for 2005

For 2005, our strategy is to develop a more
balanced portfolio of natural gas and oil production and
allocate more capital to longer life, slower decline projects
and development projects in longer reserve life areas. While our
production volumes have stabilized since the third quarter of
2004, we expect significantly lower production volumes in the
first quarter of 2005 as compared to the same period in 2004.
Approximately 65 percent of our expected first quarter 2005
natural gas production is hedged at an average price of $3.21
per MMBtu, which is significantly lower than current market
prices for natural gas. As a result, the combination of lower
production volumes, a significant hedge position at lower than
market prices, and the current level of operating costs along
with the expected higher depletion rate, will significantly
lower net income in the first quarter of 2005 as compared to the
same period in 2004.

Interest Expense

Interest expense for the year ended
December 31, 2004 increased $8 million compared to
2003. Prior to March 2003, we had no debt outstanding. For the
year ended December 31, 2004, we had outstanding debt for
the entire period. As a result, interest expense for the year
ended December 31, 2004 was higher than the same period of
2003. However, partially offsetting this higher interest expense
was the effect of a refinancing in May 2003 in which we
refinanced notes with an effective interest rate of 9.75% with
7.75% senior unsecured notes and higher capitalized interest in
2004.

Income Taxes

|                   |  |                   |    |      |  |   |    |  
|------------------ |  | ----------------- | -- | ---- |  | - | -- | -
|                   |  |                  
|                   |  | Year Ended       
|                   |  | December 31,     
|                   |  |                  
|                   |  | 2004              |    | 2003
|                   |  |                   |    |     
|                   |  |                  
|                   |  | (In millions,    
|                   |  | except for rates)
|Income taxes       |  | $                 | 49 |      |  | $ | 88 |  
|Effective tax rate |  |                   | 39 | %    |  |   | 40 | %

Our effective tax rates for each period differed
from the statutory rate of 35 percent due to the impact of
state income taxes. Further impacting 2003 were additional state
income taxes related to the sale of our Oklahoma properties. See
Item 8, Financial Statements and Supplementary Data,
Note 3, for a reconciliation of the statutory rate to the
effective rates.

Liquidity

For our primary sources of liquidity, we rely on
cash generated from our internal operations, advances from
El Paso through its cash management program, asset sales
and capital contributions from El Paso. Under
El Pasos cash management program, depending on
whether we have short-term cash surpluses or requirements, we
either provide cash to El Paso, subject to limitations
under our indenture, or El Paso provides cash to us. We
reflect these advances as investing activities in our statement
of cash flows. At December 31, 2004, we had cash advance
receivables from El Paso of $477 million, of which
$145 million were classified as current assets on our
balance sheet. In 2005, we believe that sufficient funding for
our working capital needs, capital expenditures and debt service
will continue to be provided by some or all of the sources
described above.

13



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##### Table of Contents



Commitments and Contingencies

For a discussion of our commitments and
contingencies, see Item 8, Financial Statements and
Supplementary Data, Note 7, incorporated herein by
reference.

New Accounting Pronouncements Issued But Not
Yet Adopted

As of December 31, 2004, there were a number
of accounting standards and interpretations that had been
issued, but not yet adopted by us. Based on our assessment of
those standards, we do not believe there are any that could have
a material impact on us.

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##### Table of Contents






RISK FACTORS AND CAUTIONARY STATEMENT FOR
PURPOSES OF THE SAFE HARBOR

PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995


This report contains or incorporates by reference
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Where any
forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement,
we caution that, while we believe these assumptions or bases to
be reasonable and in good faith, assumed facts or bases almost
always vary from the actual results, and differences between
assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief
as to future results, that expectation or belief is expressed in
good faith and is believed to have a reasonable basis. We cannot
assure you, however, that the statement of expectation or belief
will result or be achieved or accomplished. The words
believe, expect, estimate,
anticipate and similar expressions will generally
identify forward-looking statements. All of our forward-looking
statements, whether written or oral, are expressly qualified by
these cautionary statements and any other cautionary statements
that may accompany such forward-looking statements. In addition,
we disclaim any obligation to update any forward-looking
statements to reflect events or circumstances after the date of
this report.

With this in mind, you should consider the risks
discussed elsewhere in this report and other documents we file
with the SEC from time to time and the following important
factors that could cause actual results to differ materially
from those expressed in any forward-looking statement made by us
or on our behalf.

Risks Related to Our Business



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Natural gas and oil prices are volatile. A
    substantial decrease in natural gas and oil prices could
    adversely affect our financial results.

Our future financial condition, revenues, results
of operations, cash flows and future rate of growth depend
primarily upon the prices we receive for our natural gas and oil
production. Natural gas and oil prices historically have been
volatile and are likely to continue to be volatile in the
future, especially given current world geopolitical conditions.
The prices for natural gas and oil are subject to a variety of
additional factors that are beyond our control. These factors
include:



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the level of consumer demand for, and the supply
    of, natural gas and oil;                                                                                                                         
|
| |  | commodity processing, gathering and
    transportation availability;                                                                                                                                  
|
| |  | the level of imports of, and the price of,
    foreign natural gas and oil;                                                                                                                           
|
| |  | the ability of the members of the Organization of
    Petroleum Exporting Countries to agree to and maintain oil price
    and production controls;                                                   
|
| |  | domestic governmental regulations and taxes;                                                                                                                                                          
|
| |  | the price and availability of alternative fuel
    sources;                                                                                                                                           
|
| |  | the availability of pipeline capacity;                                                                                                                                                                
|
| |  | weather conditions;                                                                                                                                                                                   
|
| |  | market uncertainty;                                                                                                                                                                                   
|
| |  | political conditions or hostilities in natural
    gas and oil producing regions;                                                                                                                     
|
| |  | worldwide economic conditions; and                                                                                                                                                                    
|
| |  | decreased demand for the use of natural gas and
    oil because of market concerns about global warming or changes
    in governmental policies and regulations due to climate change
    initiatives.

Further, because approximately 94 percent of
our proved reserves at December 31, 2004 were natural gas,
we are substantially more sensitive to changes in natural gas
prices than we are to changes in oil prices.

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Declines in natural gas and oil prices would not
only reduce revenue, but could reduce the amount of natural gas
and oil that we can produce economically and, as a result, could
adversely affect our financial results. Changes in natural gas
and oil prices can have a significant impact on the calculation
of our full cost ceiling test. A significant decline in natural
gas and oil prices could result in a downward revision of our
reserves and a write-down in the carrying value of our natural
gas and oil properties which could be substantial, and would
negatively impact our net income and stockholders equity.




| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Our use of hedging arrangements may
    adversely affect our future results of operations or
    liquidity.

To reduce our exposure to fluctuations in the
prices of natural gas and oil, we may use futures, swaps and
option contracts traded on the New York Mercantile Exchange
(NYMEX), over-the-counter options and price and basis swaps with
other natural gas merchants and financial institutions. We also
enter into hedging arrangements with El Paso Marketing.
Hedging arrangements expose us to risk of financial loss in some
circumstances, including when:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | expected production is less than the amount
    hedged;                                                                                 
|
| |  | the counterparty to the hedging contract defaults
    on its contractual obligations; or                                                
|
| |  | there is a change in the expected differential
    between the underlying price in the hedging agreement and actual
    prices received.

Our hedging arrangements may also limit the
benefit we would receive from increases in the prices for
natural gas and oil. The use of derivatives also may require the
posting of cash collateral with counterparties which can impact
working capital when commodity prices change. El Paso
provides us with gas marketing and hedging services and we
currently do not post cash collateral with counterparties. In
addition, these hedging arrangements may impact the carrying
value of our natural gas and oil properties in our full cost
pool as we include hedges in our ceiling test calculation.



| |                                                                               
| | ------------------------------------------------------------------------------
| | Estimating our reserves, production and
    future net cash flow is difficult.

Estimating quantities of proved natural gas and
oil reserves is a complex process that involves significant
interpretations and assumptions. It requires interpretations of
available technical data and various estimates, including
estimates based upon assumptions relating to economic factors,
such as future commodity prices, production costs, severance and
excise taxes, capital expenditures and workover and remedial
costs, and the assumed effect of governmental regulation. As a
result, our reserve estimates are inherently imprecise. Also,
the use of a 10 percent discount factor for estimating the
value of our reserves, as prescribed by the SEC, may not
necessarily represent the most appropriate discount factor,
given actual interest rates and risks to which our business or
the natural gas and oil industry, in general, are subject. Any
significant variations from the interpretations or assumptions
used in our estimates or changes of conditions could cause the
estimated quantities and net present value of our reserves to
differ materially.

Our reserve data represents an estimate. You
should not assume that the present values referred to in this
report represent the current market value of our estimated
natural gas and oil reserves. The timing of the production and
expenses from the development and production of natural gas and
oil properties will affect both the timing of actual future net
cash flows from our proved reserves and their present value.
Changes in the present value of these reserves could cause a
write-down in the carrying value of our natural gas and oil
properties, which could be substantial and would negatively
affect our net income and stockholders equity.

As of December 31, 2004, approximately
28 percent of our estimated proved reserves were
undeveloped. Recovery of undeveloped reserves requires
significant capital expenditures and successful drilling
operations. The reserve data assumes that we can and will make
these expenditures and conduct these operations successfully,
but future events, including commodity price changes, may cause
these assumptions to change. In addition, estimates of proved
undeveloped reserves and proved but non-producing reserves are
subject to greater uncertainties than estimates of proved
producing reserves.

16



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##### Table of Contents





| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | The success of our business depends upon
    our ability to replace reserves that we produce.

Unless we successfully replace the reserves that
we produce, our reserves will decline, eventually resulting in a
decrease in natural gas and oil production and lower revenues
and cash flows from operations. We historically have replaced
reserves through both drilling and acquisitions. The business of
exploring for, developing or acquiring reserves requires
substantial capital expenditures. Historically, we have funded
our capital expenditures in part through contributions from
El Paso. El Paso has no commitment to fund our future
capital needs and in the future may elect not to or may be
unable to do so. Our operations require continued access to
sufficient capital to fund drilling programs to develop and
replace a reserve base with rapid depletion characteristics. If
we do not continue to make significant capital expenditures, or
if our outside capital resources become limited, we may not be
able to replace the reserves that we produce, which would
negatively affect our future revenues, cash flows and results of
operations.



| |                                                                            
| | ---------------------------------------------------------------------------
| | We face competition from third parties to
    acquire and develop reserves.

The natural gas and oil business is highly
competitive in the search for and acquisition of reserves. We
must identify and precisely locate prospective geologic
structures, drill and successfully complete wells in those
structures in a timely manner. Our ability to expand our leased
land positions in desirable areas is impacted by intensely
competitive leasing conditions. Competition for reserves and
producing natural gas and oil properties is intense and many of
our competitors have financial and other resources that are
substantially greater than those available to us. Our
competitors include the major and independent natural gas and
oil companies, individual producers, gas marketers and major
pipeline companies, as well as participants in other industries
supplying energy and fuel to industrial, commercial and
individual consumers. If we are unable to compete effectively in
the acquisition and development of reserves, our future
profitability may be negatively impacted. Ultimately, our future
success in the production business is dependent on our ability
to find or acquire additional reserves at costs that allow us to
remain competitive.

El Paso CGP, through its subsidiaries, engages in
the exploration for and the acquisition, development and
production of natural gas and oil, primarily in the United
States and in Brazil. Because El Paso CGP is very active
onshore in the United States and offshore in the Gulf of Mexico,
we may pursue opportunities that are also being pursued by
El Paso CGP. We and El Paso CGP do not have an
agreement regarding the allocation of business opportunities.

In addition, our officers, directors and
personnel also provide services to El Paso CGP and its
subsidiaries pursuant to our shared services arrangement and
therefore share their time and services between us and
El Paso CGP. These persons may therefore have conflicts of
interest between us and El Paso CGP.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Our natural gas and oil drilling and
    producing operations involve many risks and may not be
    profitable.

Our operations are subject to all the risks
normally incident to the operation and development of natural
gas and oil properties and the drilling of natural gas and oil
wells, including well blowouts, cratering and explosions, pipe
failure, fires, formations with abnormal pressures,
uncontrollable flows of natural gas, oil, brine or well fluids,
release of contaminants into the environment and other
environmental hazards and risks. The nature of the risks is such
that some liabilities could exceed our insurance policy limits,
or, as in the case of environmental fines and penalties, cannot
be insured. As a result, we could incur substantial costs that
could adversely affect our future results of operations, cash
flows or financial condition.

In addition, in our drilling operations we are
subject to the risk that we will not encounter commercially
productive reservoirs. New wells drilled by us may not be
productive, or we may not recover all or any portion of our
investment in those wells. Drilling for natural gas and oil can
be unprofitable, not only because of dry holes but wells that
are productive may not produce sufficient net reserves to return
a profit at then realized prices after deducting drilling,
operating and other costs.

17



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##### Table of Contents





| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Our drilling operations may be delayed or
    canceled as a result of factors beyond our control, resulting in
    significant costs to us.

Our drilling operations may be curtailed, delayed
or canceled as a result of numerous factors that are beyond our
control, including:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | unexpected drilling conditions;                                                                                                       
|
| |  | title problems;                                                                                                                       
|
| |  | pressure or irregularities in formations;                                                                                             
|
| |  | equipment failures or accidents;                                                                                                      
|
| |  | adverse weather conditions;                                                                                                           
|
| |  | compliance with environmental and other
    governmental requirements; and                                                            
|
| |  | costs of, or shortages or delays in the
    availability of, drilling rigs, oil field equipment, qualified
    personnel and services.

A delay or curtailment of our operations due to
these or other factors can result in significant costs or
significant reductions in revenue to us. These types of
shortages or cost increases could significantly decrease our
profit margin, cash flow and operating results or restrict our
ability to drill the wells and conduct the operations which we
currently have planned and budgeted. Future drilling, production
and development costs have a major impact on our ability to earn
adequate returns on invested capital and to generate positive
cash flow.



| |                                                                                
| | -------------------------------------------------------------------------------
| | We are vulnerable to risks associated with
    operating in the Gulf of Mexico.

Our operations and financial results could be
significantly impacted by conditions in the Gulf of Mexico
because we explore and produce in that area. As a result of this
activity, we are vulnerable to the risks associated with
operating in the Gulf of Mexico, including those relating to:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | adverse weather conditions;                                                                      
|
| |  | oil field service costs and availability;                                                        
|
| |  | compliance with environmental and other laws and
    regulations;                                
|
| |  | remediation and other costs resulting from oil
    spills or releases of hazardous materials; and
|
| |  | failure of equipment or facilities.                                                              

Further, production of reserves from reservoirs
in the shallow waters of the Gulf of Mexico shelf generally
declines more rapidly than from reservoirs in many other
producing regions of the world. This results in recovery of a
relatively higher percentage of reserves from properties in the
Gulf of Mexico during the initial few years of production, and
as a result, our reserve replacement needs from new prospects
may be greater there than for our operations elsewhere. Also,
our revenues and return on capital will depend significantly on
prices prevailing during these relatively short production
periods.



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our growth may be dependent upon successful
    acquisitions which are subject to many uncertainties and could
    subject us to significant unknown liabilities.

We expect that acquisitions of exploration and
production businesses, producing properties and undeveloped
properties will contribute to our future growth. Successful
acquisitions require an assessment of a number of factors, many
of which are beyond our control. These factors include
recoverable reserves, exploration or development potential,
future natural gas and oil prices, operating costs and potential
environmental and other liabilities. We face significant
operational, execution and integration risks when our
acquisitions consist primarily of proved undeveloped reserves or
exploration prospects. Our assessments are based on factors that

18



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##### Table of Contents



are inherently uncertain. If we are unable to
make successful acquisitions, the growth of our company may be
negatively impacted.


In connection with our acquisitions we are often
not entitled to contractual indemnification for preclosing
liabilities, including environmental liabilities associated with
acquired properties. Normally, we acquire interests in
properties on an as is basis with limited remedies
for breaches of representations and warranties. We may not be
able to become sufficiently familiar with the properties to
fully assess their deficiencies and capabilities. Our review
prior to signing a definitive purchase agreement may be even
more limited. We could incur significant unknown liabilities,
including environmental liabilities, or experience losses due to
title defects, in our acquisitions for which we have limited or
no contractual remedies or insurance coverage.

Risks Related to Legal and Regulatory
Matters



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Ongoing litigation and investigations
    related to the restatement of our financial statements
    associated with our reserve estimates could significantly
    adversely affect our business.

In 2004, we restated our historical financial
statements for 2003 and prior as a result of a downward revision
in our natural gas and oil reserves, for the manner in which we
applied the accounting rules related to two of our historical
hedges, and the classification of amounts in our historical
statements of cash flows for amounts provided to El Paso
under its cash management program. As a result of this reduction
in reserve estimates, several class action lawsuits were filed
against El Paso and several of its subsidiaries. The
reserve revisions are also the subject of investigations by the
SEC and the U.S. Attorney and may result in significant
fines to El Paso. These investigations and lawsuits, and
possible future claims based on these same facts, may further
negatively impact El Pasos and our credit ratings and
place further demands on El Pasos and our liquidity.
We cannot provide assurance at this time that the effects and
results of these or other investigations or of the class action
lawsuits will not be material to our financial condition,
results of operations and liquidity.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to complex laws and
    regulations, including environmental and safety regulations that
    can negatively affect the cost, manner or feasibility of doing
    business.

