##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number 333-106586
 El Paso Exploration & Production Company
  Delaware
    
    76-0659544(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)El Paso Building
    
    770021001 Louisiana Street
    
    (Zip Code)Houston, Texas
(Address of Principal Executive Offices)
 Telephone Number: (713) 420-2600
Internet Website: www.elpaso.com
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
 o þ
 o þ
 þ o
 þ
  o o þ
 o þ
 State the aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant:
 Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
  EL PASO EXPLORATION & PRODUCTION 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 EXPLORATION & PRODUCTION COMPANY
TABLE OF CONTENTS
 Caption
    
    PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    9Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
    
    
    9Item 1B. Unresolved Staff Comments
    
    
    16Item 2. Properties
    
    
    16Item 3. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    *PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    17Item 6. Selected Financial Data
    
    
    *Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 8. Financial Statements and Supplementary Data
    
    
    26Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    60Item 9A. Controls and Procedures
    
    
    60Item 9B. Other Information
    
    
    61PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    *Item 11. Executive Compensation
    
    
    *Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    *Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    *Item 14. Principal Accountant Fees and Services
    
    
    61PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    61Signatures
    
    
    63Sixth Supplemental IndentureSeventh Supplemental IndentureSecond Amendment Amended and Restated Credit AgreementConsent of Ryder ScottCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906Ryder Scott Reserve ReportRyder Scott Reserve Report
  
 *
    
    We have not included a response to this item in this document since no response is required
pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.  /d
    
    =
    
    per day
    
    Mcfe
    
    =
    
    thousand cubic feet of
natural gas equivalentsBbl
    
    =
    
    Barrels
    
    MMBtu
    
    =
    
    million British thermal unitsBBtu
    
    =
    
    billion British thermal units
    
    MMcf
    
    =
    
    million cubic feetBcf
    
    =
    
    billion cubic feet
    
    MMcfe
    
    =
    
    million cubic feet of natural
gas equivalentsBcfe
    
    =
    
    billion cubic feet of natural gas equivalents
    
    NGL
    
    =
    
    natural gas liquidsBlock
    
    =
    
    nine square miles of offshore properties
    
    TBtu
    
    =
    
    trillion British thermal unitsMBbls
    
    =
    
    thousand barrels
    
    Tcfe
    
    =
    
    trillion cubic feet of
natural gas equivalentsMcf
    
    =
    
    thousand cubic feet
   i




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##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
 General
   United States
 Onshore
 2006AverageCapital
    
    ProductionRegion
    
    Description
    
    Net Acres
    
    Investment
    
    (MMcfe/d)East Texas / north 
Louisiana
(Arklatex)
    
    Concentrated land
position primarily
focused on tight
gas sands
production in the
Travis Peak/Hosston
and Cotton Valley
formations.
    
    
    104,000
    
    
    $203 million
    
    
    122Black Warrior Basin
    
    Established shallow
coal bed methane
producing areas of
northwestern
Alabama. We have
high average
working interests
in our operated
properties in
addition to an
average 50 percent
working interest
covering
approximately
46,000 net acres
operated by Black
Warrior Methane,
which produces from
the Brookwood
Field.
    
    
    172,000
    
    
    $49 million
    
    
    64Mid-Continent
    
    Primarily in
Oklahoma with a
focus on
development
projects in the
Arkoma Basin where
we utilize
horizontal drilling
in the Hart shorne
Coals area, West
Verdon field, an
oil producing
waterflood project,
and shallow natural
gas production in
the Hugoton field.
    
    
    319,000
    
    
    $56 million
    
    
    28
 1




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##### Table of Contents



2006AverageCapital
    
    ProductionRegion
    
    Description
    
    Net Acres
    
    Investment
    
    (MMcfe/d)Rocky Mountain
(Rockies)
    
    Primarily in
Wyoming and Utah
with a focus in the
Powder River and
Uintah basins,
consisting
predominantly of
operated oil fields
utilizing both
primary and
secondary recovery
methods combined
with non-operated
coal bed methane
fields. We also
operate the
Altamont and
Bluebell processing
plants and related
gathering systems
in Utah.
    
    
    364,000
    
    
    $120 million
    
    
    55Raton Basin
    
    Primarily focused
on coal bed methane
production in
northern New Mexico
and southern
Colorado, where we
own the minerals
and have a 100
percent working
interest in the
Vermejo Park Ranch.
    
    
    605,000
    
    
    $72 million
    
    
    76
  Texas Gulf Coast
 2006AverageCapital
    
    ProductionRegion
    
    Description
    
    Net Acres
    
    Investment
    
    (MMcfe/d)Vicksburg/Frio 
Trends
    
    Includes
concentrated and
contiguous assets
located in south
Texas, including
the Jeffress and
Monte Christo
fields primarily in
Hidalgo county in
which we have an
average 90 percent
working interest.
    
    
    81,000
    
    
    $111 million
    
    
    123Upper Gulf Coast 
Wilcox
    
    Located onshore
Texas Gulf Coast
including the
Renger, Dry Hollow
and Speaks fields
in Lavaca County.
Average well depth
is between 13,000
to 18,000 feet.
    
    
    31,000
    
    
    $60 million
    
    
    32South Texas Wilcox
    
    Includes the Bob
West and Roleta
fields in Zapata
County where we
completed the
acquisition
discussed below in
January 2007.
    
    
    25,000
    
    
    $29 million
    
    
    27
  Gulf of Mexico Shelf and south Louisiana
 2




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##### Table of Contents



2006Capital
    
    AverageInvestment
    
    ProductionRegion
    
    Description
    
    Net Acres
    
    (in millions)
    
    (MMcfe/d)Gulf of Mexico Shelf
    
    Primarily deep
shelf drilling
interests in 173
Blocks south of the
Louisiana, Texas
and Alabama
shorelines focused
on deep (greater
than 12,000 feet)
gas reserves in
relatively shallow
waters depths (less
than 400 feet).
    
    
    688,000
    
    
    $246 million
    
    
    163South Louisiana
    
    Primarily in
Vermillion Parish
and associated bays
and waters in
southwestern
Louisiana covered
by the Catapult 3D
seismic project.
We have internally
processed 2,600
square miles of
contiguous 3D
seismic data in
this project.
    
    
    34,000
    
    
    $64 million
    
    
    11
 Unconsolidated Investment in Four Star.
 International
 Brazil.
 Egypt.
 3




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##### Table of Contents



Natural Gas and Oil Properties
 Natural Gas, Oil and Condensate and NGL Reserves and Production
 
 Net Proved ReservesNatural
    
    Oil/
    
    
    
    
    
    
    
    
    
    
    
    
    
    2006Gas
    
    Condensate
    
    NGL
    
    Total
    
    
    
    
    
    Production(MMcf)
    
    (MBbls)
    
    (MBbls)
    
    (MMcfe)
    
    (Percent)
    
    (MMcfe)Reserves and Production by RegionUnited StatesOnshore
    
    
    1,308,742
    
    
    
    28,947
    
    
    
    1,060
    
    
    
    1,488,789
    
    
    
    62
    %
    
    
    126,093Texas Gulf Coast
    
    
    344,596
    
    
    
    2,265
    
    
    
    8,004
    
    
    
    406,209
    
    
    
    17
    %
    
    
    68,269Gulf of Mexico Shelf and south
Louisiana
    
    
    209,897
    
    
    
    9,467
    
    
    
    948
    
    
    
    272,384
    
    
    
    11
    %
    
    
    63,537Total United States
    
    
    1,863,235
    
    
    
    40,679
    
    
    
    10,012
    
    
    
    2,167,382
    
    
    
    90
    %
    
    
    257,899Brazil
    
    
    56,383
    
    
    
    31,847
    
    
    
    
    
    
    
    247,466
    
    
    
    10
    %
    
    
    8,619Total
    
    
    1,919,618
    
    
    
    72,526
    
    
    
    10,012
    
    
    
    2,414,848
    
    
    
    100
    %
    
    
    266,518Unconsolidated investment in
Four Star
    
    
    167,046
    
    
    
    2,947
    
    
    
    6,209
    
    
    
    221,984
    
    
    
    100
    %
    
    
    24,663Reserves by ClassificationUnited StatesProducing
    
    
    1,251,019
    
    
    
    22,415
    
    
    
    7,402
    
    
    
    1,429,923
    
    
    
    66
    %Non-Producing
    
    
    217,881
    
    
    
    7,201
    
    
    
    1,263
    
    
    
    268,665
    
    
    
    12
    %Undeveloped
    
    
    394,335
    
    
    
    11,063
    
    
    
    1,347
    
    
    
    468,794
    
    
    
    22
    %Total proved
    
    
    1,863,235
    
    
    
    40,679
    
    
    
    10,012
    
    
    
    2,167,382
    
    
    
    100
    %BrazilProducing
    
    
    19,931
    
    
    
    489
    
    
    
    
    
    
    
    22,864
    
    
    
    9
    %Non-Producing
    
    
    3,405
    
    
    
    335
    
    
    
    
    
    
    
    5,418
    
    
    
    2
    %Undeveloped
    
    
    33,047
    
    
    
    31,023
    
    
    
    
    
    
    
    219,184
    
    
    
    89
    %Total proved
    
    
    56,383
    
    
    
    31,847
    
    
    
    
    
    
    
    247,466
    
    
    
    100
    %WorldwideProducing
    
    
    1,270,950
    
    
    
    22,904
    
    
    
    7,402
    
    
    
    1,452,787
    
    
    
    60
    %Non-Producing
    
    
    221,286
    
    
    
    7,536
    
    
    
    1,263
    
    
    
    274,083
    
    
    
    11
    %Undeveloped
    
    
    427,382
    
    
    
    42,086
    
    
    
    1,347
    
    
    
    687,978
    
    
    
    29
    %Total proved
    
    
    1,919,618
    
    
    
    72,526
    
    
    
    10,012
    
    
    
    2,414,848
    
    
    
    100
    %Unconsolidated investment in
Four StarProducing
    
    
    136,489
    
    
    
    2,874
    
    
    
    5,068
    
    
    
    184,140
    
    
    
    83
    %Non-Producing
    
    
    2,733
    
    
    
    
    
    
    
    26
    
    
    
    2,892
    
    
    
    1
    %Undeveloped
    
    
    27,824
    
    
    
    73
    
    
    
    1,115
    
    
    
    34,952
    
    
    
    16
    %Total Four Star
    
    
    167,046
    
    
    
    2,947
    
    
    
    6,209
    
    
    
    221,984
    
    
    
    100
    %
   4




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##### Table of Contents



Acreage and Wells
  Acreage
 Developed
    
    
    Undeveloped
    
    
    TotalGross(1)
    