Our operations and facilities are subject to
certain federal, state, and local laws and regulations relating
to the exploration for, and development, production, processing,
treating and transportation of, natural gas and oil, as well as
environmental and safety matters. Additionally, current or
future tax policies, rates, and drilling or production
incentives by federal, state, and local governments impact our
operations and the ability to operate profitably.

Under these laws and regulations, we could be
liable for:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | personal injuries;                                                                                   
|
| |  | property and natural resource damages;                                                               
|
| |  | oil spills and releases or discharges of
    hazardous materials;                                    
|
| |  | well reclamation costs;                                                                              
|
| |  | remediation and clean-up costs and other
    governmental sanctions, such as fines and penalties; and
|
| |  | other environmental damages.                                                                         

Existing laws or regulations, as currently
interpreted or reinterpreted in the future, or future laws or
regulations could harm our business, results of operations and
financial condition. Increased federal or state regulations,
including environmental regulations, could limit or restrict the
ability to drill natural gas or oil wells, reduce operational
flexibility, or increase capital and operating costs. We may be
required to make large and unanticipated capital expenditures to
comply with environmental and other governmental regulations. In
addition, our operations could be significantly delayed or
curtailed and our costs of operations could significantly
increase as a result of regulatory requirements or restrictions.
We are unable to predict the ultimate cost of compliance with
these requirements or their effect on our operations.

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| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Costs of environmental liabilities,
    regulations and litigation could exceed our
    estimates.

Our operations are subject to various
environmental laws and regulations. These laws and regulations
obligate us to install and maintain pollution controls and to
clean up various sites at which regulated materials may have
been disposed of or released. We are also party to legal
proceedings involving environmental matters pending in various
courts and agencies.

Compliance with environmental laws and
regulations can require significant costs, such as costs of
clean-up and damages arising out of contaminated properties, and
failure to comply with environmental laws and regulations may
result in fines and penalties being imposed. It is not possible
for us to estimate reliably the amount and timing of all future
expenditures related to environmental matters because of:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the uncertainties in estimating clean up costs;                                                                                                          
|
| |  | the discovery of new sites or information;                                                                                                               
|
| |  | the uncertainty in quantifying liability under
    environmental laws that impose joint and several liability on
    all potentially responsible parties;
|
| |  | the nature of environmental laws and regulations;
    and                                                                                                
|
| |  | potential changes in environmental laws and
    regulations, including changes in the interpretation and
    enforcement thereof.                        

Our current environmental liabilities and related
reserves are immaterial. However, we could be required to set
aside reserves in the future due to these uncertainties, and
these amounts could be material. For additional information
concerning our environmental matters, see Item 8, Financial
Statements and Supplementary Data, Note 7.

Risks Related to Our Affiliation with
El Paso

El Paso files reports, proxy statements and
other information with the SEC under the Securities Exchange Act
of 1934, as amended. Each prospective investor should consider
this information and the matters disclosed therein in addition
to the matters described in this report. Such information is not
incorporated by reference herein.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are a wholly-owned direct subsidiary of
    El Paso and its financial condition and business strategy
    subjects us to potential risks that are beyond our
    control.

Subject to the limitations of our indentures, El
Paso has substantial control over:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | our payment of dividends;                                          
|
| |  | decisions on our financings and our capital
    raising activities;
|
| |  | mergers or other business combinations;                            
|
| |  | our acquisitions or dispositions of assets; and                    
|
| |  | our participation in El Pasos cash
    management program.        

El Paso may exercise such control in its
interests and not necessarily in the interests of us or the
holders of our long-term debt.

Due to our relationship with El Paso,
adverse developments or announcements concerning El Paso
could adversely affect our financial condition, even if we have
not suffered any similar development. The ratings assigned to
El Pasos senior unsecured indebtedness are below
investment grade, currently rated Caa1 by Moodys Investor
Service and CCC+ by Standard & Poors. The ratings
assigned to our senior unsecured indebtedness are currently
rated B3 by Moodys Investor Service and B- by
Standard & Poors. Further downgrades of our
credit ratings could increase our cost of capital and collateral
requirements, and could

20



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impede our access to capital markets. As a result
of its downgrades, El Paso has realized substantial demands
on its liquidity.


El Paso continues its efforts to execute its
Long Range Plan that established certain financial and other
objectives, including asset sales and significant debt
reduction. An inability to meet these objectives could adversely
affect El Pasos liquidity position, and in turn
affect our financial condition.

We participate in El Pasos cash management
program, which matches cash surpluses and needs for its
participating affiliates. Pursuant to El Pasos cash
management program, our surplus cash is made available to El
Paso, subject to limitations in our indenture, in exchange for
an affiliated receivable. If El Paso is unable to meet its
liquidity needs, there can be no assurance that we will be able
to access cash under the cash management program, or that our
affiliates would pay their obligations to us and we might still
be required to satisfy affiliated company payables. Our
inability to recover any intercompany receivables owed to us
could adversely affect our ability to repay our outstanding
indebtedness. For a further discussion of these matters, see
Item 8, Financial Statements and Supplementary Data,
Note 10.

We are required to maintain an effective system
of internal control over financial reporting. As a result of our
efforts to comply with this requirement, we determined that as
of December 31, 2004, we did not maintain effective
internal control over financial reporting. As more fully
discussed in Item 9A, we identified several deficiencies in
internal control over financial reporting, one of which
management has concluded constituted a material weakness.
Although we have taken steps to remediate some of these
deficiencies, additional steps must be taken to remediate the
remaining control deficiencies. If we are unable to remediate
our identified internal control deficiencies over financial
reporting, or we identify additional deficiencies in our
internal control over financial reporting, we could be subjected
to additional regulatory scrutiny, future delays in filing our
financial statements and suffer a loss of public confidence in
the reliability of our financial reporting and the preparation
of financial statements for external purposes in accordance with
generally accepted accounting principles, which could have a
negative impact on our liquidity, access to capital markets, and
our financial condition.

In addition to the risk of not completing the
remediation of all deficiencies in our internal control over
financial reporting, we do not expect that our disclosure
controls and procedures or our internal control over financial
reporting will prevent all mistakes, errors and fraud. Any
system of internal controls, no matter how well designed or
implemented, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. The
design of a control system must reflect the fact that the
benefits of controls must be considered relative to their costs.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Therefore, any system of internal controls is
subject to inherent limitations, including the possibility that
controls may be circumvented or overridden, that judgments in
decision-making can be faulty, and that misstatements due to
mistakes, errors or fraud may occur and may not be detected.
Also, while we document our assumptions and review financial
disclosures, the regulations and literature governing our
disclosures are complex and reasonable persons may disagree as
to their application to a particular situation or set of facts.
In addition, the applicable regulations and literature are
relatively new. As a result, they are potentially subject to
change in the future, which could include changes in the
interpretation of the existing regulations and literature as
well as the issuance of more detailed rules and procedures.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | We could be substantively consolidated with
    El Paso if El Paso were forced to seek protection from
    its creditors in bankruptcy.

If El Paso were the subject of voluntary or
involuntary bankruptcy proceedings, El Paso and its other
subsidiaries and their creditors could attempt to make claims
against us, including claims to substantively consolidate our
assets and liabilities with those of El Paso and its other
subsidiaries. The equitable doctrine of substantive
consolidation permits a bankruptcy court to disregard the
separateness of related entities and to consolidate and pool the
entities assets and liabilities and treat them as though
held and incurred by one entity where the interrelationship
between the entities warrants such consolidation. We believe
that any effort to

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substantively consolidate us with El Paso and/or
its other subsidiaries would be without merit. However, we
cannot assure you that El Paso and/or its other subsidiaries or
their respective creditors would not attempt to advance such
claims in a bankruptcy proceeding or, if advanced, how a
bankruptcy court would resolve the issue. If a bankruptcy court
were to substantively consolidate us with El Paso and/or its
other subsidiaries, there could be a material adverse effect on
our financial condition and liquidity.


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|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

We use derivative financial instruments and
energy related contracts to manage market risks associated with
natural gas and oil. Our primary market risk exposures are those
related to changing commodity prices. Our market risks are
monitored by El Pasos Corporate Risk Management
Committee to ensure compliance with the stated risk management
policies approved by the Audit Committee of El Pasos
Board of Directors. This Committee operates independently from
us.

Commodity Price Risk

We have market risks related to the natural gas
and oil we produce. Our primary commodity price risk is that
natural gas prices decline, which will impact our sales revenue
related to our natural gas production. We attempt to mitigate
market risk associated with these significant physical
transactions through the use of derivative swap contracts which
require payments to (or receipts from) counterparties based on
the difference between a fixed and a variable price for a
commodity.

The table below presents the hypothetical
sensitivity to changes in fair values arising from immediate
selected potential changes in the quoted market prices of the
derivative commodity instruments we use to mitigate these market
risks that were outstanding at December 31, 2004 and 2003.
Any gain or loss on these derivative commodity instruments would
be substantially offset by a corresponding gain or loss on the
sale of the hedged commodity, which are not included in the
table.

|                                                                              |                   |               |   |                     |   |                     |   |            |   |          |   |      |   |  |   |      |   |  |   |     | 
|----------------------------------------------------------------------------- | ----------------- | ------------- | - | ------------------- | - | ------------------- | - | ---------- | - | -------- | - | ---- | - |  | - | ---- | - |  | - | --- | 
|                                                                              |                   |               |   |                     |   |                    
|                                                                              |                   |               |   | 10 Percent Increase |   | 10 Percent Decrease
|                                                                              |                   |               |   |                     |   |                    
|                                                                              |                   | Fair Value    |   | Fair Value          |   | (Decrease)          |   | Fair Value |   | Increase
|                                                                              |                   |               |   |                     |   |                     |   |            |   |         
|                                                                              |                   |              
|                                                                              |                   | (In millions)
|Impact of changes in commodity prices on
    derivative commodity instruments |                   |               |   |                     |   |                     |   |            |   |          |   |      |   |  |   |      |   |  |   |    
|                                                                              | December 31, 2004 |               | $ | (516                | ) |                     | $ | (624       | ) |          | $ | (108 | ) |  | $ | (408 | ) |  | $ | 108 | 
|                                                                              | December 31, 2003 |               | $ | (443                | ) |                     | $ | (564       | ) |          | $ | (121 | ) |  | $ | (322 | ) |  | $ | 121 | 

Currently, we hedge our natural gas production
with El Paso Marketing. As a result, we are not required to
provide collateral for our derivative positions.

Interest Rate Risk

The fair value of our fixed rate debt is
sensitive to changes in interest rates. As of December 31,
2004, our 7.75% long-term debt due in June 2013 had a fair value
of $1,262 million and a carrying value of
$1,200 million. The fair value of the long-term debt has
been estimated based on quoted market prices for the same or
similar issues.

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ITEM 8.  FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA

EL PASO PRODUCTION HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(In millions)


|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |      |     | 
|---------------------------------------------------------------- | ---------------------------------------- | ----------------------- | --- | ---- | --- | ---- | --- | --- | --- | - | ---- | ---- | --- | 
|                                                                 |                                          |                        
|                                                                 |                                          | Year Ended December 31,
|                                                                 |                                          |                        
|                                                                 |                                          | 2004                    |     | 2003 |     | 2002
|                                                                 |                                          |                         |     |      |     |     
|Operating revenues                                               |                                          |                         |     |      |     |      |     |     |     |   |      |     
|                                                                 | Natural gas and oil sales                |                         |     |      |     |      |     |     |     |   |      |      |    
|                                                                 |                                          | Third parties           |     | $    | 361 |      |     | $   | 135 |   |      | $    | 174 | 
|                                                                 |                                          | Affiliates              |     |      | 403 |      |     |     | 751 |   |      |      | 685 | 
|                                                                 | Other                                    |                         |     | 1    |     |      |     | 9   |     |   |      | (10  | )  
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     
|                                                                 |                                          |                         | 765 |      |     |      | 895 |     |     |   | 849  |     
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     
|Operating expenses                                               |                                          |                         |     |      |     |      |     |     |     |   |      |     
|                                                                 | Cost of sales                            |                         |     | 40   |     |      |     | 50  |     |   |      | 55   |    
|                                                                 | Operation and maintenance                |                         |     | 182  |     |      |     | 167 |     |   |      | 137  |    
|                                                                 | (Gain) loss on long-lived assets         |                         |     | 8    |     |      |     |    |     |   |      | (211 | )  
|                                                                 | Depreciation, depletion and amortization |                         |     | 326  |     |      |     | 379 |     |   |      | 396  |    
|                                                                 | Taxes, other than income taxes           |                         |     | 20   |     |      |     | 33  |     |   |      | 25   |    
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     
|                                                                 |                                          |                         |     |      | 576 |      |     |     | 629 |   |      |      | 402 | 
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     
|Operating income                                                 |                                          |                         | 189 |      |     |      | 266 |     |     |   | 447  |     
|Earnings from unconsolidated affiliates                          |                                          |                         |    |      |     |      | 9   |     |     |   | 7    |     
|Other income, net                                                |                                          |                         | 1   |      |     |      |    |     |     |   | 2    |     
|Affiliated interest income                                       |                                          |                         | 15  |      |     |      | 13  |     |     |   | 8    |     
|Interest expense                                                 |                                          |                         | (78 | )    |     |      | (70 | )   |     |   |     |     
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     
|Income before income taxes                                       |                                          |                         | 127 |      |     |      | 218 |     |     |   | 464  |     
|Income taxes                                                     |                                          |                         | (49 | )    |     |      | (88 | )   |     |   | (161 | )   
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     
|Income from continuing operations                                |                                          |                         | 78  |      |     |      | 130 |     |     |   | 303  |     
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     
|Cumulative effect of accounting changes, net of
    income taxes |                                          |                         |    |      |     |      | 1   |     |     |   |     |     
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     
|Net income                                                       |                                          | $                       | 78  |      |     | $    | 131 |     |     | $ | 303  |     
|                                                                 |                                          |                         |     |      |     |      |     |     |     |   |      |     

See accompanying notes.

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EL PASO PRODUCTION HOLDING COMPANY

CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)


|                                       |                                                                                   |                                                             |                                            |              |       |       |       |       |       |       | 
|-------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------ | ------------ | ----- | ----- | ----- | ----- | ----- | ----- | 
|                                       |                                                                                   | December 31,                                                |                                            | December 31,
|                                       |                                                                                   | 2004                                                        |                                            | 2003        
|                                       |                                                                                   |                                                             |                                            |             
|ASSETS                                
|Current assets                         |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       | Cash and cash equivalents                                                         |                                                             | $                                          | 124          |       |       | $     | 34    |      
|                                       | Accounts receivable                                                               |                                                             |                                            |              |       |       |       |       |      
|                                       |                                                                                   | Customer, net of allowance of $5 in 2004 and $6
    in 2003 |                                            |              | 46    |       |       |       | 66    |      
|                                       |                                                                                   | Affiliates                                                  |                                            |              | 92    |       |       |       | 58    |      
|                                       |                                                                                   | Other                                                       |                                            |              | 4     |       |       |       | 4     |      
|                                       | Note receivable from affiliate                                                    |                                                             |                                            | 145          |       |       |       | 393   |      
|                                       | Deferred income taxes                                                             |                                                             |                                            | 86           |       |       |       | 70    |      
|                                       | Other                                                                             |                                                             |                                            | 25           |       |       |       | 11    |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | Total current assets                       |              |       | 522   |       |       |       | 636   | 
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|Property, plant and equipment, at cost |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       | Natural gas and oil properties                                                    |                                                             |                                            |              |       |       |       |       |      
|                                       |                                                                                   | Proved properties-full cost method                          |                                            |              | 7,313 |       |       |       | 7,074 |      
|                                       |                                                                                   | Unevaluated costs excluded from amortization                |                                            |              | 253   |       |       |       | 252   |      
|                                       | Other                                                                             |                                                             |                                            | 86           |       |       |       | 123   |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | 7,652                                      |              |       |       | 7,449 |      
|                                       | Less accumulated depreciation, depletion and
    amortization                     |                                                             |                                            | 5,239        |       |       |       | 5,141 |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | Total property, plant and equipment, net   |              |       | 2,413 |       |       |       | 2,308 | 
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|Other assets                           |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       | Investments in unconsolidated affiliates                                          |                                                             |                                            | 6            |       |       |       | 6     |      
|                                       | Note receivable from affiliate                                                    |                                                             |                                            | 332          |       |       |       | 295   |      
|                                       | Deferred income taxes                                                             |                                                             |                                            | 132          |       |       |       | 204   |      
|                                       | Other                                                                             |                                                             |                                            | 60           |       |       |       | 30    |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | 530                                        |              |       |       | 535   |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | Total assets                               |              | $     | 3,465 |       |       | $     | 3,479 | 
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                      
|LIABILITIES AND STOCKHOLDERS EQUITY  
|Current liabilities                    |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       | Accounts payable                                                                  |                                                             |                                            |              |       |       |       |       |      
|                                       |                                                                                   | Trade                                                       |                                            | $            | 50    |       |       | $     | 63    |      
|                                       |                                                                                   | Affiliates                                                  |                                            |              |      |       |       |       | 7     |      
|                                       |                                                                                   | Other                                                       |                                            |              | 67    |       |       |       | 79    |      
|                                       | Liabilities from price risk management activities                                 |                                                             |                                            | 243          |       |       |       | 173   |      
|                                       | Income tax payable to affiliate                                                   |                                                             |                                            | 8            |       |       |       | 118   |      
|                                       | Other                                                                             |                                                             |                                            | 25           |       |       |       | 30    |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | Total current liabilities                  |              |       | 393   |       |       |       | 470   | 
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|Long-term debt                         |                                                                                   |                                                             | 1,200                                      |              |       |       | 1,200 |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|Other                                  |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       | Liabilities from price risk management activities                                 |                                                             |                                            | 273          |       |       |       | 270   |      
|                                       | Other                                                                             |                                                             |                                            | 102          |       |       |       | 76    |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | 375                                        |              |       |       | 346   |      
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|Commitments and contingencies          |                                                                                   |                                                             |                                            |              |       |       |       |      
|Stockholders equity                   |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       | Common stock, par value $1 per share;
    1,000 shares authorized and outstanding |                                                             |                                            |             |       |       |       |      |      
|                                       | Additional paid-in capital                                                        |                                                             |                                            | 1,701        |       |       |       | 1,700 |      
|                                       | Retained earnings                                                                 |                                                             |                                            | 109          |       |       |       | 31    |      
|                                       | Accumulated other comprehensive loss                                              |                                                             |                                            | (313         | )     |       |       | (268  | )    
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | Total stockholders equity                 |              |       | 1,497 |       |       |       | 1,463 | 
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      
|                                       |                                                                                   |                                                             | Total liabilities and stockholders equity |              | $     | 3,465 |       |       | $     | 3,479 | 
|                                       |                                                                                   |                                                             |                                            |              |       |       |       |      

See accompanying notes.

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EL PASO PRODUCTION HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In millions)


|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |        |      |     |        |  
|------------------------------------ | ----------------------------------------------------------------------------- | -------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------------- | --- | ---- | ---- | ------ | ---- | --- | ---- | ------ | ---- | --- | ------ | -
|                                     |                                                                               |                                                                     
|                                     |                                                                               | Year Ended December 31,                                             
|                                     |                                                                               |                                                                     
|                                     |                                                                               | 2004                                                                 |                                   | 2003                                                    |     | 2002
|                                     |                                                                               |                                                                      |                                   |                                                         |     |     
|Cash flows from operating activities |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|                                     | Net income                                                                    |                                                                      | $                                 | 78                                                      |     |      | $    | 131    |      |     | $    | 303    |     
|                                     | Adjustments to reconcile net income to net cash
    from operating activities |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |        |     
|                                     |                                                                               | Depreciation, depletion and amortization                             |                                   |                                                         | 326 |      |      |        | 379  |     |      |        | 396  |    
|                                     |                                                                               | Deferred income tax expense (benefit)                                |                                   |                                                         | 80  |      |      |        | (126 | )   |      |        | 122  |    
|                                     |                                                                               | (Gain) loss on long-lived assets                                     |                                   |                                                         | 8   |      |      |        |     |     |      |        | (211 | )  
|                                     |                                                                               | Earnings of unconsolidated affiliates, net of
    cash distributions |                                   |                                                         |    |      |      |        | (9   | )   |      |        | (14  | )  
|                                     |                                                                               | Other non-cash income items                                          |                                   |                                                         |    |      |      |        | 3    |     |      |        | 20   |    
|                                     |                                                                               | Asset and liability changes                                          |                                   |                                                         |     |      |      |        |      |     |      |        |      |    
|                                     |                                                                               |                                                                      | Accounts receivable               |                                                         |     | (15  | )    |        |      | 55  |      |        |      | 136 |       
|                                     |                                                                               |                                                                      | Accounts payable                  |                                                         |     | (7   | )    |        |      | (26 | )    |        |      | 80  |       
|                                     |                                                                               |                                                                      | Affiliate income taxes            |                                                         |     | (157 | )    |        |      | 214 |      |        |      | (33 | )     
|                                     |                                                                               |                                                                      | Other asset and liability changes |                                                         |     | (6   | )    |        |      | (2  | )    |        |      | (25 | )     
|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|                                     |                                                                               |                                                                      |                                   | Net cash provided by operating activities               |     |      | 307  |        |      |     | 619  |        |      |     | 774    |  
|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|Cash flows from investing activities |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|                                     | Capital expenditures                                                          |                                                                      |                                   | (428                                                    | )   |      |      | (815   | )    |     |      | (1,290 | )   
|                                     | Net proceeds from the sale of assets and
    investments                      |                                                                      |                                   |                                                        |     |      |      | 501    |      |     |      | 399    |     
|                                     | Change in note receivable from affiliate                                      |                                                                      |                                   | 211                                                     |     |      |      | (326   | )    |     |      | (271   | )   
|                                     | Restricted cash                                                               |                                                                      |                                   |                                                        |     |      |      | 6      |      |     |      | (6     | )   
|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|                                     |                                                                               |                                                                      |                                   | Net cash used in investing activities                   |     |      | (217 | )      |      |     | (634 | )      |      |     | (1,168 | )
|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|Cash flows from financing activities |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|                                     | Net proceeds from the issuance of long-term debt                              |                                                                      |                                   |                                                        |     |      |      | 1,169  |      |     |      |       |     
|                                     | Dividends to parent                                                           |                                                                      |                                   |                                                        |     |      |      | (1,276 | )    |     |      | (298   | )   
|                                     | Contributions from parent                                                     |                                                                      |                                   |                                                        |     |      |      |       |      |     |      | 848    |     
|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|                                     |                                                                               |                                                                      |                                   | Net cash provided by (used in) financing
    activities |     |      |     |        |      |     | (107 | )      |      |     | 550    |  
|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|Change in cash and cash equivalents  |                                                                               |                                                                      | 90                                |                                                         |     |      | (122 | )      |      |     | 156  |       
|Cash and cash equivalents            |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|                                     | Beginning of period                                                           |                                                                      |                                   | 34                                                      |     |      |      | 156    |      |     |      |       |     
|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       
|                                     | End of period                                                                 |                                                                      | $                                 | 124                                                     |     |      | $    | 34     |      |     | $    | 156    |     
|                                     |                                                                               |                                                                      |                                   |                                                         |     |      |      |        |      |     |      |       

See accompanying notes.

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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(In millions, except share amounts)


|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |       |       |  
|------------------------------------- | ----------------------------------------------- | -------------------------------- | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | - | ----- | ------ | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | -
|                                      |                                                 |                                 
|                                      |                                                 | For the Years Ended December 31,
|                                      |                                                 |                                 
|                                      |                                                 |                                  |       |        |       |       
|                                      |                                                 | 2004                             |       | 2003   |       | 2002  
|                                      |                                                 |                                  |       |        |       |       
|                                      |                                                 | Shares                           |       | Amount |       | Shares |       | Amount |       | Shares |       | Amount
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |       
|Common stock, $1.00 par:              |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|                                      | Balance at beginning of year                    |                                  |       | 1,000  |       |        | $     |       |       |        |       | 1,000  |       |   | $     |       |       |   |       | 1,000 |       |   | $     |      |      
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|                                      |                                                 | Balance at end of year           |       |        | 1,000 |        |       |        |      |        |       |        | 1,000 |   |       |        |      |   |       |       | 1,000 |   |       |       |      |  
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|Additional paid-in capital:           |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|                                      | Balance at beginning of year                    |                                  |       |        |       |        |       | 1,700  |       |        |       |        |       |   |       | 3,275  |       |   |       |       |       |   |       | 2,723 |      
|                                      | Contribution from parent                        |                                  |       |        |       |        |       |       |       |        |       |        |       |   |       | 26     |       |   |       |       |       |   |       | 848   |      
|                                      | Allocated tax benefit (expense) of equity plans |                                  |       |        |       |        |       | 1      |       |        |       |        |       |   |       | (5     | )     |   |       |       |       |   |       | 2     |      
|                                      | Dividends to parent                             |                                  |       |        |       |        |       |       |       |        |       |        |       |   |       | (1,596 | )     |   |       |       |       |   |       | (298  | )    
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|                                      |                                                 | Balance at end of year           |       |        |       |        |       |        | 1,701 |        |       |        |       |   |       |        | 1,700 |   |       |       |       |   |       |       | 3,275 |  
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|Retained earnings (deficit):          |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|                                      | Balance at beginning of year                    |                                  |       |        |       |        |       | 31     |       |        |       |        |       |   |       | (100   | )     |   |       |       |       |   |       | (403  | )    
|                                      | Net income                                      |                                  |       |        |       |        |       | 78     |       |        |       |        |       |   |       | 131    |       |   |       |       |       |   |       | 303   |      
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|                                      |                                                 | Balance at end of year           |       |        |       |        |       |        | 109   |        |       |        |       |   |       |        | 31    |   |       |       |       |   |       |       | (100  | )
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|Accumulated other comprehensive loss: |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|                                      | Balance at beginning of year                    |                                  |       |        |       |        |       | (268   | )     |        |       |        |       |   |       | (224   | )     |   |       |       |       |   |       | (39   | )    
|                                      | Other comprehensive loss                        |                                  |       |        |       |        |       | (45    | )     |        |       |        |       |   |       | (44    | )     |   |       |       |       |   |       | (185  | )    
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|                                      |                                                 | Balance at end of year           |       |        |       |        |       |        | (313  | )      |       |        |       |   |       |        | (268  | ) |       |       |       |   |       |       | (224  | )
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      
|Total stockholders equity            |                                                 |                                  | 1,000 |        |       | $      | 1,497 |        |       |        | 1,000 |        |       | $ | 1,463 |        |       |   | 1,000 |       |       | $ | 2,951 |      
|                                      |                                                 |                                  |       |        |       |        |       |        |       |        |       |        |       |   |       |        |       |   |       |       |       |   |       |      

See accompanying notes.

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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

(In millions)


|                                                          |                                                                                                                                                        |                          |    |      |     |      |     |      |     |   |     |      |      |  
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------ | -- | ---- | --- | ---- | --- | ---- | --- | - | --- | ---- | ---- | -
|                                                          |                                                                                                                                                        |                         
|                                                          |                                                                                                                                                        | Year Ended December 31, 
|                                                          |                                                                                                                                                        |                         
|                                                          |                                                                                                                                                        | 2004                     |    | 2003 |     | 2002
|                                                          |                                                                                                                                                        |                          |    |      |     |     
|Net income                                                |                                                                                                                                                        | $                        | 78 |      |     | $    | 131 |      |     | $ | 303 |     
|                                                          |                                                                                                                                                        |                          |    |      |     |      |     |      |     |   |     |     
|Net gains (losses) from cash flow hedging
    activities: |                                                                                                                                                        |                          |    |      |     |      |     |      |     |   |     |     
|                                                          | Unrealized mark-to-market losses arising during
    period (net of income taxes of $110, $126 and $118 in 2004, 2003
    and 2002)                     |                          |    | (193 | )   |      |     | (220 | )   |   |     | (206 | )   
|                                                          | Reclassification adjustments for changes in
    initial value to settlement date (net of income taxes of $85,
    $101 and $12 in 2004, 2003 and 2002) |                          |    | 148  |     |      |     | 176  |     |   |     | 21   |     
|                                                          |                                                                                                                                                        |                          |    |      |     |      |     |      |     |   |     |     
|                                                          |                                                                                                                                                        | Other comprehensive loss |    |      | (45 | )    |     |      | (44 | ) |     |      | (185 | )
|                                                          |                                                                                                                                                        |                          |    |      |     |      |     |      |     |   |     |     
|Comprehensive income                                      |                                                                                                                                                        | $                        | 33 |      |     | $    | 87  |      |     | $ | 118 |     
|                                                          |                                                                                                                                                        |                          |    |      |     |      |     |      |     |   |     |     

See accompanying notes.

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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies



| |                      
| | ---------------------
| | Basis of Presentation

Our consolidated financial statements include the
accounts of all majority-owned and controlled subsidiaries after
the elimination of all significant intercompany accounts and
transactions.



| |                            
| | ---------------------------
| | Principles of Consolidation

We consolidate entities when we either
(i) have the ability to control the operating and financial
decisions and policies of an entity or (ii) are allocated a
majority of the entitys losses and/or returns through our
variable interests in that entity. The determination of our
ability to control or exert significant influence over an entity
and whether we are allocated a majority of the entitys
losses and/or returns involves the use of judgment. We apply the
equity method of accounting where we can exert significant
influence over, but do not control, the decisions and policies
of an entity and where we are not allocated a majority of the
entitys losses and/or returns. We use the cost method of
accounting where we are unable to exert significant influence
over the entity.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires the use of estimates and assumptions that
affect the amounts we report as assets, liabilities, revenues
and expenses and our disclosures in these financial statements.
Actual results can, and often do, differ from those estimates.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

We consider short-term investments with an
original maturity of less than three months to be cash
equivalents.



| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts

We establish provisions for losses on accounts
receivable, notes receivable and for natural gas imbalances due
from shippers and operators if we determine that we will not
collect all or part of the outstanding receivable balance. We
regularly review collectibility and establish or adjust our
allowance as necessary using the specific identification method.



| |                               
| | ------------------------------
| | Natural Gas and Oil Properties

We use the full cost method to account for our
natural gas and oil properties. Under the full cost method,
costs incurred in connection with the acquisition, development
and exploration of natural gas and oil reserves are capitalized.
These capitalized amounts include the costs of unproved
properties, internal costs directly related to acquisitions,
development and exploration activities, asset retirement costs
and capitalized interest. This method differs from the
successful efforts method of accounting for these activities.
The primary differences between these two methods are the
treatment of exploratory dry hole costs. These costs are
generally expensed under successful efforts when the
determination is made that measurable reserves do not exist.
Geological and geophysical costs are also expensed under the
successful efforts method. Under the full cost method, both dry
hole costs and geological and geophysical costs are capitalized
into the full cost pool, which is then periodically assessed for
recoverability as discussed below.

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EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

We amortize capitalized costs using the unit of
production method over the life of our proved reserves.
Capitalized costs associated with unproved properties are
excluded from the amortizable base until these properties are
evaluated. Future development costs and dismantlement,
restoration and abandonment costs, net of estimated salvage
values, are included in the amortizable base. Beginning
January 1, 2003, we began capitalizing asset retirement
costs associated with proved developed natural gas and oil
reserves into our full cost pool pursuant to Statements of
Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations as discussed
below.

Our capitalized costs, net of related income tax
effects, are limited to a ceiling based on the present value of
future net revenues using end of period spot prices discounted
at 10 percent, plus the lower of cost or fair market value
of unproved properties, net of related income tax effects. If
these discounted revenues are not greater than or equal to the
total capitalized costs, we are required to write-down our
capitalized costs to this level. We perform this ceiling test
calculation each quarter. Any required write-downs are included
in our income statement as a ceiling test charge. Our ceiling
test calculations include the effects of derivative instruments
we have designated as, and that qualify as, cash flow hedges of
our anticipated future natural gas and oil production.

When we sell or convey interests in our natural
gas and oil properties, we reduce our reserves for the amount
attributable to the sold or conveyed interest. We do not
recognize a gain or loss on sales of our natural gas and oil
properties, unless those sales would significantly alter the
relationship between capitalized costs and proved reserves. We
treat sales proceeds on non-significant sales as an adjustment
to the cost of our properties.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Property, Plant and Equipment (Other than
    Natural Gas and Oil Properties)

Our, property, plant and equipment, other than
our assets accounted for under the full cost method, is recorded
at its original cost of construction or, upon acquisition, at
the fair value of the assets acquired. We capitalize the major
units of property replacements or improvements and expense minor
items. We depreciate our property, plant and equipment using the
straight-line method over the useful lives of the assets ranging
from three to 15 years.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Asset Impairments on Other Than Natural Gas
    and Oil Properties and Equity Investments

We apply the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and Accounting Principles
Board Opinion No. 18, The Equity Method of Accounting
for Investments in Common Stock, to account for asset and
investment impairments related to non-full cost pool assets.
Under these standards, we evaluate an asset or investment for
impairment when events or circumstances indicate that its
carrying value may not be recovered. These events include market
declines that are believed to be other than temporary, changes
in the manner in which we intend to use a long-lived asset,
decisions to sell an asset and adverse changes in the legal or
business environment such as adverse actions by regulators. When
an event occurs, we evaluate the recoverability of the
assets carrying value based on either (i) the
long-lived assets ability to generate future cash flows on
an undiscounted basis or (ii) the fair value of our
investment in unconsolidated affiliates. If an impairment is
indicated or if we decide to exit or sell a long-lived asset or
group of assets, we adjust the carrying value of these assets
downward, if necessary, to their estimated fair value, less
costs to sell. Our fair value estimates are generally based on
market data obtained through the sales process or an analysis of
expected discounted cash flows. The magnitude of any impairment
is impacted by a number of factors, including the nature of the
assets to be sold and our established time frame for completing
the sales, among other factors.



| |                    
| | -------------------
| | Revenue Recognition

Our revenues are derived primarily through the
physical sale of natural gas, oil, condensate and natural gas
liquids. Revenues from sales of these products are recorded upon
the passage of title using the sales

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EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

method, net of any royalty interests or other
profit interests in the produced product. When actual natural
gas sales volumes exceed our entitled share of sales volumes, an
overproduced imbalance occurs. To the extent the overproduced
imbalance exceeds our share of the remaining estimated proved
natural gas reserves for a given property, we record a
liability. Costs associated with the transportation and delivery
of production are included in cost of sales.



| |                                                
| | -----------------------------------------------
| | Environmental Costs and Other
    Contingencies

We record liabilities when our environmental
assessments indicate that remediation efforts are probable, and
the costs can be reasonably estimated. We recognize a current
period expense for the liability when clean-up efforts do not
benefit future periods. We capitalize costs that benefit more
than one accounting period, except in instances where separate
agreements or legal or regulatory guidelines dictate otherwise.
Estimates of our liabilities are based on currently available
facts, existing technology and presently enacted laws and
regulations taking into consideration the likely effects of
other societal and economic factors, and include estimates of
associated legal costs. These amounts also consider prior
experience in remediating contaminated sites, other
companies clean-up experience and data released by the
Environmental Protection Agency or other organizations. These
estimates are subject to revision in future periods based on
actual costs or new circumstances and are included in our
balance sheet in other current and long-term liabilities at
their undiscounted amounts. We evaluate recoveries from
insurance coverage or government sponsored programs separately
from our liability and, when recovery is assured, we record and
report an asset separately from the associated liability in our
financial statements.