    
    Net(2)
    
    
    Gross(1)
    
    
    Net(2)
    
    
    Gross(1)
    
    
    Net(2)United StatesOnshore
    
    
    874,525
    
    
    
    556,828
    
    
    
    1,612,025
    
    
    
    1,135,010
    
    
    
    2,486,550
    
    
    
    1,691,838Texas Gulf Coast
    
    
    93,573
    
    
    
    73,373
    
    
    
    91,230
    
    
    
    63,452
    
    
    
    184,803
    
    
    
    136,825Gulf of Mexico
Shelf and south
Louisiana
    
    
    508,716
    
    
    
    359,064
    
    
    
    401,075
    
    
    
    363,046
    
    
    
    909,791
    
    
    
    722,110Total
    
    
    1,476,814
    
    
    
    989,265
    
    
    
    2,104,330
    
    
    
    1,561,508
    
    
    
    3,581,144
    
    
    
    2,550,773Brazil
    
    
    49,262
    
    
    
    17,242
    
    
    
    1,158,643
    
    
    
    343,563
    
    
    
    1,207,905
    
    
    
    360,805Egypt
    
    
    
    
    
    
    
    
    
    
    64,740
    
    
    
    12,948
    
    
    
    64,740
    
    
    
    12,948Worldwide Total
    
    
    1,526,076
    
    
    
    1,006,507
    
    
    
    3,327,713
    
    
    
    1,918,019
    
    
    
    4,853,789
    
    
    
    2,924,526
  5




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##### Table of Contents



Productive Wells
 WellsBeing Drilled atNatural Gas
    
    Oil
    
    Total
    
    December 31, 2006Gross(1)
    
    Net(2)
    
    Gross(1)
    
    Net(2)
    
    Gross(1)
    
    Net(2)(3)
    
    Gross(1)
    
    Net(2)United StatesOnshore
    
    
    3,880
    
    
    
    2,954
    
    
    
    801
    
    
    
    548
    
    
    
    4,681
    
    
    
    3,502
    
    
    
    52
    
    
    
    38Texas Gulf Coast
    
    
    843
    
    
    
    703
    
    
    
    
    
    
    
    
    
    
    
    843
    
    
    
    703
    
    
    
    6
    
    
    
    5Gulf of Mexico Shelf and south
Louisiana
    
    
    187
    
    
    
    122
    
    
    
    58
    
    
    
    40
    
    
    
    245
    
    
    
    162
    
    
    
    6
    
    
    
    4Total United States
    
    
    4,910
    
    
    
    3,779
    
    
    
    859
    
    
    
    588
    
    
    
    5,769
    
    
    
    4,367
    
    
    
    64
    
    
    
    47Brazil
    
    
    4
    
    
    
    1
    
    
    
    6
    
    
    
    2
    
    
    
    10
    
    
    
    3
    
    
    
    
    
    
    
    Worldwide Total
    
    
    4,914
    
    
    
    3,780
    
    
    
    865
    
    
    
    590
    
    
    
    5,779
    
    
    
    4,370
    
    
    
    64
    
    
    
    47
 Wells Drilled
 Net Exploratory(2)
    
    Net Development(2)2006
    
    2005
    
    2004
    
    2006
    
    2005
    
    2004United StatesProductive
    
    
    106
    
    
    
    86
    
    
    
    13
    
    
    
    319
    
    
    
    279
    
    
    
    298Dry
    
    
    6
    
    
    
    2
    
    
    
    10
    
    
    
    2
    
    
    
    4
    
    
    
    3Total
    
    
    112
    
    
    
    88
    
    
    
    23
    
    
    
    321
    
    
    
    283
    
    
    
    301BrazilProductive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dry
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    WorldwideProductive
    
    
    106
    
    
    
    86
    
    
    
    13
    
    
    
    319
    
    
    
    279
    
    
    
    298Dry
    
    
    6
    
    
    
    2
    
    
    
    11
    
    
    
    2
    
    
    
    4
    
    
    
    3Total
    
    
    112
    
    
    
    88
    
    
    
    24
    
    
    
    321
    
    
    
    283
    
    
    
    301
 
 (1)
    
    Gross interest reflects the total acreage or wells we participated in,
regardless of our ownership interest in the acreage or wells.(2)
    
    Net interest is the aggregate of the fractional working interests that we have
in the gross acreage, gross wells or gross wells drilled.(3)
    
    At December 31, 2006, we operated 3,957 of the 4,370 net productive
wells.  6




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##### Table of Contents



Net Production, Sales Prices, Transportation and Production Costs
  2006
    
    
    2005
    
    
    2004Consolidated Volumes, Prices, and Costs per Unit:Net Production VolumesUnited StatesNatural gas (MMcf)
    
    
    213,262
    
    
    
    206,714
    
    
    
    238,009Oil, condensate and NGL (MBbls)
    
    
    7,439
    
    
    
    7,516
    
    
    
    8,498Total (MMcfe)
    
    
    257,899
    
    
    
    251,807
    
    
    
    288,994Brazil(1)Natural gas (MMcf)
    
    
    7,140
    
    
    
    15,578
    
    
    
    6,848Oil, condensate and NGL (MBbls)
    
    
    247
    
    
    
    620
    
    
    
    320Total (MMcfe)
    
    
    8,619
    
    
    
    19,300
    
    
    
    8,772WorldwideNatural gas (MMcf)
    
    
    220,402
    
    
    
    222,292
    
    
    
    244,857Oil, condensate and NGL (MBbls)
    
    
    7,686
    
    
    
    8,136
    
    
    
    8,818Total (MMcfe)
    
    
    266,518
    
    
    
    271,107
    
    
    
    297,766Total (MMcfe/d)
    
    
    730
    
    
    
    743
    
    
    
    814Natural Gas Average Realized Sales Price ($/Mcf)United StatesExcluding hedges
    
    $
    6.77
    
    
    $
    7.92
    
    
    $
    6.02Including hedges
    
    $
    5.40
    
    
    $
    5.33
    
    
    $
    5.09BrazilExcluding hedges
    
    $
    2.61
    
    
    $
    2.33
    
    
    $
    2.01Including hedges
    
    $
    2.61
    
    
    $
    2.33
    
    
    $
    2.01WorldwideExcluding hedges
    
    $
    6.64
    
    
    $
    7.53
    
    
    $
    5.90Including hedges
    
    $
    5.31
    
    
    $
    5.12
    
    
    $
    5.00Oil, Condensate, and NGL Average Realized Sales Price ($/Bbl)United StatesExcluding hedges
    
    $
    55.95
    
    
    $
    45.86
    
    
    $
    34.44Including hedges
    
    $
    55.95
    
    
    $
    45.86
    
    
    $
    34.44BrazilExcluding hedges
    
    $
    64.02
    
    
    $
    53.42
    
    
    $
    43.01Including hedges
    
    $
    54.48
    
    
    $
    42.42
    
    
    $
    39.19WorldwideExcluding hedges
    
    $
    56.21
    
    
    $
    46.43
    
    
    $
    34.75Including hedges
    
    $
    55.90
    
    
    $
    45.60
    
    
    $
    34.61Average Transportation CostUnited StatesNatural gas ($/Mcf)
    
    $
    0.24
    
    
    $
    0.20
    
    
    $
    0.17Oil, condensate and NGL ($/Bbl)
    
    $
    0.85
    
    
    $
    0.69
    
    
    $
    1.16WorldwideNatural gas ($/Mcf)
    
    $
    0.23
    
    
    $
    0.18
    
    
    $
    0.17Oil, condensate and NGL ($/Bbl)
    
    $
    0.82
    
    
    $
    0.63
    
    
    $
    1.12Average Production Cost($/Mcfe)(2)United StatesAverage lease operating cost
    
    $
    0.97
    
    
    $
    0.73
    
    
    $
    0.62Average production taxes
    
    
    0.28
    
    
    
    0.27
    
    
    
    0.11Total production cost
    
    $
    1.25
    
    
    $
    1.00
    
    
    $
    0.73BrazilAverage lease operating cost
    
    $
    0.28
    
    
    $
    0.42
    
    
    $
    Average production taxes
    
    
    0.53
    
    
    
    
    
    
    
    Total production cost
    
    $
    0.81
    
    
    $
    0.42
    
    
    $
    WorldwideAverage lease operating cost
    
    $
    0.95
    
    
    $
    0.72
    
    
    $
    0.60Average production taxes
    
    
    0.29
    
    
    
    0.24
    
    
    
    0.11Total production cost
    
    $
    1.24
    
    
    $
    0.96
    
    
    $
    0.71Unconsolidated affiliate volumes (Four Star)(3)Natural gas (MMcf)
    
    
    18,140
    
    
    
    6,689Oil, condensate and NGL (MBbls)
    
    
    1,087
    
    
    
    359Total equivalent volumes
MMcfe
    
    
    24,663
    
    
    
    8,844MMcfe/d
    
    
    68
    
    
    
    24
 
 (1)
    
    Production volumes in Brazil decreased due to a contractual reduction of our
ownership interest in the Pescada-Arabaiana Field in 2006.(2)
    
    Production costs include lease operating costs and production related taxes
(including ad valorem and severance taxes).(3)
    
    Includes our proportionate share of volumes in Four Star which was acquired in the
third quarter of 2005. 7




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##### Table of Contents



Acquisition, Development and Exploration Expenditures
  2006
    
    
    2005
    
    
    2004(In millions)United StatesAcquisition Costs:Proved
    
    $
    2
    
    
    $
    643
    
    
    $
    33Unproved
    
    
    34
    
    
    
    143
    
    
    
    32Development Costs
    
    
    738
    
    
    
    503
    
    
    
    395Exploration Costs:Delay rentals
    
    
    6
    
    
    
    3
    
    
    
    7Seismic acquisition and reprocessing
    
    
    23
    
    
    
    7
    
    
    
    29Drilling
    
    
    294
    
    
    
    133
    
    
    
    149Asset Retirement Obligations
    
    
    3
    
    
    
    1
    
    
    
    30Total full cost pool expenditures
    
    
    1,100
    
    
    
    1,433
    
    
    
    675Non-full cost pool expenditures
    
    
    8
    
    
    
    22
    
    
    
    11Total cost incurred(1)
    
    $
    1,108
    
    
    $
    1,455
    
    
    $
    686Acquisition of unconsolidated investment in Four Star(1)
    
    $
    
    
    
    $
    769
    
    
    $
    Brazil and EgyptAcquisition Costs:Proved
    
    $
    2
    
    
    $
    8
    
    
    $
    69Unproved
    
    
    1
    
    
    