We recognize liabilities for other contingencies
when we have an exposure that, when fully analyzed, indicates it
is both probable that an asset has been impaired or that a
liability has been incurred and the amount of impairment or loss
can be reasonably estimated. Funds spent to remedy these
contingencies are charged against a reserve, if one exists, or
expensed. When a range of probable loss can be estimated, we
accrue the most likely amount or at least the minimum within the
range of probable loss.



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

We engage in hedging activities on our natural
gas and oil production to obtain more determinable cash flows
and to mitigate the risk of downward price movements on sales of
these commodities. We do this through natural gas and oil swaps
with our affiliate, El Paso Marketing.

We account for our derivative instruments under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. Under SFAS No. 133, these
derivatives are reflected in our balance sheet at their fair
value as assets and liabilities from price risk management
activities. We classify our derivatives as either current or
non-current assets or liabilities based on our overall position
by counterparty and their anticipated settlement date.

The settlement of derivatives used in our hedging
activities are reflected as revenues in our income statements.
Cash inflows and outflows associated with the settlement of our
derivative instruments are recognized in operating cash flows,
and any receivables and payables resulting from these
settlements are reported as affiliate receivables or payables on
our balance sheet.



| |             
| | ------------
| | Income Taxes

El Paso maintains a tax accrual policy to
record both regular and alternative minimum taxes for companies
included in its consolidated federal and state income tax
returns. The policy provides, among other things, that
(i) our taxable income position will accrue a current
expense equivalent to our federal and state income taxes, and
(ii) our tax loss position will accrue a benefit to the
extent our deductions, including general business credits, can
be utilized in El Pasos consolidated returns.
El Paso pays all consolidated U.S. federal

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EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and state income tax directly to the appropriate
taxing jurisdictions and, under a separate tax billing
agreement, El Paso may bill or refund us for our portion of
these income taxes.

Pursuant to El Pasos policy, we record
current income taxes based on our current taxable income, and we
provide for deferred income taxes to reflect estimated future
tax payments and receipts. Deferred taxes represent the tax
impacts of differences between the financial statement and tax
bases of assets and liabilities and carryovers at each year end.
We account for tax credits under the flow-through method, which
reduces the provision for income taxes in the year the tax
credits first become available. We reduce deferred tax assets by
a valuation allowance when, based on our estimates, it is more
likely than not that a portion of those assets will not be
realized in a future period. The estimates utilized in
recognition of deferred tax assets are subject to revision,
either up or down, in future periods based on new facts or
circumstances.



| |                                                
| | -----------------------------------------------
| | Accounting for Asset Retirement
    Obligations

On January 1, 2003, we adopted
SFAS No. 143, which requires that we record a
liability for retirement and removal costs of long-lived assets
used in our business. Our asset retirement obligations are
associated with our natural gas and oil wells and related
infrastructure. We have obligations to plug wells when
production on those wells is exhausted, and we abandon them. We
currently forecast that these obligations will be met at various
times, generally over the next ten years, based on the expected
productive lives of the wells and the estimated timing of
plugging and abandoning those wells. In estimating the liability
associated with our asset retirement obligations, we utilize
several assumptions, including credit-adjusted discount rates,
projected inflation rates, and the estimated timing and amounts
of settling our obligations, which are based on internal models
and external quotes. The following is a summary of our asset
retirement liabilities and the significant assumptions we used
at December 31:

|                                              |  |                   |      |      |  |  |       | 
|--------------------------------------------- |  | ----------------- | ---- | ---- |  |  | ----- | 
|                                              |  | 2004              |      | 2003
|                                              |  |                   |      |     
|                                              |  |                  
|                                              |  | (In millions,    
|                                              |  | except for rates)
|Current asset retirement liability            |  |                   | $3   |      |  |  | $9    | 
|Non-current asset retirement
    liability(1) |  |                   | $100 |      |  |  | $70   | 
|Discount rates                                |  |                   | 6-8% |      |  |  | 8-10% | 
|Inflation rates                               |  |                   | 2.5% |      |  |  | 2.5%  | 



---



|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We estimate that approximately 60% of our
    non-current asset retirement liability as of December 31,
    2004 will be settled in the next five years.

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EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Our asset retirement liabilities are recorded at
their estimated fair value utilizing the assumptions above, with
a corresponding increase to property, plant and equipment. This
increase in property, plant and equipment is then depreciated
over the remaining useful life of the long-lived asset to which
that liability relates. An ongoing expense is also recognized
for changes in the value of the liability as a result of the
passage of time, which we record in depreciation, depletion and
amortization expense in our income statement. In the first
quarter of 2003, we recorded a benefit as a cumulative effect of
accounting change of approximately $1 million, net of
income taxes, related to our adoption of SFAS No. 143.

The net asset retirement liability as of
December 31, reported in other current and non-current
liabilities in our balance sheet, and the changes in the net
liability for the year ended December 31, were as follows:

|                                                   |  |               |     |      |  |   |     |  
|-------------------------------------------------- |  | ------------- | --- | ---- |  | - | --- | -
|                                                   |  | 2004          |     | 2003
|                                                   |  |               |     |     
|                                                   |  |              
|                                                   |  | (In millions)
|Net asset retirement liability at
    January 1,   |  | $             | 79  |      |  | $ | 76  |  
|Liabilities settled                                |  |               | (15 | )    |  |   | (16 | )
|Accretion expense                                  |  |               | 9   |      |  |   | 7   |  
|Liabilities incurred                               |  |               | 13  |      |  |   | 4   |  
|Changes in estimate                                |  |               | 17  |      |  |   | 8   |  
|                                                   |  |               |     |      |  |   |     |  
|Net asset retirement liability at
    December 31, |  | $             | 103 |      |  | $ | 79  |  
|                                                   |  |               |     |      |  |   |     |  

Our changes in estimate represent changes to the
expected amount and timing of payments to settle our asset
retirement obligations. These changes primarily result from
obtaining new information about the timing of our obligations to
plug our natural gas and oil wells and the costs to do so. Had
we adopted SFAS No. 143 as of January 1, 2002, our
aggregate current and non-current retirement liabilities on that
date would have been approximately $69 million and our
income from continuing operations and net income for the year
ended December 31, 2002, would have been lower by
$5 million.



|   |                              
|-- | -----------------------------
|2. | Acquisitions and Divestitures

During the past three years ended
December 31, 2004, we have entered into significant
acquisition and divestiture transactions. Additionally, we have
entered into acquisitions in 2005, all of which are discussed
below. For more information on our acquisitions from and
divestitures to affiliates, see Note 10.



| |             
| | ------------
| | Acquisitions

In July 2002, we acquired Vermejo Mineral
Corporation from a third party for approximately
$140 million. This acquisition was accounted for as a
purchase and the purchase price was assigned to natural gas and
oil properties in our full cost pool. In June 2004, we acquired
additional working interests in natural gas properties in the
White Oak Creek field in Alabama from a third party for
$22 million.

In January 2005, we announced two acquisitions in
east Texas and south Texas totaling $211 million. In March
2005, we purchased the interest held by one of the parties under
a net profits interest agreement for approximately
$40 million as further discussed under the heading
Supplemental Natural Gas and Oil Operations. These acquisitions
added properties with approximately 131 Bcfe of existing
proved reserves and 48 MMcfe/d of current production.



| |             
| | ------------
| | Divestitures

In March 2003, we sold natural gas and oil
properties located in Oklahoma, Texas, and offshore Gulf of
Mexico for approximately $450 million, and we did not
recognize a gain or loss on the reserves sold. In
March 2002, we sold natural gas and oil properties located
in east and south Texas for approximately

33



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

$382 million. We recognized a
$209 million gain on the sale of the east Texas properties
as the reserves sold significantly altered the relationship
between capitalized costs and proved reserves in our full cost
pool. We completed these sales as part of El Pasos
plan to improve its liquidity and respond to changing market
conditions.



|   |             
|-- | ------------
|3. | Income Taxes

The following table reflects the components of
income taxes included in income from continuing operations
before cumulative effect of accounting change for each of the
three years ended December 31:

|         |         |                          |     |      |    |      |      |      |    |  |     |     |     | 
|-------- | ------- | ------------------------ | --- | ---- | -- | ---- | ---- | ---- | -- |  | --- | --- | --- | 
|         |         | 2004                     |     | 2003 |    | 2002
|         |         |                          |     |      |    |     
|         |         |                         
|         |         | (In millions)           
|Current  |         |                          |     |      |    |      |      |      |    |  |     |    
|         | Federal |                          | $   | (30  | )  |      | $    | 189  |    |  | $   | 39  |    
|         | State   |                          |     | (1   | )  |      |      | 25   |    |  |     |    |    
|         |         |                          |     |      |    |      |      |      |    |  |     |    
|         |         |                          | (31 | )    |    |      | 214  |      |    |  | 39  |    
|         |         |                          |     |      |    |      |      |      |    |  |     |    
|Deferred |         |                          |     |      |    |      |      |      |    |  |     |    
|         | Federal |                          |     | 73   |    |      |      | (118 | )  |  |     | 119 |    
|         | State   |                          |     | 7    |    |      |      | (8   | )  |  |     | 3   |    
|         |         |                          |     |      |    |      |      |      |    |  |     |    
|         |         |                          | 80  |      |    |      | (126 | )    |    |  | 122 |    
|         |         |                          |     |      |    |      |      |      |    |  |     |    
|         |         | Total income tax expense |     | $    | 49 |      |      | $    | 88 |  |     | $   | 161 | 
|         |         |                          |     |      |    |      |      |      |    |  |     |    

Our income taxes, included in income from
continuing operations before cumulative effect of accounting
change, differs from the amount computed by applying the
statutory federal income tax rate of 35 percent for the
following reasons for each of the three years ended
December 31:

|                                                            |                                                            |                             |    |      |  |      |    |    |  |   |     |    |  
|----------------------------------------------------------- | ---------------------------------------------------------- | --------------------------- | -- | ---- |  | ---- | -- | -- |  | - | --- | -- | -
|                                                            |                                                            | 2004                        |    | 2003 |  | 2002
|                                                            |                                                            |                             |    |      |  |     
|                                                            |                                                            |                            
|                                                            |                                                            | (In millions, except rates)
|Income tax expense at the statutory federal rate
    of 35% |                                                            | $                           | 44 |      |  | $    | 76 |    |  | $ | 162 |   
|Increase (decrease)                                         |                                                            |                             |    |      |  |      |    |    |  |   |     |   
|                                                            | State income tax, net of federal income tax
    benefit(1) |                             |    | 4    |  |      |    | 12 |  |   |     | 2  |  
|                                                            | Earnings from unconsolidated affiliates                    |                             |    |     |  |      |    |   |  |   |     | (4 | )
|                                                            | Other                                                      |                             |    | 1    |  |      |    |   |  |   |     | 1  |  
|                                                            |                                                            |                             |    |      |  |      |    |    |  |   |     |   
|Income tax expense                                          |                                                            | $                           | 49 |      |  | $    | 88 |    |  | $ | 161 |   
|                                                            |                                                            |                             |    |      |  |      |    |    |  |   |     |   
|Effective tax rate                                          |                                                            |                             | 39 | %    |  |      | 40 | %  |  |   | 35  | % 
|                                                            |                                                            |                             |    |      |  |      |    |    |  |   |     |   



---



|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(1) | State income taxes for 2003 include the effect of
    properties sold in Oklahoma.

34



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following are the components of our net
deferred tax asset as of December 31:

|                         |                                                 |                              |     |      |     |   |     |     |     | 
|------------------------ | ----------------------------------------------- | ---------------------------- | --- | ---- | --- | - | --- | --- | --- | 
|                         |                                                 | 2004                         |     | 2003
|                         |                                                 |                              |     |     
|                         |                                                 |                             
|                         |                                                 | (In millions)               
|Deferred tax assets      |                                                 |                              |     |      |     |   |     |    
|                         | Net operating loss and tax credit carryforwards |                              | $   | 174  |     |   | $   | 151 |    
|                         | Property, plant and equipment(1)                |                              |     |     |     |   |     | 38  |    
|                         | Price risk management activities                |                              |     | 192  |     |   |     | 162 |    
|                         | Other                                           |                              |     | 16   |     |   |     | 17  |    
|                         |                                                 |                              |     |      |     |   |     |    
|                         |                                                 | Total deferred tax asset     |     |      | 382 |   |     |     | 368 | 
|                         |                                                 |                              |     |      |     |   |     |    
|Deferred tax liabilities |                                                 |                              |     |      |     |   |     |    
|                         | Property, plant and equipment(1)                |                              |     | 75   |     |   |     |    |    
|                         | Employee benefits                               |                              |     | 40   |     |   |     | 43  |    
|                         | Merger related costs                            |                              |     | 49   |     |   |     | 51  |    
|                         |                                                 |                              |     |      |     |   |     |    
|                         |                                                 | Total deferred tax liability |     |      | 164 |   |     |     | 94  | 
|                         |                                                 |                              |     |      |     |   |     |    
|Net deferred tax asset   |                                                 | $                            | 218 |      |     | $ | 274 |    
|                         |                                                 |                              |     |      |     |   |     |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We elected to capitalize intangible drilling
    costs, under Section 59(e) of the Internal Revenue Code,
    beginning with the 2002 tax year, and those costs are being
    amortized at a faster rate for tax purposes compared to book
    purposes. The difference between tax and book amortization
    caused the deferred taxes associated with property, plant, and
    equipment to change from an asset in 2003 to a liability in 2004.

Under El Pasos tax allocation policy,
we are allocated the tax effects associated with sales of stock
by employees under an employee stock purchase plan, the exercise
of non-qualified stock options and the vesting of restricted
stock, as well as dividends on restricted stock. This allocation
decreased the deferred taxes payable by $1 million in 2004,
increased the deferred taxes payable by $5 million in 2003
and decreased the deferred taxes payable by $2 million in
2002. These tax effects are included in additional paid-in
capital in our balance sheets.

As of December 31, 2004, we had available
net operating loss carryforwards of approximately
$426 million. The net operating loss carryforward periods
end in the years 2017 through 2024. We also have alternative
minimum tax carryforwards of approximately $25 million,
which are carried forward indefinitely. Usage of our federal
carryover is subject to the limitations provided under
Sections 382 and 383 of the Internal Revenue Code as well
as separate return limitation year rules of IRS regulations.



|   |                                                               
|-- | --------------------------------------------------------------
|4. | Financial Instruments and Price Risk
    Management Activities

The following table presents the carrying amounts
and estimated fair values of our financial instruments as of
December 31:

|                                                          |  |               |       |       |  |          |       |            |  |   |       |  |  |   |       | 
|--------------------------------------------------------- |  | ------------- | ----- | ----- |  | -------- | ----- | ---------- |  | - | ----- |  |  | - | ----- | 
|                                                          |  |               |       |      
|                                                          |  | 2004          |       | 2003 
|                                                          |  |               |       |      
|                                                          |  | Carrying      |       | Fair  |  | Carrying |       |           
|                                                          |  | Amount        |       | Value |  | Amount   |       | Fair Value
|                                                          |  |               |       |       |  |          |       |           
|                                                          |  |              
|                                                          |  | (In millions)
|Long-term debt                                            |  | $             | 1,200 |       |  | $        | 1,262 |            |  | $ | 1,200 |  |  | $ | 1,182 | 
|Net liabilities from price risk management
    activities |  | $             | 516   |       |  | $        | 516   |            |  | $ | 443   |  |  | $ | 443   | 

As of December 31, 2004 and 2003, the
carrying amounts of cash and cash equivalents, and trade
receivables and payables represented fair value because of the
short-term nature of these instruments. We estimated the fair
value of debt with fixed interest rates based on quoted market
prices for the same or similar issues.

35



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Our derivative contracts are recorded in our
financial statements at fair value. The best indication of fair
value is quoted market prices. However, when quoted market
prices are not available, we estimate the fair value of those
derivatives. Due to major industry participants exiting or
reducing their trading activities in 2002 and 2003, the
availability of reliable commodity pricing data from
market-based sources that we used in estimating the fair value
of our derivatives was significantly limited for certain
locations and for longer time periods. Consequently, we use a
combination of commodity prices from market-based sources and
other forecasted settlement prices from an independent pricing
source to develop forward pricing data beyond a current two-year
period, which we then use to estimate the value of settlements
in future periods based on the contractual settlement quantities
and dates. For forward pricing data within two years, we use
commodity prices from market-based sources such as the NYMEX.

We use derivative financial instruments to hedge
the cash flow impact of our market price risk exposures on our
forecasted transactions related to our natural gas and oil
production. A majority of our commodity sales are at spot market
prices. We may use futures, forward contracts and swaps to limit
our exposure to fluctuations in the commodity markets with the
objective of realizing a fixed cash flow stream from these
activities. Changes in derivative fair values that are
designated as cash flow hedges are deferred in accumulated other
comprehensive income to the extent that they are effective and
are not included in income until the hedged transactions occur
and are recognized in earnings. The ineffective portion of a
cash flow hedges change in value is recognized immediately
in earnings as a component of operating revenues in our income
statement.