    1
    
    
    
    3Development Costs
    
    
    40
    
    
    
    6
    
    
    
    1Exploration Costs:Seismic acquisition and reprocessing
    
    
    7
    
    
    
    7
    
    
    
    15Drilling
    
    
    46
    
    
    
    8
    
    
    
    10Asset Retirement Obligations
    
    
    
    
    
    
    
    
    
    
    3Total full cost pool expenditures
    
    
    96
    
    
    
    30
    
    
    
    101Non-full cost pool expenditures
    
    
    
    
    
    
    
    
    
    
    3Total cost incurred
    
    $
    96
    
    
    $
    30
    
    
    $
    104WorldwideAcquisition Costs:Proved
    
    $
    4
    
    
    $
    651
    
    
    $
    102Unproved
    
    
    35
    
    
    
    144
    
    
    
    35Development Costs
    
    
    778
    
    
    
    509
    
    
    
    396Exploration Costs:Delay rentals
    
    
    6
    
    
    
    3
    
    
    
    7Seismic acquisition and reprocessing
    
    
    30
    
    
    
    14
    
    
    
    44Drilling
    
    
    340
    
    
    
    141
    
    
    
    159Asset Retirement Obligations
    
    
    3
    
    
    
    1
    
    
    
    33Total full cost pool expenditures
    
    
    1,196
    
    
    
    1,463
    
    
    
    776Non-full cost pool expenditures
    
    
    8
    
    
    
    22
    
    
    
    14Total cost incurred(1)
    
    $
    1,204
    
    
    $
    1,485
    
    
    $
    790Acquisition of unconsolidated investment in Four Star(1)
    
    $
    
    
    
    $
    769
    
    
    $
    
 
 (1)
    
    In 2005, amount includes $179 million of deferred income tax adjustments
related to the acquisition of full-cost pool properties and $217 million related to the
acquisition of our unconsolidated investment in Four Star.  Markets and Competition
  8




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##### Table of Contents



Regulatory and Operating Environment
   Environmental
  Employees
  
 ITEM 1A. RISK FACTORS
 
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
   9




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##### Table of Contents



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.
  
    
    the level of consumer demand for, and the supply of, natural gas and oil;
    
    the availability and reliability of commodity processing, gathering and pipeline capacity;
    
    the level of imports of, and the price of, foreign natural gas, LNG, 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;
    
    weather conditions, such as unusually warm or cold weather and hurricanes in the Gulf of Mexico;
    
    market uncertainty;
    
    political conditions or hostilities in natural gas and oil producing regions;
    
    worldwide economic conditions; and
    
    changes in demand for the use of natural gas and oil because of changes in weather
patterns and market concerns about global warming or changes in governmental policies and
regulations due to climate change initiatives.
  Our use of hedging arrangements may adversely affect our future results of operations or
liquidity.
  
    
    expected production is less than the amount hedged; or
    
    the counterparty to the hedging contract defaults on its contractual obligations.
   10




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##### Table of Contents



Estimating our reserves, production and future net cash flow is inherently imprecise.
    The success of our business depends upon our ability to replace reserves that we produce.
  The success of our business is dependent, in part, on factors that are beyond our control.
  
    
    the results of future drilling activity;
    
    the availability and significant increases in future costs of rigs, equipment and labor
to support drilling activity and production operations;
    
    our ability to identify and precisely locate prospective geologic structures and to drill
and successfully complete wells in those structures in a timely manner;
    
    our ability to expand our leased land positions in desirable areas, which often are
subject to intensely competitive conditions from other companies;
    
    adverse changes in future tax policies, rates and drilling or production incentives by
state, federal or foreign governments;
 11




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##### Table of Contents




    
    increased federal or state regulations, including environmental regulations, that limit
or restrict the ability to drill natural gas or oil wells, reduce operational flexibility,
or increase capital and operating costs;
    
    governmental action affecting the profitability of our exploration and production
activities, such as increased royalty rates payable on oil and gas leases, the imposition of
additional taxes on such activities or the modification or withdrawal of tax incentives in
favor of exploration and development activity;
    
    our lack of control over jointly owned properties and properties operated by others;
    
    declines in production volumes, including those from the Gulf of Mexico; and
    
    continued access to sufficient capital to fund drilling programs to develop and replace a
reserve base with rapid depletion characteristics.
 We face competition from third parties to acquire and develop natural gas and oil reserves.
  Our natural gas and oil drilling and producing operations involve many risks and may not be
profitable.
    Our drilling operations may be delayed or canceled as a result of factors beyond our control,
resulting in significant costs to us.
  
    
    unexpected drilling conditions;
    
    title problems;
    
    pressure or irregularities in formations;
    
    equipment failures or accidents;
 12




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##### Table of Contents




    
    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.
  We are vulnerable to risks associated with operating in the Gulf of Mexico.
  
    
    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.
  Our foreign operations and investments involve special risks.
  
    
    loss of revenue, property and equipment as a result of hazards such as wars and
insurrection;
    
    the effects of currency fluctuations and exchange controls, such as devaluation of
foreign currencies and other economic problems;
    
    changes in laws, regulations and policies of foreign governments, including those
associated with changes in the governing parties, nationalization and expropriation; and
    
    protracted delays in securing government consents, permits, licenses or other regulatory
approvals necessary to conduct our operations.
 Our growth may be dependent upon successful acquisitions which are subject to many uncertainties
and could subject us to significant unknown liabilities.
  13




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##### Table of Contents



Our business requires the retention and recruitment of a skilled workforce and the loss of
employees could result in the failure to implement our business plans.
  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.
  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.
   
    
    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.
  14




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##### Table of Contents



Environmental compliance and remediation costs and the costs of environmental liabilities could
exceed our estimates.
  
    
    estimating pollution control and clean up costs, including sites for which only
preliminary site investigation or assessments have been completed;
    
    discovering new sites or additional information at existing sites;
    
    quantifying liability under environmental laws that impose joint and several liability on
all potentially responsible parties (PRPs); and
    
    evaluating and understanding environmental laws and regulations, including their interpretation and
enforcement.
  Risks Related to Our Affiliation with El Paso
  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.
  
    
    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.
  15




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##### Table of Contents



ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  16




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##### Table of Contents



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  
 ITEM 6. SELECTED FINANCIAL DATA
  
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    Overview and Strategy
   
    
    Re-shaping our portfolio to provide greater optionality for achieving our long term performance goals;
    
    Leveraging operational expertise we already possess in key operating areas, geologies or techniques;
    
    Balancing our exposure to regions, basins and commodities;
    
    Achieving risk-adjusted returns competitive with those available within our existing inventory; and
    
    Increasing our reserves more rapidly by supplementing our current drilling inventory.
 17




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##### Table of Contents



Significant Operational Factors Affecting the Year Ended December 31, 2006
 Production.
 2006
    
    2005
    
    2004United StatesOnshore
    
    
    345
    
    
    
    300
    
    
    
    231Texas Gulf Coast (1)
    
    
    187
    
    
    
    211
    
    
    
    283Gulf of Mexico Shelf / south Louisiana
    
    
    174
    
    
    
    179
    
    
    
    276706
    
    
    
    690
    
    
    
    790InternationalBrazil(2)
    
    
    24
    
    
    
    53
    
    
    
    24Total Consolidated
    
    
    730
    
    
    
    743
    
    
    
    814Four Star
(3)
    
    
    68
    
    
    
    24
    
    
    
    
 
 (1)
    
    During 2006, we completed the sale of certain non-strategic south Texas
properties with production of five MMcfe/d for $80 million.In January 2007, we acquired certain properties with net production of
approximately 12 MMcfe/d on the acquisition date.(2)
    
    Production volumes decreased due to contractual reduction of
our ownership interest in the Pescada-Arabaiana Field in 2006.(3)
    
    Amounts represent our proportionate share of the production
of Four Star which was acquired in the third quarter of 2005.  2006 Drilling Results
 Onshore.
 Texas Gulf Coast.
 Gulf of Mexico Shelf and south Louisiana.
 Brazil.
 Egypt.
 18




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##### Table of Contents



Cash Operating Costs
 Reserve Replacement Costs / Reserve Replacement Ratio.
 Reserve replacement ratio
    
    Sum of reserve additions (1)Actual production for the corresponding periodReserve replacement cost / Mcfe
    
    Total oil and gas capital costs (2)Sum of reserve additions (1)
 
 (1)
    
    Reserve additions include proved reserves and reflect reserve revisions,
extensions, discoveries, and other additions and acquisitions and do not include
unproved reserve quantities or proved reserve additions attributable to investments
accounted for using the equity method. Amounts are derived directly from the proved
reserves table presented in Item 8, Financial Statements and Data, Supplementary Oil
and Gas Operations.(2)
    
    Total oil and gas capital costs include the costs of development, exploration, and
property acquisition activities conducted to add reserves and exclude asset retirement
obligations. Amounts are derived directly from the cost incurred table presented in
Item 8, Financial Statements and Data, Supplementary Oil and Gas Operations.    2006
    
    2005
    
    2004$/ McfeReserve replacement costs, including acquisitions
    
    
    4.17
    
    
    
    2.75
    
    
    
    21.85Reserve replacement costs, excluding acquisitions
    
    
    4.19
    
    
    
    3.19
    
    
    NA(1)% of ProductionReserve replacement ratio, including acquisitions
    
    
    108
    
    
    
    195
    
    
    
    11Reserve replacement ratio, excluding acquisitions
    
    
    107
    
    
    
    93
    
    
    
    (10
    )
 
 (1)
    
    Not meaningful in 2004 due to downward revisions in previous estimate of
reserves.  19




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##### Table of Contents



Capital Expenditures
 2006
    
    
    2005
    
    
    2004Total oil and gas capital(1)
    
    $
    1,193
    
    
    $
    1,462
    
    
    $
    743Less: acquisition capital
    
    
    (4
    )
    
    
    (651
    )
    
    
    (102
    )Capital expenditures, excluding acquisitions
    
    $
    1,189
    
    
    $
    811
    
    
    $
    641
 
 (1)
    
    Total oil and gas capital costs include the costs of development,
exploration and property acquisition activities conducted to add reserves and exclude
asset retirement obligations. Amounts are derived directly from the cost incurred
table presented in Item 8, Financial Statements and Supplementary Data, Supplemental
Natural Gas and Oil Operations. Outlook for 2007
  
    
    Average daily production volumes for the year of approximately 740 MMcfe/d to 795
MMcfe/d, which excludes approximately 60 to 65 MMcfe/d from our equity investment in Four
Star. Our goal is to achieve a three to eight percent average annual production growth over
the next several years.
    
    Capital expenditures, excluding acquisitions, between $1.4 billion and $1.5 billion,
which represent a 20 percent increase over 2006. While 85% of our planned 2007
capital program is allocated to our domestic program, we plan to
spend $215 million in international capital in 2007, primarily in our
Brazil exploration and development program. In January 2007, we acquired
producing properties and undeveloped acreage in Zapata County, Texas, for $249 million,
which complement our existing Texas Gulf Coast operations and provide a re-entry into the
Lobo trend. The assets acquired had net production of approximately 12 MMcfe/d on the
acquisition date. Estimated proved reserves were approximately 84 Bcfe, of which
approximately 73 percent was undeveloped.
    
    Average cash operating costs, which include production costs, general and administrative
expenses and other expenses, of approximately $1.68/Mcfe to $2.00/Mcfe for the year; and
    
    Depreciation, depletion and amortization rate of between $2.60/Mcfe and $2.85/Mcfe in the
first quarter of 2007 compared with $2.68/Mcfe in the fourth quarter of 2006.
 Price Risk Management Activities
  Fixed Price
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BasisSwaps(1)
    
    Floors(1)
    
    Ceilings(1)
    
    Swaps(1)(2)Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    VolumeNatural Gas2007
    
    
    78
    
    
    $
    7.70
    
    
    
    55
    
    
    $
    8.00
    
    
    
    55
    
    
    $
    16.89
    
    
    
    1102008
    
    
    5
    
    
    $
    3.42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009
    
    
    5
    
    
    $
    3.56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2010-2012
    
    
    11
    
    
    $
    3.81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Oil2007
    
    
    192
    
    
    $
    35.15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 20




---



##### Table of Contents



(1)
    
    Volumes presented are TBtu for natural gas. Prices presented are per MMBtu of natural gas.(2)
    
    Our basis swaps effectively lock-in locational price differences on a portion of our
natural gas production in Texas and Oklahoma.   Results of Operations
 Overview
   2006
    
    
    2005(In millions)Operating revenues
    
    $
    1,618
    
    
    $
    1,543Operating expenses
    
    
    (1,255
    )
    
    
    (1,166
    )Operating income
    
    
    363
    
    
    
    377Other income, net
    
    
    15
    
    
    
    25EBIT
    
    
    378
    
    
    
    402Affiliated interest expense
    
    
    (3
    )
    
    
    (61
    )Interest expense
    
    
    (86
    )
    
    
    (83
    )Income taxes
    
    
    (93
    )
    
    
    (96
    )Net income
    
    $
    196
    
    
    $
    162
 Operating Results and Variance Analysis
  2006
    
    
    2005(In millions, exceptvolumes and prices)Operating revenues:Natural gas
    
    $
    1,170
    
    
    $
    1,138Oil, condensate and NGL
    
    
    430
    
    
    
    371Other
    
    
    18
    
    
    
    34Total operating revenues
    
    
    1,618
    
    
    
    1,543Operating expenses:Depreciation, depletion and amortization
    
    
    673
    
    
    
    643Production costs(1)
    
    
    331
    
    
    
    264
 21




---



##### Table of Contents



2006
    
    
    2005(In millions, exceptvolumes and prices)Cost of product and services
    
    
    87
    
    
    
    62General and administrative expenses
    
    
    156
    
    
    
    186Other
    
    
    8
    
    
    
    11Total operating expenses
    
    
    1,255
    
    
    
    1,166Operating income
    
    
    363
    
    
    
    377Other income, net(2)
    
    
    15
    
    
    
    25EBIT
    
    $
    378
    
    
    $
    402
 Percent2006
    
    
    2005
    
    
    VarianceConsolidated volumes, prices and costs per unit:Natural gasVolumes (MMcf)
    
    
    220,402
    
    
    
    222,292
    
    
    
    (1
    )%Prices ($/Mcf)(3)Average realized prices including hedges
    
    $
    5.31
    
    
    $
    5.12
    
    
    
    4
    %Average realized prices excluding hedges
    
    $
    6.64
    
    
    $
    7.53
    
    
    
    (12
    )%Average transportation costs ($/Mcf)
    
    $
    0.23
    
    
    $
    0.18
    
    
    
    28
    %Oil, condensate and NGLVolumes (MBbls)
    
    
    7,686
    
    
    
    8,136
    
    
    
    (6
    )%Prices ($/Bbl)(3)Average realized prices including hedges
    
    $
    55.90
    
    
    $
    45.60
    
    
    
    23
    %Average realized prices excluding hedges
    
    $
    56.21
    
    
    $
    46.43
    
    
    
    21
    %Average transportation costs ($/Bbl)
    
    $
    0.82
    
    
    $
    0.63
    
    
    
    30
    %Total equivalent volumesMmcfe
    
    
    266,518
    
    
    
    271,107
    
    
    
    (2
    )%MMcfe/d
    
    
    730
    
    
    
    743
    
    
    
    (2
    )%Production costs and other cash operating costs ($/Mcfe)Average lease operating costs
    
    $
    0.95
    
    
    $
    0.72
    
    
    
    32
    %Average production taxes
    
    
    0.29
    
    
    
    0.24
    
    
    
    21
    %Total production costs(1)
    
    
    1.24
    
    
    
    0.96
    
    
    
    29
    %Average general and administrative expenses
    
    
    0.59
    
    
    
    0.68
    
    
    
    (13
    )%Average taxes other than production and income
    
    
    0.03
    
    
    
    0.03
    
    
    
    
    %Total cash
operating costs(4)
    
    $
    1.86
    
    
    $
    1.67
    
    
    
    11
    %Unit of production depletion cost ($/Mcfe)
    
    $
    2.39
    
    
    $
    2.21
    
    
    
    8
    %Unconsolidated affiliate volumes (Four Star)(2)Natural Gas (MMcf)
    
    
    18,140
    
    
    
    6,689Oil, condensate and NGL (MBbls)
    
    
    1,087
    
    
    
    359Total equivalent volumesMmcfe
    
    
    24,663
    
    
    
    8,844MMcfe/d
    
    
    68
    
    
    
    24
 
 (1)
    
    Production costs include lease operating costs and production related taxes
(including ad valorem and severance taxes).(2)
    
    Includes equity earnings from our investment or proportionate share of volumes
in Four Star acquired in the third quarter
of 2005.(3)
    
    Prices are stated before transportation costs.(4)
    
    See further discussion on page 19. 
 22




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##### Table of Contents



Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
  VarianceOperating
    
    
    OperatingRevenue
    
    
    Expense
    
    
    Other
    
    
    EBITFavorable/(Unfavorable)(In millions)Natural Gas RevenueLower prices in 2006
    
    $
    (197
    )
    
    $
    
    
    
    $
    
    
    
    $
    (197
    )Impact of hedges
    
    
    243
    
    
    
    
    
    
    
    
    
    
    
    243Lower production volumes in 2006
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    (14
    )Oil, Condensate and NGL RevenueHigher realized prices in 2006
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75Impact of hedges
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Lower production volumes in 2006
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    (21
    )Depreciation, Depletion and Amortization ExpenseHigher depletion rate in 2006
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    (49
    )Lower production volumes in 2006
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Other
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Production CostsHigher lease operating costs in 2006
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (56
    )Higher production taxes in 2006
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )General and administrative expenses
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    30Earnings from unconsolidated affiliates(1)
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )OtherChange in
fair value of oil and basis swaps
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    (31
    )Processing plants
    
    
    3
    
    
    
    (14
    )
    
    
    
    
    
    
    (11
    )Other
    
    
    12
    
    
    
    (8
    )
    
    
    (1
    )
    
    
    3Total Variances
    
    $
    75
    
    
    $
    (89
    )
    
    $
    (10
    )
    
    $
    (24
    )
 
 (1)
    
    We acquired Four Star in August 2005. Operating Revenues.
  Depreciation, depletion, and amortization expense.
 Production costs.
 General and administrative expenses.
 Other.
 23




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##### Table of Contents



Affiliated Interest Expense
  Interest Expense
  Income Taxes
  Year Ended December 31,2006
    
    2005(In millions, except for rates)Income taxes
    
    $
    93
    
    
    $
    96Effective tax rate
    
    
    32
    %
    
    
    37
    %
  Commitments and Contingencies
  Liquidity
   24




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##### Table of Contents



New Accounting Pronouncements Issued But Not Yet Adopted
 New Accounting
Pronouncements Issued But Not Yet Adopted.
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Commodity Price Risk
   10 Percent Increase
    
    10 Percent DecreaseFair Value
    
    Fair Value
    
    (Decrease)
    
    Fair Value
    
    Increase(In millions)Impact of changes in commodity prices on derivative
commodity instrumentsDecember 31, 2006
    
    $
    35
    
    
    $
    (44
    )
    
    $
    (79
    )
    
    $
    118
    
    
    $
    83December 31, 2005
    
    $
    (747
    )
    
    $
    (850
    )
    
    $
    (103
    )
    
    $
    (641
    )
    
    $
    106
 Interest Rate Risk
  December 31, 2006
    
    December 31, 2005Expected Fiscal Year ofMaturity of Carrying AmountsFair
    
    Carrying
    
    Fair2010
    
    Thereafter
    
    Total
    
    Value
    
    Amounts
    
    Value(In millions)Long-term debt  7.75% fixed rate
    
    
    
    
    
    $
    1,200
    
    
    $
    1,200
    
    
    $
    1,256
    
    
    $
    1,200
    
    
    $
    1,257Long-term debt LIBOR + (1.25% to
1.875%)(1)
    
    $
    145
    
    
    
    
    
    
    $
    145
    
    
    $
    145
    
    
    $
    500
    
    
    $
    500
 
 (1)
    
    Interest rate varies depending on usage of our $500 million revolving credit
facility. 25




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Index to Financial Statements
  PageReports of Independent Registered Public Accounting Firms
    
    
    27Consolidated Statements of Income
    
    
    30Consolidated Balance Sheets
    
    
    31Consolidated Statements of Cash Flows
    
    
    32Consolidated Statements of Stockholders Equity
    
    
    33Consolidated Statements of Comprehensive Income
    
    
    33Notes to Consolidated Financial Statements
    
    
    341. Basis of Presentation and Summary of Significant Accounting Policies
    
    
    342. Acquisitions and Divestitures
    
    
    373. Income Taxes
    
    
    384. Financial Instruments and Price Risk Management Activities
    
    
    405. Property, Plant and Equipment
    
    
    416. Debt and Available Credit Facilities
    
    
    427. Commitments and Contingencies
    
    
    428. Retirement Benefits
    
    
    449. Investments in and Earnings from Unconsolidated Affiliates and Related Party Transactions

    
    4410. Consolidating Financial Statements

    
    46Supplemental Financial InformationSupplemental Selected Quarterly Financial Information (Unaudited)
    