We formally document all relationships between
hedging instruments and hedged items, as well as our risk
management objectives, strategies for undertaking various hedge
transactions and our methods for assessing and testing
correlation and hedge ineffectiveness. All hedging instruments
are linked to the hedged asset, liability, firm commitment or
forecasted transaction. We also assess whether these derivatives
are highly effective in offsetting changes in cash flows of the
hedged items. We discontinue hedge accounting prospectively if
we determine that a derivative is no longer highly effective as
a hedge or if we decide to discontinue the hedging relationship.

As of December 31, 2004 and 2003, the value
of cash flow hedges included in accumulated other comprehensive
income was a net unrealized loss of $313 million and
$268 million, net of income taxes. We estimate that
unrealized losses of $173 million, net of income taxes,
will be reclassified from accumulated other comprehensive income
during 2005. Reclassifications occur upon physical delivery of
the hedge commodity and the corresponding expiration of the
hedge. The maximum term of our cash flow hedges is 8 years;
however, most of our cash flow hedges expire within the next
24 months.

For the years ended December 31, 2004,
2003 and 2002, we recognized a net loss of $1 million,
$5 million and $7 million, net of income taxes,
related to the ineffective portion of all cash flow hedges.

In December 2004, we removed the hedging
designation on derivatives that had a fair value loss at that
time of $520 million. This amount, net of income taxes of
$192 million, has been reflected in accumulated other
comprehensive income and will be reclassified to income as the
original hedged transactions settle in 2005 and 2006.

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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|5. | Property, Plant and Equipment

Presented below is an analysis of the capitalized
costs of natural gas and oil properties by year of expenditure
that are not being amortized as of December 31, 2004,
pending determination of proved reserves (in millions):

|            |  |              |     |                    |  |              |    |      |  |      |    |  |  |   |    |  |  |   |    | 
|----------- |  | ------------ | --- | ------------------ |  | ------------ | -- | ---- |  | ---- | -- |  |  | - | -- |  |  | - | -- | 
|            |  |              |     |                    |  |             
|            |  | Cumulative   |     | Costs Excluded for |  | Cumulative  
|            |  | Balance      |     | Years Ended        |  | Balance     
|            |  | December 31, |     | December 31,       |  | December 31,
|            |  |              |     |                    |  |             
|            |  | 2004         |     | 2004               |  | 2003         |    | 2002 |  | 2001
|            |  |              |     |                    |  |              |    |      |  |     
|Acquisition |  | $            | 126 |                    |  | $            | 39 |      |  | $    | 34 |  |  | $ | 45 |  |  | $ | 8  | 
|Exploration |  |              | 96  |                    |  |              | 33 |      |  |      | 45 |  |  |   | 13 |  |  |   | 5  | 
|Development |  |              | 31  |                    |  |              | 1  |      |  |      | 2  |  |  |   | 28 |  |  |   |   | 
|            |  |              |     |                    |  |              |    |      |  |      |    |  |  |   |    |  |  |   |    | 
|            |  | $            | 253 |                    |  | $            | 73 |      |  | $    | 81 |  |  | $ | 86 |  |  | $ | 13 | 
|            |  |              |     |                    |  |              |    |      |  |      |    |  |  |   |    |  |  |   |    | 

Projects presently excluded from amortization are
in various stages of evaluation. The majority of these costs are
expected to be included in the amortization calculation in the
years 2005 through 2008.

During 2004, 2003 and 2002, our weighted average
unit of production depletion rate on our natural gas and oil
properties per Mcfe was $1.81, $1.59 and $1.42.

In the fourth quarter of 2004, we incurred an
$8 million impairment on fixed assets related to the
relocation of our offices.



|   |                                 
|-- | --------------------------------
|6. | Debt and Other Credit Facilities

In March 2003, El Paso obtained a
$1.2 billion, London Interbank Offered Rate (LIBOR) plus
4.25% bridge loan, collateralized by substantially all of our
natural gas and oil reserves. El Paso loaned
$913 million of the proceeds to several of our
subsidiaries. These subsidiaries subsequently distributed the
amounts to El Paso to retire the net balance of
$913 million on El Pasos Red River financing
arrangement. Prior to repayment of the Red River financing, the
cash generated from our assets was restricted for amortization
requirements on the Red River arrangement. For the year ended
December 31, 2003, we recorded interest expense of
$23 million to El Paso related to this financing
arrangement. See Note 10 for a further discussion of the
Red River financing arrangement.

In May 2003, we issued $1.2 billion of
7.75% senior unsecured notes due June 1, 2013 and
received net proceeds of $1.17 billion. We used these
proceeds to repay our obligation to El Paso in conjunction
with the Red River financing arrangement as discussed above. The
7.75% senior unsecured notes are fully and unconditionally
guaranteed by our wholly-owned subsidiary guarantors on a joint
and several basis. There are no independent assets or operations
at the holding company level, and our subsidiaries, other than
the subsidiary guarantors, are minor.

Under the indenture covering the 7.75% senior
unsecured notes we and our Restricted Subsidiaries (as defined
in the indenture) are subject to a number of restrictions and
covenants. These include (i) limitations on the incurrence
of additional debt if there is a default or our Consolidated
Coverage Ratio (as defined in the indenture) is below
2.0 to 1.0, (ii) limitations on dividends that
can be made based on Free Cash Flow and Net Cash Proceeds (each
as defined in the indenture) (there are no restrictions on the
amount of dividends that our Restrictive Subsidiaries can make
to us), (iii) limitations on asset sales,
(iv) limitations on affiliate transactions,
(v) limitations on liens securing debt and
(vi) limitations on providing cash to El Paso under
its cash management program. As of December 31, 2004,
we were in compliance with these covenants.

In addition, our 7.75% senior unsecured notes
contain a $25 million cross-acceleration provision.

37



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies



| |                                              
| | ---------------------------------------------
| | Legal Proceedings and Other
    Contingencies

Grynberg.A number
of El Paso entities, including our subsidiary, El Paso
Production Company, are named defendants in actions filed in
1997 brought by Jack Grynberg on behalf of the
U.S. Government under the False Claims Act. Generally,
these complaints allege an industry-wide conspiracy to
underreport the heating value as well as the volumes of the
natural gas produced from federal and Native American lands,
which deprived the U.S. Government of royalties. The
plaintiff in this case seeks royalties that he contends the
government should have received had the volume and heating value
been differently measured, analyzed, calculated and reported,
together with interest, treble damages, civil penalties,
expenses and future injunctive relief to require the defendants
to adopt allegedly appropriate gas measurement practices. No
monetary relief has been specified in this case. These matters
have been consolidated for pretrial purposes (In re: Natural
Gas Royalties Qui Tam Litigation, U.S. District Court
for the District of Wyoming, filed June 1997). Motions to
dismiss have been filed on behalf of all defendants. Our costs
and legal exposure related to these lawsuits and claims are not
currently determinable.

Will Price (formerly Quinque).A number of El Paso entities,
including our subsidiary, El Paso Production Company, are
named as defendants in Will Price et al v. Gas
Pipelines and Their Predecessors, et al., filed in 1999
in the District Court of Stevens County, Kansas. Plaintiffs
allege that the defendants mismeasured natural gas volumes and
heating content of natural gas on non-federal and non-Native
American lands and seek to recover royalties that they contend
they should have received had the volume and heating value of
natural gas produced from their properties been differently
measured, analyzed, calculated and reported, together with
prejudgment and postjudgment interest, punitive damages, treble
damages, attorneys fees, costs and expenses, and future
injunctive relief to require the defendants to adopt allegedly
appropriate gas measurement practices. No monetary relief has
been specified in this case. Plaintiffs motion for class
certification of a nationwide class of natural gas working
interest owners and natural gas royalty owners was denied on
April 10, 2003. Plaintiffs were granted leave to file a
Fourth Amended Petition, which narrows the proposed class to
royalty owners in wells in Kansas, Wyoming and Colorado and
removes claims as to heating content. A second class action
petition has since been filed as to the heating content claims.
The plaintiffs have filed motions for class certification in
both proceedings and the defendants have filed briefs in
opposition thereto. Our costs and legal exposure related to
these lawsuits and claims are not currently determinable.

Black Warrior Methane.In September 2001, an explosion at the
Brookwood Coal Mine #5 in Tuscaloosa, Alabama resulted in
13 fatalities and numerous other injuries. The mine is owned and
operated by Jim Walter Resources (JWR). El Paso has no
ownership interest in the mine. However, we are a
50 percent stockholder in Black Warrior Methane Corporation
(Black Warrior), which was involved in the extraction of methane
from the mine, and which is a named defendant in 19 of the
lawsuits filed to date. El Paso Production Company is named
as a defendant in the 22 cases filed to date. Plaintiffs have
asserted a joint venture theory of liability against JWR, Black
Warrior and El Paso Production Company, alleging that the
defendants have breached a duty to properly degasify the mine.
We are being defended as an additional insured under Black
Warriors insurance policy. Black Warrior has also asserted
that it qualifies as an insured under El Pasos
corporate insurance policy. The parties have settled this matter
and the settlement was covered by insurance, except for a
deductible amount.

Reserve Revisions.In March 2004, El Paso received a
subpoena from the SEC requesting documents relating to its
December 31, 2003 natural gas and oil reserve revisions.
El Paso and its Audit Committee have also received federal
grand jury subpoenas for documents regarding the reserve
revisions. We are assisting El Paso and its Audit Committee
in their efforts to cooperate with the SECs and the U.S.
Attorneys investigations into this matter.

38



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In addition to the above matters, we and our
subsidiaries and affiliates are named defendants in numerous
lawsuits and governmental proceedings that arise in the ordinary
course of our business.

Other.During the
third quarter of 2004, we discovered that the supplier of
electricity to our Raton field in New Mexico may have
underbilled us for electricity usage during the last two years.
We are currently reviewing information concerning this matter
and do not expect this matter to have a significant impact on
our financial statements.

For each of our outstanding legal and other
contingent matters, we evaluate the merits of the item, our
exposure to the matter, possible legal or settlement strategies
and the likelihood of an unfavorable outcome. If we determine
that an unfavorable outcome is probable and can be estimated, we
establish the necessary accruals. While the outcome of these
matters cannot be predicted with certainty and there are still
uncertainties related to the costs we may incur, based upon our
evaluation and experience to date, we believe we have
established appropriate reserves for these matters. However, it
is possible that new information or future developments could
require us to reassess our potential exposure related to these
matters and adjust our accruals accordingly. As of
December 31, 2004, we had approximately
$4 million accrued for all outstanding legal and other
contingent matters.



| |                      
| | ---------------------
| | Environmental Matters

We are subject to federal, state and local laws
and regulations governing environmental quality and pollution
control. These laws and regulations require us to remove or
remedy the effect on the environment of the disposal or release
of specified substances at current and former operating sites.
As of December 31, 2004, we had no accrual for remediation
costs and associated onsite, offsite and groundwater technical
studies or for related environmental legal costs.

Air Permit Violation.In March 2003, the Louisiana
Department of Environmental Quality (LDEQ) issued a Consolidated
Compliance Order and Notice of Potential Penalty to our
subsidiary, El Paso Production Company, alleging that it
failed to timely obtain air permits for specified oil and gas
facilities. El Paso Production Company requested an
adjudicatory hearing on the matter. The hearing has been stayed
by agreement to allow El Paso Production Company and LDEQ
time to possibly settle this matter. Negotiations are ongoing
for resolving this matter.

It is possible that new information or future
developments could require us to reassess our potential exposure
related to environmental matters. We may incur significant costs
and liabilities in order to comply with existing environmental
laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws and
regulations and claims for damages to property, employees, other
persons and the environment resulting from our current or past
operations, could result in substantial costs and liabilities in
the future. As this information becomes available, or other
relevant developments occur, we will adjust our accrual amounts
accordingly. While there are still uncertainties relating to the
ultimate costs we may incur, based upon our evaluation and
experience to date, we believe no reserves are required at this
time.



| |                  
| | -----------------
| | Lease Obligations

We lease office space and various equipment under
operating lease agreements. As of December 31, 2004,
the annual minimum lease payments under non-cancelable future
operating lease commitments were less than $1 million for
each of the years 2005 and 2009. These amounts exclude minimum
annual commitments paid by El Paso, which are allocated to
us through an overhead allocation. Rental expense for operating
leases, including the overhead allocation, was approximately
$5 million for the year ended December 31, 2004 and
approximately $4 million for each of the years ended
December 31, 2003 and 2002.

39



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | Other Commercial Commitments

At December 31, 2004, we have various
commercial commitments totaling $94 million, primarily
related to transportation obligations. Our annual obligations
under these arrangements are $10 million in 2005,
$11 million for each of the years 2006 through 2007,
$18 million in 2008, $11 million in 2009 and
$33 million in total thereafter.



|   |                    
|-- | -------------------
|8. | Retirement Benefits



| |                                
| | -------------------------------
| | Pension and Retirement Benefits

El Paso maintains a primary pension plan
that is a defined benefit plan that covers substantially all of
our U.S. employees and provides benefits under a cash
balance formula.

El Paso also maintains a defined contribution
plan covering all of our U.S. employees. Prior to
May 1, 2002, El Paso matched 75 percent of
participant basic contributions up to 6 percent, with the
matching contributions being made to the plans stock fund
which participants could diversify at any time. After
May 1, 2002, the plan was amended to allow for company
matching contributions to be invested in the same manner as that
of participant contributions. Effective March 1, 2003,
El Paso suspended the matching contribution, but
reinstituted it again at a rate of 50 percent of
participant basic contributions up to 6 percent on
July 1, 2003. Effective July 1, 2004,
El Paso increased the matching contributions to
75 percent of participant basic contributions up to
6 percent. El Paso is responsible for benefits accrued
under its plan and allocates the related costs to its affiliates.



| |                              
| | -----------------------------
| | Other Postretirement Benefits

El Paso provides limited postretirement life
insurance benefits for current and retired employees.
El Paso is responsible for benefits accrued under its plan
and allocates the related costs to its affiliates. We do not
provide subsidized postretirement medical benefits.



|   |                                   
|-- | ----------------------------------
|9. | Supplemental Cash Flow Information

The following table contains supplemental cash
flow information for each of the three years ended
December 31:

|                                          |  |               |     |      |  |      |    |  |  |   |   | 
|----------------------------------------- |  | ------------- | --- | ---- |  | ---- | -- |  |  | - | - | 
|                                          |  | 2004          |     | 2003 |  | 2002
|                                          |  |               |     |      |  |     
|                                          |  |              
|                                          |  | (In millions)
|Interest paid, net of amounts capitalized |  | $             | 79  |      |  | $    | 36 |  |  | $ |  | 
|Income tax payments(1)                    |  |               | 127 |      |  |      |   |  |  |   |  | 



---



|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In 2004, we settled income taxes with our parent
    under our tax sharing agreement. There were no income tax
    settlements in 2003 and 2002.



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|10. | Investments in Unconsolidated Affiliates and
    Related Party Transactions

Investments in Unconsolidated
Affiliates

Noric L.L.C. and Clydesdale Associates,
L.P.Prior to their sale in 2003, we
had ownership interests in several companies, including a
62 percent equity interest in Noric Holdings I, an
8.2 percent voting interest in Clydesdale Associates, L.P.
and a 62 percent effective interest in Noric, L.L.C. (an
investment of Noric Holding I), that El Paso formed in
2000 for the purpose of generating funds for El Paso to
invest in capital projects and other assets. In April 2003, we
sold our interest in Noric Holdings I, our consolidated
subsidiary, to an affiliate of El Paso for less than
$1 million. Our investment in Noric Holdings I, at the
time of the sale, was $148 million. Because this sale
involved entities under the common control of El Paso, we
recorded the

40



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

difference between the cash consideration and
book value of the investment as a dividend. As a result of the
sale of our interest in Noric Holdings I, we no longer have
investments in Noric, L.L.C. and Clydesdale Associates, L.P.,
(Clydesdale). We accounted for our investments in Noric, L.L.C.
and Clydesdale, using the equity and cost methods of accounting,
respectively. For the years ended December 31, 2003 and
2002, we recognized $9 million and $15 million in
equity earnings from our investment in these unconsolidated
affiliates. In May 2002, we were notified by Clydesdale that it
had distributed cash of $8 million in excess earnings to us
because of a change in the pro-rata allocation between us and
other investors. We returned the excess earnings and reflected
this transaction on our statement of income as a reduction in
earnings from unconsolidated affiliates.

Black Warrior Transmission
Corp.We hold a 50 percent
ownership interest in Black Warrior Transmission Corp. and
account for this investment using the equity method of
accounting. Our investment was $6 million as of
December 31, 2004 and 2003. We recognized equity
earnings of less than $1 million for each of the years
ended December 31, 2004, 2003 and 2002 from this
unconsolidated affiliate.

Related Party Transactions

Affiliate Receivables and
Payables.We sell our natural gas
primarily to affiliates of El Paso at spot-market prices.
Current receivables due from affiliates at December 31,
2004 and 2003, were $92 million and $58 million.
Payables due to affiliates at December 31, 2003, were
$7 million. These affiliate receivables and payables were
created in the normal course of business.