    
    54Supplemental Natural Gas and Oil Operations (Unaudited)

    
    54Financial Statement ScheduleSchedule II  Valuation and Qualifying Accounts

    
    60
 26




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 27




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
 28




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
        PricewaterhouseCoopers
    LLP
    29




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##### Table of Contents



EL PASO EXPLORATION & PRODUCTION COMPANY
 
 CONSOLIDATED STATEMENTS OF INCOME
(In millions)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Operating revenuesNatural gas and oil salesThird parties
    
    $
    729
    
    
    $
    777
    
    
    $
    579Affiliates
    
    
    871
    
    
    
    732
    
    
    
    952Other
    
    
    18
    
    
    
    34
    
    
    
    231,618
    
    
    
    1,543
    
    
    
    1,554Operating expensesCost of sales
    
    
    87
    
    
    
    62
    
    
    
    60Operation and maintenance
    
    
    409
    
    
    
    387
    
    
    
    377Depreciation, depletion and amortization
    
    
    673
    
    
    
    643
    
    
    
    585Taxes, other than income taxes
    
    
    86
    
    
    
    74
    
    
    
    341,255
    
    
    
    1,166
    
    
    
    1,056Operating income
    
    
    363
    
    
    
    377
    
    
    
    498Earnings from unconsolidated affiliates
    
    
    10
    
    
    
    19
    
    
    
    4Other income
    
    
    5
    
    
    
    6
    
    
    
    3Interest expenseThird parties
    
    
    (86
    )
    
    
    (83
    )
    
    
    (74
    )Affiliated
    
    
    (3
    )
    
    
    (61
    )
    
    
    (28
    )Income before income taxes
    
    
    289
    
    
    
    258
    
    
    
    403Income taxes
    
    
    (93
    )
    
    
    (96
    )
    
    
    (142
    )Net income
    
    $
    196
    
    
    $
    162
    
    
    $
    261
  30




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##### Table of Contents



EL PASO EXPLORATION & PRODUCTION COMPANY
 
 CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
 December 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    132
    
    
    $
    60Accounts receivableCustomer, net of allowance of $8 in 2006 and $10 in 2005
    
    
    54
    
    
    
    62Affiliates
    
    
    291
    
    
    
    355Other
    
    
    122
    
    
    
    83Notes receivable from affiliate
    
    
    59
    
    
    
    75Assets from price risk management activities
    
    
    144
    
    
    
    Deferred income taxes
    
    
    73
    
    
    
    221Other
    
    
    48
    
    
    
    76Total current assets
    
    
    923
    
    
    
    932Property, plant and equipment, at costNatural gas and oil propertiesProved
properties, at full cost
    
    
    16,042
    
    
    
    15,135Unevaluated costs excluded from amortization
    
    
    410
    
    
    
    491Other
    
    
    119
    
    
    
    14116,571
    
    
    
    15,767Less accumulated depreciation, depletion and amortization
    
    
    (11,383
    )
    
    
    (10,993
    )Total property, plant and equipment, net
    
    
    5,188
    
    
    
    4,774Other assetsInvestments in unconsolidated affiliates
    
    
    729
    
    
    
    761Deferred income taxes
    
    
    43
    
    
    
    57Other
    
    
    42
    
    
    
    41814
    
    
    
    859Total assets
    
    $
    6,925
    
    
    $
    6,565LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payableTrade
    
    $
    82
    
    
    $
    97Affiliates
    
    
    19
    
    
    
    32Other
    
    
    267
    
    
    
    180Notes payable to affiliate
    
    
    
    
    
    
    255Liabilities from price risk management activities
    
    
    41
    
    
    
    631Asset retirement obligations
    
    
    56
    
    
    
    31Income taxes payable
    
    
    106
    
    
    
    8Other
    
    
    42
    
    
    
    35Total current liabilities
    
    
    613
    
    
    
    1,269Long-term debt
    
    
    1,345
    
    
    
    1,700OtherLiabilities from price risk management activities
    
    
    68
    
    
    
    116Deferred income taxes
    
    
    408
    
    
    
    288Asset retirement obligations
    
    
    133
    
    
    
    163Other
    
    
    46
    
    
    
    53655
    
    
    
    620Commitments and contingenciesStockholders equityCommon stock, par value $1 per share; 1,000 shares
authorized and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    4,310
    
    
    
    3,703Accumulated deficit
    
    
    (82
    )
    
    
    (278
    )Accumulated other comprehensive income (loss)
    
    
    84
    
    
    
    (449
    )Total stockholders equity
    
    
    4,312
    
    
    
    2,976Total liabilities and stockholders equity
    
    $
    6,925
    
    
    $
    6,565
  31




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EL PASO EXPLORATION & PRODUCTION COMPANY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    196
    
    
    $
    162
    
    
    $
    261Adjustments to reconcile net income to net cash from operating activitiesDepreciation, depletion and amortization
    
    
    673
    
    
    
    643
    
    
    
    585Deferred income tax expense
    
    
    (8
    )
    
    
    88
    
    
    
    169Earnings from unconsolidated affiliates, adjusted for cash distributions
    
    
    34
    
    
    
    15
    
    
    
    (4
    )Other non-cash items
    
    
    4
    
    
    
    
    
    
    
    8Asset and liability changesAccounts and notes receivable
    
    
    37
    
    
    
    (210
    )
    
    
    (23
    )Accounts payable
    
    
    (28
    )
    
    
    32
    
    
    
    (6
    )Price risk management activities
    
    
    50
    
    
    
    (17
    )
    
    
    2Affiliate income taxes
    
    
    137
    
    
    
    (10
    )
    
    
    (166
    )Other asset changes
    
    
    (18
    )
    
    
    13
    
    
    
    (16
    )Other liability changes
    
    
    (19
    )
    
    
    (33
    )
    
    
    (62
    )Net cash provided by operating activities
    
    
    1,058
    
    
    
    683
    
    
    
    748Cash flows from investing activitiesCapital expenditures
    
    
    (1,114
    )
    
    
    (827
    )
    
    
    (719
    )Net proceeds from the sale of assets
    
    
    122
    
    
    
    10
    
    
    
    14Cash paid for acquisitions, net of cash acquired
    
    
    
    
    
    
    (1,025
    )
    
    
    (49
    )Change in note receivable from affiliate
    
    
    16
    
    
    
    (52
    )
    
    
    215Change in restricted cash
    
    
    (1
    )
    
    
    3
    
    
    
    (11
    )Net cash used in investing activities
    
    
    (977
    )
    
    
    (1,891
    )
    
    
    (550
    )Cash flows from financing activitiesRepayment of amounts borrowed under revolving credit
    
    
    (530
    )
    
    
    
    
    
    
    Net proceeds from borrowings under revolving credit facility
    
    
    175
    
    
    
    495
    
    
    
    Dividends to parent
    
    
    
    
    
    
    (183
    )
    
    
    (57
    )Contributions from parent
    
    
    500
    
    
    
    262
    
    
    
    137Change in note payable with affiliate
    
    
    (154
    )
    
    
    547
    
    
    
    (180
    )Net cash provided by (used in) financing activities
    
    
    (9
    )
    
    
    1,121
    
    
    
    (100
    )Change in cash and cash equivalents
    
    
    72
    
    
    
    (87
    )
    
    
    98Cash and cash equivalentsBeginning of period
    
    
    60
    
    
    
    147
    
    
    
    49End of period
    
    $
    132
    
    
    $
    60
    
    
    $
    147Supplemental Cash Flow InformationInterest paid, net of amounts capitalized
    
    $
    91
    
    
    $
    141
    
    
    $
    103Income tax payments (refunds)
    
    
    (36
    )
    
    
    45
    
    
    
    180
  32




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##### Table of Contents



EL PASO EXPLORATION & PRODUCTION COMPANY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In millions, except share amounts)
 For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountCommon 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
    
    
    
    
    
    
    3,703
    
    
    
    
    
    
    
    2,287
    
    
    
    
    
    
    
    2,242Contributions from parent
    
    
    
    
    
    
    607
    
    
    
    
    
    
    
    1,615
    
    
    
    
    
    
    
    182Allocated tax benefit (expense) of equity plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Dividends to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (199
    )
    
    
    
    
    
    
    (138
    )Balance at end of year
    
    
    
    
    
    
    4,310
    
    
    
    
    
    
    
    3,703
    
    
    
    
    
    
    
    2,287Accumulated deficit:Balance at beginning of year
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    (440
    )
    
    
    
    
    
    
    (701
    )Net income
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    261Balance at end of year
    
    
    
    
    
    
    (82
    )
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    (440
    )Accumulated other comprehensive income (loss):Balance at beginning of year
    
    
    
    
    
    
    (449
    )
    
    
    
    
    
    
    (269
    )
    
    
    
    
    
    
    (241
    )Other comprehensive income (loss)
    
    
    
    
    
    
    533
    
    
    
    
    
    
    
    (180
    )
    
    
    
    
    
    
    (28
    )Balance at end of year
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    (449
    )
    
    
    
    
    
    
    (269
    )Total stockholders equity
    
    
    1,000
    
    
    $
    4,312
    
    
    
    1,000
    
    
    $
    2,976
    
    
    
    1,000
    
    
    $
    1,578
  EL PASO EXPLORATION & PRODUCTION COMPANY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Net income
    
    $
    196
    
    
    $
    162
    
    
    $
    261Net gains (losses) from cash flow hedging activities:Unrealized mark-to-market gains (losses) arising
during period (net of income taxes of $201, $275
and $100 in 2006, 2005 and 2004)
    
    
    357
    
    
    
    (493
    )
    
    
    (176
    )Reclassification adjustments for changes in initial
value to settlement date (net of income taxes of
$99, $176 and $85 in 2006, 2005 and 2004)
    
    
    176
    
    
    
    313
    
    
    
    148Other comprehensive income (loss)
    
    
    533
    
    
    
    (180
    )
    
    
    (28
    )Comprehensive income (loss)
    
    $
    729
    
    
    $
    (18
    )
    
    $
    233
  33




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##### Table of Contents



EL PASO EXPLORATION & PRODUCTION COMPANY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1. Basis of Presentation and Significant Accounting Policies
 Basis of Presentation and Consolidation
    Year Ended December 31,2006
    
    2005
    
    2004(In millions)Operating revenues
    
    $
    24
    
    
    $
    54
    
    
    $
    27Net income
    
    
    3
    
    
    
    (12
    )
    
    
    7
  Use of Estimates
  Cash and Cash Equivalents
  Allowance for Doubtful Accounts
 34




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##### Table of Contents



Natural Gas and Oil Properties
     Property, Plant and Equipment (Other than Natural Gas and Oil Properties)
  Revenue Recognition
  Environmental Costs and Other Contingencies
 Environmental Costs.
 35




---



##### Table of Contents



Other Contingencies.
 Price Risk Management Activities
      Income Taxes
  36




---



##### Table of Contents



Accounting for Asset Retirement Obligations
 Accounting for Asset Retirement Obligations Accounting for
Conditional Asset Retirement Obligations.
 Evaluation
of Prior Period Misstatements in Current Financial Statements
 Considering the Effects of Prior Year Misstatements
When Quantifying Misstatements in Current Year Financial
Statements
 New Accounting Pronouncements Issued But Not Yet Adopted
  Accounting for Uncertainty in Income Taxes. Accounting for Uncertainty in Income Taxes. Accounting for
Income Taxes,
 Fair Value Measurements. Fair Value
Measurements
 
 2. Acquisitions and Divestitures
 Zapata County.
 Medicine Bow.
 37




---



##### Table of Contents



Year EndedDecember 31,2005(1)
    
    2004(In millions)Revenues
    
    $
    1,582
    
    
    $
    1,604Net income
    
    
    172
    
    
    
    250
 
 (1)
    
    Excludes a $13 million pre-tax charge for change in control payments
triggered at Medicine Bow as a result of the acquisition. Other Acquisitions.
 Divestitures.
 