Additionally, we are party to a tax accrual
policy with El Paso whereby El Paso files U.S. and
certain state tax returns on our behalf. In certain states, we
file and pay directly to the state taxing authorities. We have
federal income tax receivables of $15 million in other
current assets and $32 million in other non-current assets
at December 31, 2004, on our balance sheet. We also have
federal and state income taxes payable of $8 million and
$118 million at December 31, 2004 and 2003, included
in income tax payable to affiliate on our balance sheet. The
majority of these balances will become payable to or receivable
from El Paso under the tax accrual policy as further
described in Note 1.

Cash Management
Program.Subject to limitations in our
indenture, we participate in El Pasos cash management
program which matches short-term cash surpluses and needs of its
participating affiliates, thus minimizing total borrowing from
outside sources. At December 31, 2004 and 2003, we had
receivables from El Paso of $477 million and
$688 million, of which $145 million and
$393 million are classified as current notes receivables
from affiliates on our balance sheets. The interest rate was
2.0% and 2.8% at December 31, 2004 and 2003 on these
advances.

Red River Financing.During 1999, El Paso formed various companies for the
purpose of generating funds for El Paso to invest in
capital projects and other assets.

During March 2002, we acquired natural gas and
oil properties located in south Texas from an affiliate of
El Paso CGP for approximately $400 million in cash in
order to maintain an adequate collateral balance for our Red
River financing arrangement. Because this property acquisition
involved entities under the common control of El Paso, we
recorded the acquired properties at their El Paso CGP
carryover basis net book value of $130 million, along with
an associated deferred tax asset of $91 million. The
$171 million difference between the cash consideration
price and the carryover basis of the acquired properties was
reflected as a dividend.

In the first quarter of 2003, in conjunction with
El Pasos Red River financing arrangement
transactions, as further discussed in Note 6, we
contributed $56 million to El Paso for a partial
payment of its Red River financing arrangement and we made a
$150 million dividend to El Paso of demand loans
established under this financing arrangement.

41



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Dividends.During
2003 and 2002, we made dividends of $1.6 billion and
$298 million to El Paso, of which $320 million in
2003 were non-cash dividends. These dividends are primarily
related to the Red River transactions discussed above and in
Note 6. There were no dividends declared or paid in 2004.

Capital
Contributions.In the first quarter of
2005, El Paso contributed approximately $79 million to
us to partially fund the acquisition of the natural gas and oil
properties in east Texas.

Acquisitions and
Divestitures.During 2003, we acquired
natural gas and oil properties and a gas gathering system from
El Paso for a total of $53 million. In
March 2002, we acquired natural gas and oil properties in
south Texas from an affiliate, El Paso CGP, as discussed above
under the heading Red River Financing, and the Prince offshore
platform from GulfTerra Energy Partners (GulfTerra) for
$190 million.

In March 2003, we distributed our ownership
interests in El Paso Energy Oil Transmission L.L.C.,
El Paso Energy Minerals, L.L.C., and El Paso Energy
Minerals Leasing, L.L.C. to El Paso CGP. At the time of
these distributions, our combined investment in these
subsidiaries was $24 million. In April 2003, we sold
our interest in Noric Holdings I, as discussed above.

Affiliate Revenues and
Expenses.We enter into a number of
transactions with affiliates in the ordinary course of
conducting our business as described below. The following table
shows revenues and charges to/ from our affiliates for each of
the three years ended December 31:

|                                                               |  |      |     |      |  |      |     |  |  |   |     | 
|-------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                               |  | 2004 |     | 2003 |  | 2002
|                                                               |  |      |     |      |  |     
|Operating revenues                                             |  | $    | 403 |      |  | $    | 751 |  |  | $ | 685 | 
|Operating expenses from affiliates                             |  |      | 127 |      |  |      | 137 |  |  |   | 131 | 
|Reimbursements of operating expenses charged to
    affiliates |  |      | 111 |      |  |      | 122 |  |  |   | 141 | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | El Paso.We are
    allocated a portion of El Pasos corporate overhead
    which covers charges related to management, legal, financial,
    tax, consultative administrative and other services, including
    employee benefits, annual incentive bonuses, rent, insurance,
    and information technology. The allocation of these expenses is
    based upon the relative size of our EBIT, gross property and
    payroll. We also entered into a service agreement with
    El Paso that provides for a reimbursement of 2.5 cents
    per MMBtu in 2005 and 2006 for our expected administrative costs
    associated with hedging transactions we entered into in December
    2004.



| |  |                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We also allocate a portion of El Pasos
    corporate overhead allocated to us and our general corporate
    overhead to affiliates of El Paso CGP for management,
    legal, accounting, financial, tax, consulting, administrative,
    and other services. This allocation is reflected on our
    statements of income as a reduction in operations and
    maintenance expense.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | El Paso
    Marketing.We are a party to a master
    hedging contract with El Paso Marketing whereby we hedge a
    portion of our natural gas production with El Paso Marketing.
    Realized gains and losses on these hedges are included in our
    operating revenues.                                                                                                                                             
|
| |  | El Paso CGP.Our affiliate El Paso CGP, through its subsidiaries,
    engages in the exploration for and the acquisition, development
    and production of natural gas and oil. We do not have an
    agreement with El Paso CGP or its subsidiaries regarding
    the allocation of business opportunities and therefore we may
    pursue opportunities that are also being pursued by El Paso
    CGPs subsidiaries.



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, our officers, directors and
    personnel also provide services to El Paso CGP and its
    subsidiaries pursuant to our shared services arrangement and
    therefore share their time and services between us and
    El Paso CGP.



| |   |                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | El Paso Field Services and
    Pipelines.We also contract for
    services with El Paso Field Services Company and
    El Pasos regulated interstate pipelines. These
    companies provide transportation, gathering, processing, and
    treating for our natural gas, oil, condensate, and liquids
    production to us.

42



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | GulfTerra.GulfTerra, an equity investment in which El Paso previously
    had a general and limited partner ownership, was a publicly
    traded master limited partnership that provided natural gas and
    oil gathering, transportation, processing, storage, and other
    related services to us. In a series of transactions in September
    2004 and January 2005, El Paso sold all of its equity
    interest in GulfTerra.

Supplemental Selected Quarterly Financial
Information (Unaudited)

Financial information by quarter, is summarized
below:

|     |                                   |                |   |         |  |              |   |             |  |       |   |     |  |  |   |     |  |  |   |     | 
|---- | --------------------------------- | -------------- | - | ------- |  | ------------ | - | ----------- |  | ----- | - | --- |  |  | - | --- |  |  | - | --- | 
|     |                                   |                |   |        
|     |                                   | Quarters Ended |   |        
|     |                                   |                |   |        
|     |                                   | March 31       |   | June 30 |  | September 30 |   | December 31 |  | Total
|     |                                   |                |   |         |  |              |   |             |  |      
|     |                                   |               
|     |                                   | (In millions) 
|2004 |                                   |                |   |         |  |              |   |             |  |       |   |     |  |  |   |     |  |  |   |    
|     | Operating revenues                |                | $ | 219     |  |              | $ | 193         |  |       | $ | 168 |  |  | $ | 185 |  |  | $ | 765 | 
|     | Operating income                  |                |   | 64      |  |              |   | 60          |  |       |   | 41  |  |  |   | 24  |  |  |   | 189 | 
|     | Income from continuing operations |                |   | 33      |  |              |   | 27          |  |       |   | 14  |  |  |   | 4   |  |  |   | 78  | 
|     | Net income                        |                |   | 33      |  |              |   | 27          |  |       |   | 14  |  |  |   | 4   |  |  |   | 78  | 

|     |                                   |                |   |         |  |              |   |             |  |       |   |     |  |  |   |     |  |  |   |     | 
|---- | --------------------------------- | -------------- | - | ------- |  | ------------ | - | ----------- |  | ----- | - | --- |  |  | - | --- |  |  | - | --- | 
|     |                                   |                |   |        
|     |                                   | Quarters Ended |   |        
|     |                                   |                |   |        
|     |                                   | March 31       |   | June 30 |  | September 30 |   | December 31 |  | Total
|     |                                   |                |   |         |  |              |   |             |  |      
|     |                                   |               
|     |                                   | (In millions) 
|2003 |                                   |                |   |         |  |              |   |             |  |       |   |     |  |  |   |     |  |  |   |    
|     | Operating revenues                |                | $ | 303     |  |              | $ | 234         |  |       | $ | 199 |  |  | $ | 159 |  |  | $ | 895 | 
|     | Operating income                  |                |   | 117     |  |              |   | 72          |  |       |   | 52  |  |  |   | 25  |  |  |   | 266 | 
|     | Income from continuing operations |                |   | 67      |  |              |   | 32          |  |       |   | 21  |  |  |   | 10  |  |  |   | 130 | 
|     | Net income                        |                |   | 68      |  |              |   | 32          |  |       |   | 21  |  |  |   | 10  |  |  |   | 131 | 

Supplemental Natural Gas and Oil Operations
(Unaudited)

We are engaged in the exploration for, and the
acquisition, development and production of natural gas, oil,
condensate and natural gas liquids. We primarily operate in
Alabama, Louisiana, New Mexico, Oklahoma, Texas and the Gulf of
Mexico.

Capitalized costs relating to natural gas and oil
producing activities and related accumulated depreciation,
depletion and amortization were as follows at December 31:

|                                                              |                                   |               |       |       |  |   |       |       | 
|------------------------------------------------------------- | --------------------------------- | ------------- | ----- | ----- |  | - | ----- | ----- | 
|                                                              |                                   | 2004          |       | 2003 
|                                                              |                                   |               |       |      
|                                                              |                                   |              
|                                                              |                                   | (In millions)
|Natural gas and oil properties:                               |                                   |               |       |       |  |   |       |      
|                                                              | Costs subject to amortization(1)  |               | $     | 7,399 |  |   | $     | 7,197 | 
|                                                              | Costs not subject to amortization |               |       | 253   |  |   |       | 252   | 
|                                                              |                                   |               |       |       |  |   |       |      
|                                                              |                                   |               | 7,652 |       |  |   | 7,449 |      
|Less accumulated depreciation, depletion and
    amortization |                                   |               | 5,239 |       |  |   | 5,141 |      
|                                                              |                                   |               |       |       |  |   |       |      
|Net capitalized costs                                         |                                   | $             | 2,413 |       |  | $ | 2,308 |      
|                                                              |                                   |               |       |       |  |   |       |      
|FAS 143 abandonment liability                                 |                                   | $             | 103   |       |  | $ | 79    |      
|                                                              |                                   |               |       |       |  |   |       |      



---



|    |                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of January 1, 2003 we adopted
    SFAS No. 143, which is further discussed in
    Note 1. Included in our costs subject to amortization at
    December 31, 2004 and 2003 are SFAS No. 143 asset
    values of $66 million and $47 million.

43



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Costs incurred in natural gas and oil producing
activities, whether capitalized or expensed, were as follows for
each of the years ended December 31:

|                                     |                     |                      |     |      |     |      |     |     |     |  |     |       |       | 
|------------------------------------ | ------------------- | -------------------- | --- | ---- | --- | ---- | --- | --- | --- |  | --- | ----- | ----- | 
|                                     |                     | 2004                 |     | 2003 |     | 2002
|                                     |                     |                      |     |      |     |     
|                                     |                     |                     
|                                     |                     | (In millions)       
|Property acquisition costs           |                     |                      |     |      |     |      |     |     |     |  |     |      
|                                     | Proved properties   |                      | $   | 27   |     |      | $   | 37  |     |  | $   | 339   |      
|                                     | Unproved properties |                      |     | 28   |     |      |     | 26  |     |  |     | 16    |      
|Exploration costs(1)                 |                     |                      | 98  |      |     |      | 252 |     |     |  | 326 |      
|Development costs(1)                 |                     |                      | 245 |      |     |      | 398 |     |     |  | 695 |      
|                                     |                     |                      |     |      |     |      |     |     |     |  |     |      
|                                     | Costs expended      |                      |     | 398  |     |      |     | 713 |     |  |     | 1,376 |      
|                                     |                     |                      |     |      |     |      |     |     |     |  |     |      
|Asset retirement obligation costs(2) |                     |                      | 19  |      |     |      | 47  |     |     |  |    |      
|                                     |                     |                      |     |      |     |      |     |     |     |  |     |      
|                                     |                     | Total costs incurred |     | $    | 417 |      |     | $   | 760 |  |     | $     | 1,376 | 
|                                     |                     |                      |     |      |     |      |     |     |     |  |     |      



---



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes approximately $77 million and
    $76 million that was paid during 2004 and 2003 by third
    parties under net profits interest agreements.              
|(2) | In January 2003 we adopted SFAS No. 143,
    which is further discussed in Note 1. The cumulative effect
    of adopting SFAS No. 143 was approximately $1 million.

The table above includes capitalized internal
costs incurred in connection with acquisition, development and
exploration of natural gas and oil reserves of $22 million,
$8 million and $6 million for the years ended
December 31, 2004, 2003 and 2002. The table also includes
capitalized interest of $18 million and $12 million
for the years ended December 31, 2004 and 2003. We did not
capitalize interest for the year ended December 31, 2002.

In our January 1, 2005 reserve report, the
amounts estimated to be spent in 2005, 2006 and 2007 to develop
our booked proved undeveloped reserves are $152 million,
$168 million and $106 million.

Net quantities of proved developed and
undeveloped reserves of natural gas, oil and condensate and NGL,
and changes in these reserves at December 31, 2004, are
presented below. All of our proved properties and reserves are
located in the United States. Information in this table is based
on our internal reserve report. Ryder Scott Company, an
independent petroleum engineering firm, prepared a reserve
estimate of our natural gas and oil reserves for 92 percent
of our properties by volume. The total estimate of proved
reserves prepared by Ryder Scott was within five percent of our
internally prepared estimates presented in this table. This
information is consistent with estimates of reserves filed with
other federal agencies except for differences of less than five
percent resulting from actual production, acquisitions, property
sales, necessary reserve revisions and additions to reflect
actual experience. Ryder Scott Company was retained by and
reports to the Audit

44



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Committee of El Pasos Board of Directors.
The properties reviewed by Ryder Scott represented
90 percent of our proved properties based on value.

|                                                     |                   |                                   |  |            |      |         |  |        |        |   |  |       |        |  
|---------------------------------------------------- | ----------------- | --------------------------------- |  | ---------- | ---- | ------- |  | ------ | ------ | - |  | ----- | ------ | -
|                                                     |                   |                                   |  | Oil &      |      |        
|                                                     |                   | Natural Gas                       |  | Condensate |      | NGL    
|                                                     |                   | (Bcf)                             |  | (MBbls)    |      | (MBbls)
|                                                     |                   |                                   |  |            |      |        
|Net proved developed and undeveloped
    reserves(1) |                   |                                   |  |            |      |         |  |        |        |   |  |      
|                                                     | January 1, 2002   |                                   |  | 1,222      |      |         |  | 20,734 |        |   |  | 5,337 |       
|                                                     |                   | Revisions of previous estimates   |  |            | 19   |         |  |        | 291    |   |  |       | 1,137  |  
|                                                     |                   | Extensions, discoveries and other |  |            | 554  |         |  |        | 4,802  |   |  |       | 2,818  |  
|                                                     |                   | Purchase of reserves in place     |  |            | 137  |         |  |        | 62     |   |  |       |       |  
|                                                     |                   | Sales of reserves in place        |  |            | (171 | )       |  |        | (1,776 | ) |  |       | (900   | )
|                                                     |                   | Production                        |  |            | (215 | )       |  |        | (7,356 | ) |  |       | (2,272 | )
|                                                     |                   |                                   |  |            |      |         |  |        |        |   |  |      
|                                                     | December 31, 2002 |                                   |  | 1,546      |      |         |  | 16,757 |        |   |  | 6,120 |       
|                                                     |                   | Revisions of previous estimates   |  |            | 2    |         |  |        | 102    |   |  |       | 329    |  
|                                                     |                   | Extensions, discoveries and other |  |            | 316  |         |  |        | 2,720  |   |  |       | 399    |  
|                                                     |                   | Purchases of reserves in place    |  |            | 64   |         |  |        | 303    |   |  |       | 337    |  
|                                                     |                   | Sales of reserves in place(2)     |  |            | (300 | )       |  |        | (3,595 | ) |  |       | (317   | )
|                                                     |                   | Production                        |  |            | (191 | )       |  |        | (3,679 | ) |  |       | (2,040 | )
|                                                     |                   |                                   |  |            |      |         |  |        |        |   |  |      
|                                                     | December 31, 2003 |                                   |  | 1,437      |      |         |  | 12,608 |        |   |  | 4,828 |       
|                                                     |                   | Revisions of previous estimates   |  |            | (133 | )       |  |        | (1,318 | ) |  |       | 1,482  |  
|                                                     |                   | Extensions, discoveries and other |  |            | 53   |         |  |        | 325    |   |  |       | 5      |  
|                                                     |                   | Purchases of reserves in place    |  |            | 15   |         |  |        |       |   |  |       |       |  
|                                                     |                   | Sales of reserves in place(2)     |  |            | (18  | )       |  |        | (1,268 | ) |  |       |       |  
|                                                     |                   | Production                        |  |            | (142 | )       |  |        | (2,375 | ) |  |       | (1,713 | )
|                                                     |                   |                                   |  |            |      |         |  |        |        |   |  |      
|                                                     | December 31, 2004 |                                   |  | 1,212      |      |         |  | 7,972  |        |   |  | 4,602 |       
|                                                     |                   |                                   |  |            |      |         |  |        |        |   |  |      
|Proved developed reserves                            |                   |                                   |  |            |      |         |  |        |        |   |  |      
|                                                     | December 31, 2002 |                                   |  | 1,063      |      |         |  | 12,715 |        |   |  | 4,299 |       
|                                                     | December 31, 2003 |                                   |  | 926        |      |         |  | 9,244  |        |   |  | 4,529 |       
|                                                     | December 31, 2004 |                                   |  | 868        |      |         |  | 5,669  |        |   |  | 4,259 |       



---



|    |                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net proved reserves exclude royalties and
    interests owned by others and reflects contractual arrangements
    and royalty obligations in effect at the time of the estimate.                                                        
|(2) | Sales of reserves in place include
    17,295 MMcf and 17,363 MMcf of natural gas and
    1,268 MBbls and 779 MBbls of oil, condensate and NGL
    conveyed to third parties under net profits interest agreements
    in 2004 and 2003.