 3. Income Taxes
 Pretax Income and Income Tax Expense.
 2006
    
    
    2005
    
    
    2004(In millions)Pretax Income (Loss)U.S
    
    $
    287
    
    
    $
    264
    
    
    $
    400Foreign
    
    
    2
    
    
    
    (6
    )
    
    
    3$
    289
    
    
    $
    258
    
    
    $
    403Income Tax ExpenseCurrentFederal
    
    $
    100
    
    
    $
    (7
    )
    
    $
    (31
    )State
    
    
    (1
    )
    
    
    2
    
    
    
    1Foreign
    
    
    2
    
    
    
    13
    
    
    
    3101
    
    
    
    8
    
    
    
    (27
    )DeferredFederal
    
    
    (25
    )
    
    
    72
    
    
    
    158State
    
    
    20
    
    
    
    23
    
    
    
    9Foreign
    
    
    (3
    )
    
    
    (7
    )
    
    
    2(8
    )
    
    
    88
    
    
    
    169Total income tax expense
    
    $
    93
    
    
    $
    96
    
    
    $
    142
 Effective Tax Rate Reconciliation.
 38




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##### Table of Contents



2006
    
    
    2005
    
    
    2004(In millions, except rates)Income tax expense at the statutory federal rate of 35%
    
    $
    101
    
    
    $
    90
    
    
    $
    141Increase (decrease)State income tax, net of federal income tax benefit
    
    
    12
    
    
    
    16
    
    
    
    6Earnings from unconsolidated affiliates where we
anticipate receiving dividends
    
    
    (18
    )
    
    
    (11
    )
    
    
    Valuation allowances
    
    
    19
    
    
    
    
    
    
    
    Foreign income taxed at different rates
    
    
    (20
    )
    
    
    6
    
    
    
    5Other
    
    
    (1
    )
    
    
    (5
    )
    
    
    (10
    )Income tax expense
    
    $
    93
    
    
    $
    96
    
    
    $
    142Effective tax rate
    
    
    32
    %
    
    
    37
    %
    
    
    35
    %
 Deferred Tax Assets and Liabilities.
 2006
    
    
    2005(In millions)Deferred tax liabilitiesProperty, plant and equipment
    
    $
    410
    
    
    $
    274Employee benefits
    
    
    34
    
    
    
    26Investment in unconsolidated affiliates
    
    
    197
    
    
    
    214Price risk management activities
    
    
    1
    
    
    
    Other
    
    
    51
    
    
    
    58Total deferred tax liability
    
    
    693
    
    
    
    572Deferred tax assetsNet operating loss and tax credit carryforwards
    
    
    343
    
    
    
    280Price risk management activities
    
    
    
    
    
    
    276Other
    
    
    75
    
    
    
    6Valuation allowances
    
    
    (19
    )
    
    
    Total deferred tax asset
    
    
    399
    
    
    
    562Net deferred tax liability
    
    $
    (294
    )
    
    $
    (10
    )
  Net operating loss and tax carryovers.
 Amount
    
    Expiration Year(In millions)U.S. federal net operating loss
    
    $
    670
    
    
    
    2017-2026State net operating loss
    
    $
    249
    
    
    
    2007-2024
   Valuation Allowances.
 39




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##### Table of Contents



4. Financial Instruments and Price Risk Management Activities
  2006
    
    
    2005Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(In millions)Long-term debt
    
    $
    1,345
    
    
    $
    1,401
    
    
    $
    1,700
    
    
    $
    1,757Net assets (liabilities) from price risk management activitiesDerivatives with third parties
    
    
    121
    
    
    
    121
    
    
    
    
    
    
    
    Derivatives with affiliate
    
    
    (86
    )
    
    
    (86
    )
    
    
    (747
    )
    
    
    (747
    )Net assets (liabilities) from price risk management activities
    
    $
    35
    
    
    $
    35
    
    
    $
    (747
    )
    
    $
    (747
    )
     40




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##### Table of Contents



5. Property, Plant and Equipment
 Unevaluated Capitalized Costs.
 Cumulative
    
    
    Costs Excluded
    
    
    
    
    
    
    CumulativeBalance(1)
    
    
    for Years Ended(1)
    
    
    
    
    
    
    BalanceDecember 31,
    
    
    December 31
    
    
    
    
    
    
    December 31,2006
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003United StatesAcquisition
    
    $
    280
    
    
    $
    39
    
    
    $
    182
    
    
    $
    24
    
    
    $
    35Exploration
    
    
    52
    
    
    
    36
    
    
    
    3
    
    
    
    1
    
    
    
    12Development
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total United States
    
    
    333
    
    
    
    75
    
    
    
    185
    
    
    
    25
    
    
    
    48Brazil
& EgyptAcquisition
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    3Exploration
    
    
    72
    
    
    
    51
    
    
    
    10
    
    
    
    10
    
    
    
    1Development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Brazil
& Egypt
    
    
    77
    
    
    
    52
    
    
    
    10
    
    
    
    11
    
    
    
    4Worldwide
    
    $
    410
    
    
    $
    127
    
    
    $
    195
    
    
    $
    36
    
    
    $
    52
 
 (1)
    
    Includes capitalized interest of $24 million, $19 million, and $1 million for
the years ended December 31, 2006, 2005, and 2004. Depreciation, Depletion and Amortization Rates.
 Asset retirement obligations.
  41




---



##### Table of Contents



2006
    
    
    2005(In millions)Net asset retirement liability at January 1
    
    $
    194
    
    
    $
    258Liabilities settled(1)
    
    
    (18
    )
    
    
    (87
    )Accretion expense
    
    
    18
    
    
    
    26Liabilities incurred
    
    
    5
    
    
    
    9Changes in estimate
    
    
    (10
    )
    
    
    (12
    )Net asset retirement liability at December 31
    
    $
    189
    
    
    $
    194
 
 (1)
    
    Decrease is due primarily to the sale of certain domestic natural gas and
oil properties in 2005. For a further discussion of these divestitures see Note 2.  
 6. Debt and Available Credit Facilities
  AmountDescription
    
    Interest Rate
    
    
    Term(1)
    
    
    Outstanding(Millions)$1.2 billion senior notes
    
    
    7.75%
    
    
    June 1, 2013
    
    $
    1,200$500 million revolving credit facility
    
    LIBOR plus 1.25% -1.875%
    
    August 30, 2010
    
    
    145Total
    
    
    
    
    
    
    
    
    
    $
    1,345
 
 (1)
    
    We have the ability to prepay amounts outstanding as of December 31, 2006
under our $500 million revolving credit facility in 2007 or thereafter and our $1.2 billion
senior notes after June 1, 2008. However, we do not currently have the intent to prepay or
call this debt. $1.2 billion senior notes.
 $500 million credit facility.
  $400 million credit facility.
 
 7. Commitments and Contingencies
 42




---



##### Table of Contents



Legal Proceedings and Other Contingencies
 Gas Measurement Cases. In re:
Natural Gas Royalties Qui Tam Litigation
 Will Price, et
al. v. Gas Pipelines and Their Predecessors, et al.
 Reserve Revisions.
  Environmental Matters
   Balance at January 1, 2006
    
    $
    5Additions/adjustments for remediation activities
    
    
    3Payments for remediation activities
    
    
    (1
    )Balance at December 31, 2006
    
    $
    7
  43




---



##### Table of Contents



CERCLA Matters.
  Lease Obligations
  Other Commercial Commitments
  Guarantees
and Indemnification
  
 8. Retirement Benefits
 Pension and Retirement Benefits
  Other Postretirement Benefits
  
 9. Investments in and Earnings from Unconsolidated Affiliates and Related Party Transactions
 Investments in Unconsolidated Affiliates
 Four Star Oil & Gas Company.
 44




---



##### Table of Contents



2006
    
    2005(In millions)Operating results data:Operating revenues
    
    $
    156
    
    
    $
    81Operating expenses
    
    
    61
    
    
    
    20Net income
    
    
    64
    
    
    
    39Financial position data:Current assets
    
    
    64
    
    
    
    64Non-current assets
    
    
    102
    
    
    
    101Current liabilities
    
    
    30
    
    
    
    51Non-current liabilities
    
    
    32
    
    
    
    29Equity in net assets
    
    
    104
    
    
    
    85
  Black Warrior Transmission Corp.
 Related Party Transactions
 Cash Management Program.
 Capital Contributions.
 Dividends.
 Other Affiliated Transactions.
 2006
    
    2005
    
    2004(In millions)Operating revenues
    
    $
    871
    
    
    $
    732
    
    
    $
    952Operating expenses from affiliates
    
    
    97
    
    
    
    118
    
    
    
    125Reimbursements of operating expenses charged to affiliates
    
    
    13
    
    
    
    11
    
    
    
    6
 45




---



##### Table of Contents




    
    El Paso.El Paso bills us directly for certain general and administrative costs and
allocates a portion of its general and administrative costs to us. This allocation is based
on the estimated level of resources devoted to our operations and the relative size of our
EBIT, gross property and payroll. These expenses are primarily related to management, legal,
financial, tax, consultative, administrative and other services, including employee
benefits, annual incentive bonuses, rent, insurance, and information technology. El Paso
currently bills us directly for compensation expense related to certain stock-based
compensation awards granted directly to our employees as well as allocates to us our
proportionate share of El Pasos corporate compensation expense.
   
    
    El Paso Marketing.We sell our natural gas primarily to El Paso Marketing at spot market
prices. At December 31, 2006 and 2005, substantially all of our affiliated accounts
receivable of $291 million and $355 million related to sales of natural gas to El Paso
Marketing. We are also a party to a master hedging contract with El Paso Marketing, L.P.
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 affiliated operating revenues.
 
    
    El Paso Pipelines.We also contract for services with El Pasos regulated interstate
pipelines that provide transportation and related services for our natural gas production.
At December 31, 2006 and December 31, 2005, we had contractual deposits of $6 million with
El Pasos regulated interstate pipelines.
 Taxes.
 
 10. Consolidating Financial Statements
  46




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##### Table of Contents



Non-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenuesNatural gas and oil salesThird parties
    
    $
    
    
    
    $
    695
    
    
    $
    34
    
    
    $
    
    
    
    $
    729Affiliates
    
    
    
    
    
    
    873
    
    
    
    (2
    )
    
    
    
    
    
    
    871Other
    
    
    
    
    
    
    19
    
    
    
    (1
    )
    
    
    
    
    
    
    18
    
    
    
    1,587
    
    
    
    31
    
    
    
    
    
    
    
    1,618Operating expensesCost of sales
    
    
    
    
    
    
    87
    
    
    
    
    
    
    
    
    
    
    
    87Operation and maintenance
    
    
    
    
    
    
    400
    
    
    
    9
    
    
    
    
    
    
    
    409Depreciation, depletion and amortization
    
    
    
    
    
    
    653
    
    
    
    20
    
    
    
    
    
    
    
    673Taxes, other than income taxes
    
    
    
    
    
    
    80
    
    
    
    6
    
    
    
    
    
    
    
    86
    
    
    
    1,220
    
    
    
    35
    
    
    
    
    
    
    
    1,255Operating income (loss)
    
    
    
    
    
    
    367
    
    
    
    (4
    )
    
    
    
    
    
    
    363Earnings from unconsolidated affiliates
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Other income
    
    
    
    
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    5Interest expenseThird party, net of interest capitalized
    
    
    (116
    )
    
    
    25
    
    
    
    5
    
    
    
    
    
    
    
    (86
    )Affiliated
    
    
    32
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )Income (loss) before income taxes and earnings from
consolidated subsidiaries
    
    
    (84
    )
    
    
    371
    
    
    
    2
    
    
    
    
    
    
    
    289Income taxes
    
    
    30
    
    
    
    (125
    )
    
    
    2
    
    
    
    
    
    
    
    (93
    )Income (loss) before earnings from consolidated subsidiaries
    
    
    (54
    )
    
    
    246
    
    
    
    4
    
    
    
    
    
    
    
    196Earnings from consolidated subsidiaries
    
    
    250
    
    
    
    4
    
    
    
    
    
    
    
    (254
    )
    
    
    Net income
    
    $
    196
    
    
    $
    250
    
    
    $
    4
    
    
    $
    (254
    )
    
    $
    196
 
 Non-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenuesNatural gas and oil salesThird parties
    
    $
    
    
    
    $
    708
    
    
    $
    69
    
    
    $
    
    
    
    $
    777Affiliates
    
    
    
    
    
    
    739
    
    
    
    (7
    )
    
    
    
    
    
    
    732Other
    
    
    
    
    
    
    43
    
    
    
    (9
    )
    
    
    
    
    
    
    34
    
    
    
    1,490
    
    
    
    53
    
    
    
    
    
    
    
    1,543Operating expensesCost of sales
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    62Operation and maintenance
    
    
    
    
    
    
    368
    
    
    
    19
    
    
    
    
    
    
    
    387Depreciation, depletion and amortization
    
    
    
    
    
    
    598
    
    
    
    45
    
    
    
    
    
    
    
    643Taxes, other than income taxes
    
    
    
    
    
    
    73
    
    
    
    1
    
    
    
    
    
    
    
    74
    
    
    
    1,101
    
    
    
    65
    
    
    
    
    
    
    
    1,166Operating income (loss)
    
    
    
    
    
    
    389
    
    
    
    (12
    )
    
    
    
    
    
    
    377Earnings from unconsolidated affiliates
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Other income
    
    
    
    
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    6Interest expenseThird party, net of interest capitalized
    
    
    (107
    )
    
    
    19
    
    
    
    5
    
    
    
    
    
    
    
    (83
    )Affiliated
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Income (loss) before income taxes and earnings from
consolidated subsidiaries
    
    
    (107
    )
    
    
    371
    
    
    
    (6
    )
    
    
    
    
    
    
    258Income taxes
    
    
    37
    
    
    
    (127
    )
    
    
    (6
    )
    
    
    
    
    
    
    (96
    )Income (loss) before earnings from consolidated subsidiaries
    
    
    (70
    )
    
    
    244
    
    
    
    (12
    )
    
    
    
    
    
    
    162Earnings (loss) from consolidated subsidiaries
    
    
    232
    
    
    
    (12
    )
    
    
    
    
    
    
    (220
    )
    
    
    Net income (loss)
    
    $
    162
    
    
    $
    232
    
    
    $
    (12
    )
    
    $
    (220
    )
    
    $
    162
 47




---



##### Table of Contents



Non-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenuesNatural gas and oil salesThird parties
    
    $
    
    
    
    $
    551
    
    
    $
    28
    
    
    $
    
    
    
    $
    579Affiliates
    
    
    
    
    
    
    953
    
    
    
    (1
    )
    
    
    
    
    
    
    952Other
    
    
    
    
    
    
    24
    
    
    
    (1
    )
    
    
    
    
    
    
    23
    
    
    
    1,528
    
    
    
    26
    
    
    
    
    
    
    
    1,554Operating expensesCost of sales
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    60Operation and maintenance
    
    
    
    
    
    
    365
    
    
    
    12
    
    
    
    
    
    
    
    377Depreciation, depletion and amortization
    
    
    
    
    
    
    567
    
    
    
    18
    
    
    
    
    
    
    
    585Taxes, other than income taxes
    
    
    
    
    
    
    33
    
    
    
    1
    
    
    
    
    
    
    
    34
    
    
    
    1,025
    
    
    
    31
    
    
    
    
    
    
    
    1,056Operating income (loss)
    
    
    
    
    
    
    503
    
    
    
    (5
    )
    
    
    
    
    
    
    498Earnings from unconsolidated affiliates
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Other income
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    3Interest expenseThird party, net of interest capitalized
    
    
    (95
    )
    
    
    19
    
    
    
    2
    
    
    
    
    
    
    
    (74
    )Affiliated
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (28
    )Income (loss) before income taxes and earnings from
consolidated subsidiaries
    
    
    (95
    )
    
    
    495
    
    
    
    3
    
    
    
    
    
    
    
    403Income taxes
    
    
    34
    
    
    
    (173
    )
    
    
    (3
    )
    
    
    
    
    
    
    (142
    )Income (loss) before earnings from consolidated subsidiaries
    
    
    (61
    )
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    261Earnings (loss) from consolidated subsidiaries
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    (322
    )
    
    
    Net income (loss)
    
    $
    261
    
    
    $
    322
    
    
    $
    
    
    
    $
    (322
    )
    
    $
    261
 48




---



##### Table of Contents



Non-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assetsCash and cash equivalents
    
    $
    
    
    
    $
    95
    
    
    $
    37
    
    
    $
    
    
    
    $
    132Accounts receivableCustomer, net
    
    
    
    
    
    
    49
    
    
    
    5
    
    
    
    
    
    
    
    54Affiliates
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    
    
    
    
    291Other
    
    
    29
    
    
    
    117
    
    
    
    6
    
    
    
    (30
    )
    
    
    122Note receivable from affiliate
    
    
    56
    
    
    
    14
    
    
    
    
    
    
    
    (11
    )
    
    
    59Assets held for price risk management activities
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    144Deferred income taxes
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73Other
    
    
    
    
    
    
    39
    
    
    
    9
    
    
    
    
    
    
    
    48Total current assets
    
    
    85
    
    
    
    822
    
    
    
    57
    
    
    
    (41
    )
    
    
    923Property, plant and equipment, at costNatural gas and oil propertiesProved properties-full cost method
    
    
    
    
    
    
    15,587
    
    
    
    455
    
    
    
    
    
    
    
    16,042Unevaluated costs excluded from amortization
    
    
    
    
    
    
    333
    
    
    
    77
    
    
    
    
    
    
    
    410Other
    
    
    
    
    
    
    118
    
    
    
    1
    
    
    
    
    
    
    
    119
    
    
    
    16,038
    
    
    
    533
    
    
    
    
    
    
    
    16,571Less accumulated depreciation, depletion and amortization
    
    
    
    
    
    
    (11,181
    )
    
    
    (202
    )
    
    
    
    
    
    
    (11,383
    )Total property, plant and equipment, net
    
    
    
    
    
    
    4,857
    
    
    
    331
    
    
    
    
    
    
    
    5,188Other assetsInvestments in consolidated and unconsolidated affiliates
    
    
    4,972
    
    
    
    1,021
    
    
    
    42
    
    
    
    (5,306
    )
    
    
    729Note receivable from affiliate
    
    
    565
    
    
    
    142
    
    
    
    
    
    
    
    (707
    )
    
    
    Deferred income taxes
    
    
    19
    
    
    
    4
    
    
    
    39
    
    
    
    (19
    )
    
    
    43Other
    
    
    25
    
    
    
    5
    
    
    
    12
    
    
    
    
    
    
    
    425,581
    
    
    
    1,172
    
    
    
    93
    
    
    
    (6,032
    )
    
    
    814Total assets
    
    $
    5,666
    
    
    $
    6,851
    
    
    $
    481
    
    
    $
    (6,073
    )
    
    $
    6,925LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payableTrade
    
    $
    
    
    
    $
    81
    
    
    $
    1
    
    
    $
    
    
    
    $
    82Affiliates
    
    
    
    
    
    
    19
    
    
    
    11
    
    
    
    (11
    )
    
    
    19Other
    
    
    
    
    
    
    244
    
    
    
    23
    
    
    
    
    
    
    
    267Liabilities from price risk management activities
    
    
    
    
    
    
    35
    
    
    
    6
    
    
    
    
    
    
    
    41Asset retirement obligation
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    56Income tax payable
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    (30
    )
    
    
    106Other
    
    
    9
    
    
    