During 2004, we had approximately 132 Bcfe
of negative reserve revisions that were largely
performance-driven. Our reserve revisions were primarily
concentrated onshore in our coal bed methane operations and
offshore in the Gulf of Mexico:



| |                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Onshore.The onshore
    region recorded 86 Bcfe of negative reserve revisions. All
    of the negative reserve revisions are related to performance
    results from producing wells or the recent drilling program
    coupled with the related impact on booked proven undeveloped
    locations.                                                                    
|
| | Offshore.The
    offshore region recorded 43 Bcfe of negative reserve
    revisions in the Gulf of Mexico. This is a result of mechanical
    failures and producing well performance. In addition, the
    drilling of development wells resulted in adjustments to proved
    undeveloped reserves as a result of production performance in
    offsetting locations.

45



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

There are numerous uncertainties inherent in
estimating quantities of proved reserves, projecting future
rates of production and projecting the timing of development
expenditures, including many factors beyond our control. The
reserve data represents only estimates. Reservoir engineering is
a subjective process of estimating underground accumulations of
natural gas and oil that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological
interpretations and judgment. All estimates of proved reserves
are determined according to the rules prescribed by the SEC.
These rules indicate that the standard of reasonable
certainty be applied to proved reserve estimates. This
concept of reasonable certainty implies that as more technical
data becomes available, a positive, or upward, revision is more
likely than a negative, or downward, revision. Estimates are
subject to revision based upon a number of factors, including
reservoir performance, prices, economic conditions and
government restrictions. In addition, results of drilling,
testing and production subsequent to the date of an estimate may
justify revision of that estimate. Reserve estimates are often
different from the quantities of natural gas and oil that are
ultimately recovered. The meaningfulness of reserve estimates is
highly dependent on the accuracy of the assumptions on which
they were based. In general, the volume of production from
natural gas and oil properties we own declines as reserves are
depleted. Except to the extent we conduct successful exploration
and development activities or acquire additional properties
containing proved reserves, or both, our proved reserves will
decline as reserves are produced. There have been no major
discoveries or other events, favorable or adverse, that may be
considered to have caused a significant change in the estimated
proved reserves since December 31, 2004, except as
discussed below.

In January 2005, we announced two acquisitions in
east Texas and south Texas for $211 million. In March 2005,
we purchased the interest held by one of the parties under a net
profits interest agreement, as discussed below, for
approximately $40 million. These acquisitions added
properties with approximately 131 Bcfe of proved reserves
and 48 MMcfe/d of average net production. More importantly, the
Texas acquisitions offered additional exploration upside in two
of our key operating areas.

In 2003, we entered into agreements to sell
interests in a maximum of 82 wells to a subsidiary of
Lehman Brothers (Lehman) and a wholly-owned subsidiary of Nabors
Industries, Ltd. (Nabors). As the wells are developed, these
parties will pay 70 percent of the drilling and completion
costs in exchange for 70 percent of the net profits of the
wells sold. As each well is commenced, these parties receive an
overriding royalty interest in the form of a net profits
interest in each well, under which they are entitled to receive
70 percent of the aggregate net profits of all wells until
they have recovered 117.5 percent of their aggregate
investment in the wells. Upon this recovery, the net profits
interest will convert to a proportionately reduced
two percent overriding royalty interest in the wells for
the remainder of the wells productive life. We do not
guarantee a return or the recovery of their costs or any return
on their investment. All parties to the agreements have the
right to cease participation in the agreements at any time. Upon
ceasing participation in the agreements, they will continue to
receive their net profits interest on wells previously started,
but will relinquish their right to participate in any future
wells. During 2004, we have sold interests in 45 wells and
total proved reserves of 17,295 MMcf of natural gas and
1,268 MBbls of oil and condensate. They have paid
$77 million of drilling and completion costs and were paid
$112 million of the revenues net of $7 million of
operating expenses associated with these wells for the year
ended December 31, 2004.

46



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Results of operations from producing activities
by fiscal year were as follows at December 31:

|                                                |                             |               |      |      |  |      |      |     |  |   |      |     | 
|----------------------------------------------- | --------------------------- | ------------- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- | --- | 
|                                                |                             | 2004          |      | 2003 |  | 2002
|                                                |                             |               |      |      |  |     
|                                                |                             |              
|                                                |                             | (In millions)
|Net Revenues                                    |                             |               |      |      |  |      |      |     |  |   |      |    
|                                                | Sales to external customers |               | $    | 335  |  |      | $    | 113 |  |   | $    | 119 | 
|                                                | Affiliated sales            |               |      | 390  |  |      |      | 732 |  |   |      | 675 | 
|                                                |                             |               |      |      |  |      |      |     |  |   |      |    
|                                                | Total                       |               |      | 725  |  |      |      | 845 |  |   |      | 794 | 
|Production costs(1)                             |                             |               | (104 | )    |  |      | (109 | )   |  |   | (108 | )  
|Depreciation, depletion and
    amortization(2) |                             |               | (326 | )    |  |      | (379 | )   |  |   | (396 | )  
|Gain on long-lived assets                       |                             |               |     |      |  |      |     |     |  |   | 209  |    
|                                                |                             |               |      |      |  |      |      |     |  |   |      |    
|                                                |                             |               | 295  |      |  |      | 357  |     |  |   | 499  |    
|Income tax expense                              |                             |               | (110 | )    |  |      | (131 | )   |  |   | (181 | )  
|                                                |                             |               |      |      |  |      |      |     |  |   |      |    
|Results of operations from producing activities |                             | $             | 185  |      |  | $    | 226  |     |  | $ | 318  |    
|                                                |                             |               |      |      |  |      |      |     |  |   |      |    



---



|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Production costs include lease operating costs
    and production related taxes (including ad valorem and
    severance taxes).                                                                                                                         
|(2) | In January 2003, we adopted
    SFAS No. 143, which is further discussed in
    Note 1. Our 2004 and 2003 depreciation, depletion and
    amortization includes accretion expense for SFAS 143
    abandonment liabilities of $9 million and $7 million.

The standardized measure of discounted future net
cash flows relating to proved natural gas and oil reserves at
December 31 follows:

|                                                                                                      |  |               |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                      |  | 2004          |        | 2003 |  | 2002
|                                                                                                      |  |               |        |      |  |     
|                                                                                                      |  |              
|                                                                                                      |  | (In millions)
|Future cash inflows(1)                                                                                |  | $             | 7,832  |      |  | $    | 8,854  |   |  | $ | 7,728  |  
|Future production costs                                                                               |  |               | (2,498 | )    |  |      | (2,058 | ) |  |   | (1,744 | )
|Future development costs                                                                              |  |               | (691   | )    |  |      | (761   | ) |  |   | (730   | )
|Future income tax expenses                                                                            |  |               | (929   | )    |  |      | (1,368 | ) |  |   | (1,383 | )
|                                                                                                      |  |               |        |      |  |      |        |   |  |   |        |  
|Future net cash flows                                                                                 |  |               | 3,714  |      |  |      | 4,667  |   |  |   | 3,871  |  
|10% annual discount for estimated timing of cash
    flows                                            |  |               | (1,340 | )    |  |      | (1,696 | ) |  |   | (1,442 | )
|                                                                                                      |  |               |        |      |  |      |        |   |  |   |        |  
|Standardized measure of discounted future net
    cash flows                                          |  | $             | 2,374  |      |  | $    | 2,971  |   |  | $ | 2,429  |  
|                                                                                                      |  |               |        |      |  |      |        |   |  |   |        |  
|Standardized measure of discounted future net
    cash flows, including effects of hedging activities |  | $             | 2,012  |      |  | $    | 2,537  |   |  | $ | 2,105  |  
|                                                                                                      |  |               |        |      |  |      |        |   |  |   |        |  



---



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes $493 million, $739 million and
    $599 million of future net cash outflows attributable to
    hedging activities as of December 31, 2004, 2003 and 2002.

For the calculations in the preceding table,
estimated future cash inflows from estimated future production
of proved reserves were computed using year-end 2004 prices of
$6.22 per MMBtu for natural gas and $43.45 per barrel of oil.
Adjustments for transportation and other charges resulted in a
net price of $6.07 per Mcf of gas, $42.09 per barrel of oil and
$33.03 per barrel of NGL. We may receive amounts different than
the standardized measure of discounted cash flow for a number or
reasons, including price changes and the effects of our hedging
activities.

We do not rely upon the standardized measure when
making investment and operating decisions. These decisions are
based on various factors including probable and proved reserves,
different price and cost assumptions, actual economic
conditions, capital availability, and corporate investment
criteria.

47



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##### Table of Contents



EL PASO PRODUCTION HOLDING COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following are the principal sources of change
in the standardized measure of discounted future net cash flows
(in millions):

|                                                                                |            |                 |      |      |   |      |      |     |  |   |       |       | 
|------------------------------------------------------------------------------- | ---------- | --------------- | ---- | ---- | - | ---- | ---- | --- |  | - | ----- | ----- | 
|                                                                                |            |                
|                                                                                |            | Years Ended    
|                                                                                |            | December 31,(1)
|                                                                                |            |                
|                                                                                |            | 2004            |      | 2003 |   | 2002
|                                                                                |            |                 |      |      |   |     
|Sales and transfers of natural gas and oil
    produced net of production costs |            | $               | (621 | )    |   | $    | (737 | )   |  | $ | (678  | )    
|Net changes in prices and production costs                                      |            |                 | (290 | )    |   |      | 699  |     |  |   | 1,358 |      
|Extensions, discoveries and improved recovery,
    less related costs           |            |                 | 119  |      |   |      | 710  |     |  |   | 1,037 |      
|Changes in estimated future development costs                                   |            |                 | (14  | )    |   |      | (7   | )   |  |   | (40   | )    
|Previously estimated development costs incurred
    during the period           |            |                 | 139  |      |   |      | 160  |     |  |   | 150   |      
|Revision of previous quantity estimates                                         |            |                 | (324 | )    |   |      | 11   |     |  |   | 63    |      
|Accretion of discount                                                           |            |                 | 359  |      |   |      | 312  |     |  |   | 135   |      
|Net change in income taxes                                                      |            |                 | 233  |      |   |      | 72   |     |  |   | (587  | )    
|Purchases of reserves in place                                                  |            |                 | 26   |      |   |      | 168  |     |  |   | 271   |      
|Sale of reserves in place                                                       |            |                 | (62  | )    |   |      | (775 | )   |  |   | (368  | )    
|Change in production rates, timing and other                                    |            |                 | (162 | )    |   |      | (71  | )   |  |   | (163  | )    
|                                                                                |            |                 |      |      |   |      |      |     |  |   |       |      
|                                                                                | Net change |                 | $    | (597 | ) |      | $    | 542 |  |   | $     | 1,178 | 
|                                                                                |            |                 |      |      |   |      |      |     |  |   |       |      



---



|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|(1) | This disclosure reflects changes in the
    standardized measure calculation excluding the effects of
    hedging activities.

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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Stockholder of

El Paso Production Holding Company:


In our opinion, the accompanying consolidated
financial statements listed in the Index appearing under
Item 15(a)1 present fairly, in all material respects, the
financial position of El Paso Production Holding Company
and its subsidiaries (the Company) at
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the Index appearing under Item 15(a)2
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits
of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.

As discussed in Note 1 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standards No. 143, Accounting for Asset
Retirement Obligations, effective January 1, 2003.

Houston, Texas

March 31, 2005


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##### Table of Contents



SCHEDULE II

EL PASO PRODUCTION HOLDING COMPANY

VALUATION AND QUALIFYING ACCOUNTS


Years Ended December 31, 2004, 2003 and
2002

(In millions)


|            |                                        |            |   |          |  |            |   |          |   |           |   |    |   |  |   |    |   |  |   |   | 
|----------- | -------------------------------------- | ---------- | - | -------- |  | ---------- | - | -------- | - | --------- | - | -- | - |  | - | -- | - |  | - | - | 
|            |                                        |            |   | Charged  |  |            |   |          |   |          
|            |                                        | Balance at |   | to Costs |  |            |   | Charged  |   | Balance  
|            |                                        | Beginning  |   | and      |  |            |   | to Other |   | at End   
|Description |                                        | of Period  |   | Expenses |  | Deductions |   | Accounts |   | of Period
|            |                                        |            |   |          |  |            |   |          |   |          
|2004        |                                        |            |   |          |  |            |   |          |   |           |   |    |   |  |   |    |   |  |   |  
|            | Allowance for doubtful accounts        |            | $ | 6        |  |            | $ |         |   |           | $ | (2 | ) |  | $ | 1  |   |  | $ | 5 | 
|            | Legal reserves and other contingencies |            |   | 4        |  |            |   | 3        |   |           |   | (2 | ) |  |   | (1 | ) |  |   | 4 | 
|2003        |                                        |            |   |          |  |            |   |          |   |           |   |    |   |  |   |    |   |  |   |  
|            | Allowance for doubtful accounts        |            | $ | 5        |  |            | $ | 2        |   |           | $ |   |   |  | $ | (1 | ) |  | $ | 6 | 
|            | Legal reserves and other contingencies |            |   | 8        |  |            |   | (3       | ) |           |   | (1 | ) |  |   |   |   |  |   | 4 | 
|2002        |                                        |            |   |          |  |            |   |          |   |           |   |    |   |  |   |    |   |  |   |  
|            | Allowance for doubtful accounts        |            | $ | 6        |  |            | $ | (1       | ) |           | $ |   |   |  | $ |   |   |  | $ | 5 | 
|            | Legal reserves and other contingencies |            |   | 8        |  |            |   | 1        |   |           |   | (1 | ) |  |   |   |   |  |   | 8 | 

50



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
    ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.






|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and
Procedures

As of December 31, 2004, we carried out an
evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer (CEO) and
our Chief Financial Officer (CFO), as to the effectiveness,
design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange
Act)). This evaluation considered the various processes
carried out under the direction of our disclosure committee in
an effort to ensure that information required to be disclosed in
the SEC reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified by the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our CEO and CFO, as appropriate, to allow
timely discussion regarding required financial disclosure.

Based on the results of this evaluation, our CEO
and CFO concluded that as a result of the material weakness
discussed below, our disclosure controls and procedures were not
effective as of December 31, 2004. Because of the material
weakness, we performed additional procedures to ensure that our
financial statements as of and for the year ended
December 31, 2004, were fairly presented in all material
respects in accordance with generally accepted accounting
principles.

Internal Control Over Financial
Reporting

During 2004, we continued our efforts to ensure
our compliance with Section 404 of the Sarbanes-Oxley Act
of 2002, which will apply to us at December 31, 2006. In our
efforts to evaluate our internal control over financial
reporting, we have identified the material weakness described
below as of December 31, 2004. A material weakness is a
control deficiency, or combination of control deficiencies, that
results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will
not be prevented or detected.

Access to Financial Application Programs and
Data.At December 31, 2004, we
did not maintain effective controls over access to financial
application programs and data. Specifically, we identified
internal control deficiencies with respect to inadequate design
of and compliance with our security access procedures related to
identifying and monitoring conflicting roles (i.e., segregation
of duties) and a lack of independent monitoring of access to
various systems by our information technology staff, as well as
certain users that require unrestricted security access to
financial and reporting systems to perform their
responsibilities. These control deficiencies did not result in
an adjustment to the 2004 interim or annual consolidated
financial statements. However, these control deficiencies could
result in a misstatement of a number of our financial statement
accounts, including property, plant and equipment, accounts
payable, operating expenses and potentially others, that would
result in a material misstatement to the annual or interim
consolidated financial statements that would not be prevented or
detected. Accordingly, management has determined that these
control deficiencies constitute a material weakness.

Changes in Internal Control over Financial
Reporting

Changes in the Fourth Quarter
2004.There has been no change in our
internal control over financial reporting during the fourth
quarter of 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.

Changes in 2005.Since December 31, 2004, we have taken action to correct
the control deficiencies that resulted in the material weakness
described above including implementing monitoring controls in
our information technology areas over users who require
unrestricted access to perform their job responsibilities. Other
remedial actions have also been identified and are in the
process of being implemented.

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|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION

None.




PART III

Item 10, Directors and Executive Officers
of the Registrant; Item 11, Executive
Compensation; Item 12, Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters and Item 13, Certain Relationships and
Related Transactions, have been omitted from this report
pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.






|         |                                           
|-------- | ------------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND
    SERVICES

Audit Fees

The audit fees for the years ended
December 31, 2004 and 2003 of $1,252,000 and $1,970,000
were for professional services rendered by
PricewaterhouseCoopers LLP for the audits of our consolidated
financial statements. The amount reflected for audit fees for
2003 includes $1,520,000 that was billed after we filed our 2003
Form 10-K related to audit work performed on our 2003
financial statements as a result of the restatements we made in
2003.

All Other Fees

No other audit-related, tax or other services
were provided by our independent registered public accounting
firm for the years ended December 31, 2004 and 2003.

Policy for Approval of Audit and Non-Audit
Fees

We are a wholly-owned direct subsidiary of
El Paso and do not have a separate audit committee.
El Pasos Audit Committee has adopted a pre-approval
policy for audit and non-audit services. For a description of
El Pasos pre-approval policies for audit and
non-audit related services, see the El Paso proxy statement.




PART IV






|         |                                               
|-------- | ----------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES

(a) The following documents are filed as
a part of this report:

1. Financial statements.

The following consolidated financial statements
are included in Part II, Item 8 of this report:

|                                                                                             |                                                                                         |      |    |    | 
|-------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---- | -- | -- | 
|                                                                                             |                                                                                         | Page
|                                                                                             |                                                                                         |     
|                                                                                             | Consolidated Statements of Income                                                       |      |    | 24 | 
|                                                                                             | Consolidated Balance Sheets                                                             |      |    | 25 | 
|                                                                                             | Consolidated Statements of Cash Flows                                                   |      |    | 26 | 
|                                                                                             | Consolidated Statements of
    Stockholders Equity                                     |      |    | 27 | 
|                                                                                             | Consolidated Statements of Comprehensive
    Income                                     |      |    | 28 | 
|                                                                                             | Notes to Consolidated Financial Statements                                              |      |    | 29 | 
|                                                                                             | Report of Independent Registered Public
    Accounting Firm                             |      |    | 49 | 
|2. Financial statement schedules and
    supplementary information required to be submitted. |                                                                                         |      |    |   
|                                                                                             | Schedule II  Valuation and
    Qualifying accounts                                     |      |    | 50 | 
|                                                                                             | Schedules other than that listed above are
    omitted because they are not applicable. |      |    |    | 
|3. Exhibit list                                                                              |                                                                                         |      | 53 |   

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EL PASO PRODUCTION HOLDING COMPANY

EXHIBIT LIST

December 31, 2004


Each exhibit identified below is filed as a part
of this report. Exhibits not incorporated by reference to a
prior filing are designated by an asterisk; all exhibits not so
designated are incorporated herein by reference to a prior
filing as indicated. Exhibits designated with a +
constitute a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report
pursuant to Item 14(c) of Form 10-K.

|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                   
|------- | --- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 3   | .A          |  | Amended and Restated Certificate of Incorporation
    as filed with the Delaware Secretary of State on May 23,
    2003 (Exhibit 3.1 to our Form S-4 filed on
    June 27, 2003, Registration No. 333-106586).                                                                                                                                    
|        | 3   | .B          |  | By-laws effective as of June 24, 2002
    (Exhibit 3.2 to our Form S-4 filed on June 27,
    2003, Registration No. 333-106586).                                                                                                                                                                                                                  
|        | 4   | .A          |  | Indenture dated as of May 23, 2003 by and
    between El Paso Production Holding Company, the Subsidiary
    Guarantors named therein and Wilmington Trust Company, as
    Trustee (Exhibit 4.1 to our Form S-4 filed on
    June 27, 2003, Registration No. 333-106586).                                                                         
|        | 4   | .A.1        |  | First Supplemental Indenture dated
    January 31, 2004 among El Paso Production Holding
    Company, the Subsidiary Guarantors named therein and Wilmington
    Trust Company, as Trustee (Exhibit 4.A.1 to our 2003
    Form 10-K).                                                                                                             
|        | 4   | .A.2        |  | Consent by the Holders (as defined therein)
    effective July 26, 2004 Relating to a Proposed Waiver under
    the Indenture, as Supplemented, Governing El Paso
    Production Holding Companys $1,200,000,000 Aggregate
    Principal Amount of Issued and Outstanding 7 3/4% Senior
    Notes due 2013 (Exhibit 4.A.2 to our 2003 Form 10-K).
|        | 4   | .A.3        |  | Second Supplemental Indenture dated July 26,
    2004 among El Paso Production Holding Company, the Subsidiary
    Guarantors named therein and Wilmington Trust Company, as
    Trustee (Exhibit 4.A.3 to our 2003 Form 10-K).                                                                                                                   
|        | 10  | .A          |  | ISDA Master Agreement, dated as of
    January 1, 2001, between El Paso Merchant Energy, L.P.
    and El Paso Production Company (Exhibit 10.1 to our
    Form S-4 filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                                      
|        | 10  | .B          |  | Services Agreement, dated as of May 23,
    2003, between El Paso Energy Service Company and
    El Paso Production Holding Company (Exhibit 10.2 to
    our Form S-4 filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                                   
|        | 10  | .C          |  | Services Agreement dated as of May 23, 2003,
    between El Paso Production Oil & Gas Company and
    El Paso Production Holding Company (Exhibit 10.3 to
    our Form S-4 filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                              
|        | +10 | .D          |  | El Paso Production Companies Long-Term
    Incentive Plan effective as of January 1, 2003
    (Exhibit 10.AA to El Pasos 2003 First Quarter
    Form 10-Q).                                                                                                                                                                                      
|        | +10 | .D.1        |  | Amendment No. 1 to the El Paso Production
    Companies Long-Term Incentive Plan effective as of June 6,
    2003 (Exhibit 10.13 to our Form S-4 filed on
    June 27, 2003, Registration No. 333-106586).                                                                                                                                        
|        | +10 | .D.2        |  | Amendment No. 2 to the El Paso
    Production Companies Long-Term Incentive Plan effective as of
    December 31, 2003 (Exhibit 10.D.2 to our 2003
    Form 10-K).                                                                                                                                                                                
|        | +10 | .E          |  | Termination of Employment Agreement between El
    Paso CGP Company and Rodney D. Erskine effective as of
    December 16, 2002 (Exhibit 10.17 to our Form S-4
    filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                                      
|        | 10  | .F          |  | Federal and State Tax Reimbursement Agreement
    among El Paso Corporation and the Controlled Entities (named
    therein), effective as of May 22, 2003 (Exhibit 10.18
    to our Form S-4 filed on June 27, 2003,
    Registration No. 333-106586).                                                                                            

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|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | --- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 10  | .G          |  | El Paso Corporation and Consolidated Subsidiaries
    Accounting Policy for the Accrual of U.S. Federal Income
    Taxes, effective as of January 1, 2002 (Exhibit 10.19
    to our Form S-4 filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                                                                                                                                        
|        | 10  | .H          |  | Intercompany State Income Tax Allocation and
    Payments Policy, effective for tax years beginning after
    January 29, 2001 (Exhibit 10.20 to our Form S-4
    filed on June 27, 2003, Registration No. 333-106586).                                                                                                                                                                                                                                                       
|        | 10  | .I          |  | Purchase and Sale Agreement (Red River) by and
    among El Paso Production Company, El Paso Production
    GOM Inc. and Lehman Commercial Paper Inc., dated October 3,
    2003 (Exhibit 10.21 to Amendment No. 2 to our
    Form S-4 filed on November 24, 2003, Registration
    No. 333-106586).                                                                                                                                                                          
|        | 10  | .J          |  | First Amendment to Purchase and Sale Agreement by
    and among El Paso Production Company, El Paso
    Production GOM Inc. and Lehman Commercial Paper Inc., dated
    October 6, 2003 (Exhibit 10.22 to Amendment No. 2
    to our Form S-4 filed on November 24, 2003,
    Registration No. 333-106586).                                                                                                                                                                   
|        | 10  | .K          |  | Purchase and Sale Agreement (Red River) by and
    among El Paso Production Company, El Paso Production
    GOM Inc. and Ramshorn Investments, Inc., dated October 8,
    2003 (Exhibit 10.23 to Amendment No. 2 to our
    Form S-4 filed on November 24, 2003, Registration
    No. 333-106586).                                                                                                                                                                            
|        | 10  | .L          |  | Purchase Agreement dated as of May 20, 2003,
    between El Paso Production Holding Company, the Subsidiary
    Guarantors named therein and Credit Suisse First Boston LLC,
    Citigroup Global Markets Inc., Banc of America Securities LLC,
    Deutsche Bank Securities Inc., Lehman Brothers Inc. and Scotia
    Capital (USA) Inc., (collectively, the Initial
    Purchasers) (Exhibit 1.1 to our Form S-4 filed
    on June 27, 2003, Registration No. 333-106586).
|        | 21  |             |  | Omitted pursuant to the reduced disclosure format
    permitted by General Instruction I to Form 10-K.                                                                                                                                                                                                                                                                                                                                                                        
|        | *31 | .A          |  | Certification of Chief Executive Officer pursuant
    to sec. 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                          
|        | *31 | .B          |  | Certification of Chief Financial Officer pursuant
    to sec. 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                          
|        | *32 | .A          |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. sec. 1350 as adopted pursuant to
    sec. 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                           
|        | *32 | .B          |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. sec. 1350 as adopted pursuant to
    sec. 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                           

Undertaking

We hereby undertake, pursuant to
Regulation S-K, Item 601(b), paragraph (4)(iii),
to furnish to the Securities and Exchange Commission upon
request all constituent instruments defining the rights of
holders of our long-term debt and our consolidated subsidiaries
not filed herewith for the reason that the total amount of
securities authorized under any of such instruments does not
exceed 10 percent of our total consolidated assets.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended,
El Paso Production Holding Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized on the 31st day of March 2005.



| |                                   
| | ----------------------------------
| | EL PASO PRODUCTION HOLDING COMPANY
| | Registrant                        



| |    |                    
| | -- | -------------------
| | By | /s/ LISA A. STEWART

| |                
| | ---------------
| |                
| | Lisa A. Stewart
| | President      

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of El Paso
Production Holding Company and in the capacities and on the
dates indicated:

|                                         |  |                                                                                                  |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | -------------- |  | 
|                                         |  |                                                                                                  |  |               
|Signature                                |  | Title                                                                                            |  | Date          
|                                         |  |                                                                                                  |  |               
|                                        
|/s/ LISA A. STEWARTLisa A. Stewart       |  | President and Director (Principal Executive
    Officer)                                         |  | March 31, 2005
|                                        
|/s/ D. MARK LELANDD. Mark Leland         |  | Executive Vice President, Chief Financial Officer
    and Director (Principal Financial Officer) |  | March 31, 2005
|                                        
|/s/ GENE T. WAGUESPACKGene T. Waguespack |  | Senior Vice President, Treasurer and Controller
    (Principal Accounting Officer)               |  | March 31, 2005

55



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EL PASO PRODUCTION HOLDING COMPANY

EXHIBIT INDEX

Each exhibit identified below is filed as a part
of this report. Exhibits not incorporated by reference to a
prior filing are designated by an asterisk; all exhibits not so
designated are incorporated herein by reference to a prior
filing as indicated. Exhibits designated with a +
constitute a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report
pursuant to Item 14(c) of Form 10-K.

|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                   
|------- | --- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 3   | .A          |  | Amended and Restated Certificate of Incorporation
    as filed with the Delaware Secretary of State on May 23,
    2003 (Exhibit 3.1 to our Form S-4 filed on
    June 27, 2003, Registration No. 333-106586).                                                                                                                                    
|        | 3   | .B          |  | By-laws effective as of June 24, 2002
    (Exhibit 3.2 to our Form S-4 filed on June 27,
    2003, Registration No. 333-106586).                                                                                                                                                                                                                  
|        | 4   | .A          |  | Indenture dated as of May 23, 2003 by and
    between El Paso Production Holding Company, the Subsidiary
    Guarantors named therein and Wilmington Trust Company, as
    Trustee (Exhibit 4.1 to our Form S-4 filed on
    June 27, 2003, Registration No. 333-106586).                                                                         
|        | 4   | .A.1        |  | First Supplemental Indenture dated
    January 31, 2004 among El Paso Production Holding
    Company, the Subsidiary Guarantors named therein and Wilmington
    Trust Company, as Trustee (Exhibit 4.A.1 to our 2003
    Form 10-K).                                                                                                             
|        | 4   | .A.2        |  | Consent by the Holders (as defined therein)
    effective July 26, 2004 Relating to a Proposed Waiver under
    the Indenture, as Supplemented, Governing El Paso
    Production Holding Companys $1,200,000,000 Aggregate
    Principal Amount of Issued and Outstanding 7 3/4% Senior
    Notes due 2013 (Exhibit 4.A.2 to our 2003 Form 10-K).
|        | 4   | .A.3        |  | Second Supplemental Indenture dated July 26,
    2004 among El Paso Production Holding Company, the Subsidiary
    Guarantors named therein and Wilmington Trust Company, as
    Trustee (Exhibit 4.A.3 to our 2003 Form 10-K).                                                                                                                   
|        | 10  | .A          |  | ISDA Master Agreement, dated as of
    January 1, 2001, between El Paso Merchant Energy, L.P.
    and El Paso Production Company (Exhibit 10.1 to our
    Form S-4 filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                                      
|        | 10  | .B          |  | Services Agreement, dated as of May 23,
    2003, between El Paso Energy Service Company and
    El Paso Production Holding Company (Exhibit 10.2 to
    our Form S-4 filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                                   
|        | 10  | .C          |  | Services Agreement dated as of May 23, 2003,
    between El Paso Production Oil & Gas Company and
    El Paso Production Holding Company (Exhibit 10.3 to
    our Form S-4 filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                              
|        | +10 | .D          |  | El Paso Production Companies Long-Term
    Incentive Plan effective as of January 1, 2003
    (Exhibit 10.AA to El Pasos 2003 First Quarter
    Form 10-Q).                                                                                                                                                                                      
|        | +10 | .D.1        |  | Amendment No. 1 to the El Paso Production
    Companies Long-Term Incentive Plan effective as of June 6,
    2003 (Exhibit 10.13 to our Form S-4 filed on
    June 27, 2003, Registration No. 333-106586).                                                                                                                                        
|        | +10 | .D.2        |  | Amendment No. 2 to the El Paso
    Production Companies Long-Term Incentive Plan effective as of
    December 31, 2003 (Exhibit 10.D.2 to our 2003
    Form 10-K).                                                                                                                                                                                
|        | +10 | .E          |  | Termination of Employment Agreement between El
    Paso CGP Company and Rodney D. Erskine effective as of
    December 16, 2002 (Exhibit 10.17 to our Form S-4
    filed on June 27, 2003, Registration
    No. 333-106586).                                                                                                                      
|        | 10  | .F          |  | Federal and State Tax Reimbursement Agreement
    among El Paso Corporation and the Controlled Entities (named
    therein), effective as of May 22, 2003 (Exhibit 10.18
    to our Form S-4 filed on June 27, 2003,
    Registration No. 333-106586).                                                                                            
|        | 10  | .G          |  | El Paso Corporation and Consolidated Subsidiaries
    Accounting Policy for the Accrual of U.S. Federal Income
    Taxes, effective as of January 1, 2002 (Exhibit 10.19
    to our Form S-4 filed on June 27, 2003, Registration
    No. 333-106586).                                                                                            



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##### Table of Contents



|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | --- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 10  | .H          |  | Intercompany State Income Tax Allocation and
    Payments Policy, effective for tax years beginning after
    January 29, 2001 (Exhibit 10.20 to our Form S-4
    filed on June 27, 2003, Registration No. 333-106586).                                                                                                                                                                                                                                                       
|        | 10  | .I          |  | Purchase and Sale Agreement (Red River) by and
    among El Paso Production Company, El Paso Production
    GOM Inc. and Lehman Commercial Paper Inc., dated October 3,
    2003 (Exhibit 10.21 to Amendment No. 2 to our
    Form S-4 filed on November 24, 2003, Registration
    No. 333-106586).                                                                                                                                                                          
|        | 10  | .J          |  | First Amendment to Purchase and Sale Agreement by
    and among El Paso Production Company, El Paso
    Production GOM Inc. and Lehman Commercial Paper Inc., dated
    October 6, 2003 (Exhibit 10.22 to Amendment No. 2
    to our Form S-4 filed on November 24, 2003,
    Registration No. 333-106586).                                                                                                                                                                   
|        | 10  | .K          |  | Purchase and Sale Agreement (Red River) by and
    among El Paso Production Company, El Paso Production
    GOM Inc. and Ramshorn Investments, Inc., dated October 8,
    2003 (Exhibit 10.23 to Amendment No. 2 to our
    Form S-4 filed on November 24, 2003, Registration
    No. 333-106586).                                                                                                                                                                            
|        | 10  | .L          |  | Purchase Agreement dated as of May 20, 2003,
    between El Paso Production Holding Company, the Subsidiary
    Guarantors named therein and Credit Suisse First Boston LLC,
    Citigroup Global Markets Inc., Banc of America Securities LLC,
    Deutsche Bank Securities Inc., Lehman Brothers Inc. and Scotia
    Capital (USA) Inc., (collectively, the Initial
    Purchasers) (Exhibit 1.1 to our Form S-4 filed
    on June 27, 2003, Registration No. 333-106586).
|        | 21  |             |  | Omitted pursuant to the reduced disclosure format
    permitted by General Instruction I to Form 10-K.                                                                                                                                                                                                                                                                                                                                                                        
|        | *31 | .A          |  | Certification of Chief Executive Officer pursuant
    to sec. 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                          
|        | *31 | .B          |  | Certification of Chief Financial Officer pursuant
    to sec. 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                          
|        | *32 | .A          |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. sec. 1350 as adopted pursuant to
    sec. 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                           
|        | *32 | .B          |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. sec. 1350 as adopted pursuant to
    sec. 906 of the Sarbanes-Oxley Act of 2002.