    32
    
    
    
    1
    
    
    
    
    
    
    
    42Total current liabilities
    
    
    9
    
    
    
    603
    
    
    
    42
    
    
    
    (41
    )
    
    
    613Long-term debt
    
    
    1,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,345OtherLiabilities from price risk management activities
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    68Note payable to affiliate
    
    
    
    
    
    
    563
    
    
    
    144
    
    
    
    (707
    )
    
    
    Deferred income taxes
    
    
    
    
    
    
    427
    
    
    
    
    
    
    
    (19
    )
    
    
    408Asset retirement obligation
    
    
    
    
    
    
    130
    
    
    
    3
    
    
    
    
    
    
    
    133Other
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    1,234
    
    
    
    147
    
    
    
    (726
    )
    
    
    655Commitments and contingenciesStockholders equityCommon stock, par value $1 per share; 1,000 shares
authorized and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    (12
    )
    
    
    Additional paid-in capital
    
    
    4,310
    
    
    
    4,734
    
    
    
    311
    
    
    
    (5,045
    )
    
    
    4,310Retained earnings (accumulated deficit)
    
    
    (82
    )
    
    
    196
    
    
    
    (27
    )
    
    
    (169
    )
    
    
    (82
    )Accumulated other comprehensive gain (loss)
    
    
    84
    
    
    
    84
    
    
    
    (4
    )
    
    
    (80
    )
    
    
    84Total stockholders equity
    
    
    4,312
    
    
    
    5,014
    
    
    
    292
    
    
    
    (5,306
    )
    
    
    4,312Total liabilities and stockholders equity
    
    $
    5,666
    
    
    $
    6,851
    
    
    $
    481
    
    
    $
    (6,073
    )
    
    $
    6,925
 49




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##### Table of Contents



Non-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assetsCash and cash equivalents
    
    $
    10
    
    
    $
    37
    
    
    $
    13
    
    
    $
    
    
    
    $
    60Accounts receivableCustomer, net
    
    
    
    
    
    
    53
    
    
    
    9
    
    
    
    
    
    
    
    62Affiliates
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    
    
    
    
    355Other
    
    
    
    
    
    
    80
    
    
    
    3
    
    
    
    
    
    
    
    83Note receivable from affiliate
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    75Deferred income taxes
    
    
    
    
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    221Other
    
    
    38
    
    
    
    31
    
    
    
    7
    
    
    
    
    
    
    
    76Total current assets
    
    
    48
    
    
    
    777
    
    
    
    107
    
    
    
    
    
    
    
    932Property, plant and equipment, at cost
Natural gas and oil propertiesProved properties-full cost method
    
    
    
    
    
    
    14,764
    
    
    
    371
    
    
    
    
    
    
    
    15,135Unevaluated costs excluded from amortization
    
    
    
    
    
    
    384
    
    
    
    107
    
    
    
    
    
    
    
    491Other
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    141
    
    
    
    15,289
    
    
    
    478
    
    
    
    
    
    
    
    15,767Less accumulated depreciation, depletion and amortization
    
    
    
    
    
    
    (10,810
    )
    
    
    (183
    )
    
    
    
    
    
    
    (10,993
    )Total property, plant and equipment, net
    
    
    
    
    
    
    4,479
    
    
    
    295
    
    
    
    
    
    
    
    4,774Other assetsInvestments in consolidated and unconsolidated affiliates
    
    
    4,007
    
    
    
    1,046
    
    
    
    
    
    
    
    (4,292
    )
    
    
    761Note receivable from affiliate
    
    
    586
    
    
    
    
    
    
    
    
    
    
    
    (586
    )
    
    
    Deferred income taxes
    
    
    15
    
    
    
    22
    
    
    
    35
    
    
    
    (15
    )
    
    
    57Other
    
    
    30
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    414,638
    
    
    
    1,068
    
    
    
    46
    
    
    
    (4,893
    )
    
    
    859Total assets
    
    $
    4,686
    
    
    $
    6,324
    
    
    $
    448
    
    
    $
    (4,893
    )
    
    $
    6,565LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payableTrade
    
    $
    
    
    
    $
    97
    
    
    $
    
    
    
    $
    
    
    
    $
    97Affiliates
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32Other
    
    
    
    
    
    
    167
    
    
    
    13
    
    
    
    
    
    
    
    180Notes payable to affiliate
    
    
    
    
    
    
    126
    
    
    
    129
    
    
    
    
    
    
    
    255Liabilities from price risk management activities
    
    
    
    
    
    
    621
    
    
    
    10
    
    
    
    
    
    
    
    631Asset retirement obligation
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31Income tax payable
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Other
    
    
    10
    
    
    
    23
    
    
    
    2
    
    
    
    
    
    
    
    35Total current liabilities
    
    
    10
    
    
    
    1,105
    
    
    
    154
    
    
    
    
    
    
    
    1,269Long-term debt
    
    
    1,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,700OtherLiabilities from price risk management activities
    
    
    
    
    
    
    111
    
    
    
    5
    
    
    
    
    
    
    
    116Note payable to affiliate
    
    
    
    
    
    
    586
    
    
    
    
    
    
    
    (586
    )
    
    
    Deferred income taxes
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    (15
    )
    
    
    288Asset retirement obligation
    
    
    
    
    
    
    159
    
    
    
    4
    
    
    
    
    
    
    
    163Other
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    1,212
    
    
    
    9
    
    
    
    (601
    )
    
    
    620Commitments and contingenciesStockholders equityCommon stock, par value $1 per share; 1,000 shares
authorized and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    (12
    )
    
    
    Additional paid-in capital
    
    
    3,703
    
    
    
    4,510
    
    
    
    310
    
    
    
    (4,820
    )
    
    
    3,703Accumulated deficit
    
    
    (278
    )
    
    
    (54
    )
    
    
    (32
    )
    
    
    86
    
    
    
    (278
    )Accumulated other comprehensive loss
    
    
    (449
    )
    
    
    (449
    )
    
    
    (5
    )
    
    
    454
    
    
    
    (449
    )Total stockholders equity
    
    
    2,976
    
    
    
    4,007
    
    
    
    285
    
    
    
    (4,292
    )
    
    
    2,976Total liabilities and stockholders equity
    
    $
    4,686
    
    
    $
    6,324
    
    
    $
    448
    
    
    $
    (4,893
    )
    
    $
    6,565
 50




---



##### Table of Contents



Non-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activitiesNet income
    
    $
    196
    
    
    $
    250
    
    
    $
    4
    
    
    $
    (254
    )
    
    $
    196Adjustments to reconcile net income to net cash from
operating activitiesDepreciation, depletion and amortization
    
    
    
    
    
    
    653
    
    
    
    20
    
    
    
    
    
    
    
    673Deferred income tax expense (benefit)
    
    
    
    
    
    
    (5
    )
    
    
    (3
    )
    
    
    
    
    
    
    (8
    )Earnings from consolidated affiliates, adjusted for cash
distributions
    
    
    (200
    )
    
    
    (4
    )
    
    
    
    
    
    
    204
    
    
    
    Earnings from unconsolidated affiliates, adjusted for
cash distributions
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    34Other non-cash items
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Asset and liability changesAccounts receivable
    
    
    
    
    
    
    36
    
    
    
    1
    
    
    
    
    
    
    
    37Accounts payable
    
    
    
    
    
    
    (22
    )
    
    
    (6
    )
    
    
    
    
    
    
    (28
    )Price risk management activities
    
    
    
    
    
    
    59
    
    
    
    (9
    )
    
    
    
    
    
    
    50Affiliate income taxes
    
    
    8
    
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    137Other asset changes
    
    
    2
    
    
    
    (17
    )
    
    
    (3
    )
    
    
    
    
    
    
    (18
    )Other liability changes
    
    
    (6
    )
    
    
    (12
    )
    
    
    (1
    )
    
    
    
    
    
    
    (19
    )Net cash provided by (used in) operating activities
    
    
    4
    
    
    
    1,101
    
    
    
    3
    
    
    
    (50
    )
    
    
    1,058Cash flows from investing activitiesCapital expenditures
    
    
    
    
    
    
    (1,040
    )
    
    
    (74
    )
    
    
    
    
    
    
    (1,114
    )Net proceeds from the sale of assets
    
    
    
    
    
    
    84
    
    
    
    38
    
    
    
    
    
    
    
    122Investment in consolidated subsidiaries
    
    
    (125
    )
    
    
    (1
    )
    
    
    (42
    )
    
    
    168
    
    
    
    Change in note receivable from affiliate
    
    
    (34
    )
    
    
    (56
    )
    
    
    74
    
    
    
    32
    
    
    
    16Change in restricted cash
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Net cash provided by (used in) investing activities
    
    
    (159
    )
    
    
    (1,013
    )
    
    
    (5
    )
    
    
    200
    
    
    
    (977
    )Cash flows from financing activitiesNet proceeds from the issuance of long-term debt
    
    
    (530
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (530
    )Net proceeds from borrowings under revolving credit facility
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175Dividends to parent
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    50
    
    
    
    Contributions from parent
    
    
    500
    
    
    
    167
    
    
    
    1
    
    
    
    (168
    )
    
    
    500Change in note payable with affiliate
    
    
    
    
    
    
    (147
    )
    
    
    25
    
    
    
    (32
    )
    
    
    (154
    )Net cash provided by (used in) financing activities
    
    
    145
    
    
    
    (30
    )
    
    
    26
    
    
    
    (150
    )
    
    
    (9
    )Change in cash and cash equivalents
    
    
    (10
    )
    
    
    58
    
    
    
    24
    
    
    
    
    
    
    
    72Cash and cash equivalentsBeginning of period
    
    
    10
    
    
    
    37
    
    
    
    13
    
    
    
    
    
    
    
    60End of period
    
    $
    
    
    
    $
    95
    
    
    $
    37
    
    
    $
    
    
    
    $
    132
 51




---



##### Table of Contents



Non-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activitiesNet income (loss)
    
    $
    162
    
    
    $
    232
    
    
    $
    (12
    )
    
    $
    (220
    )
    
    $
    162Adjustments to reconcile net income to net cash from
operating activitiesDepreciation, depletion and amortization
    
    
    
    
    
    
    598
    
    
    
    45
    
    
    
    
    
    
    
    643Deferred income tax expense (benefit)
    
    
    (13
    )
    
    
    107
    
    
    
    (6
    )
    
    
    
    
    
    
    88Earnings from consolidated subsidiaries, adjusted for
cash distributions
    
    
    (232
    )
    
    
    12
    
    
    
    
    
    
    
    220
    
    
    
    Earnings from unconsolidated affiliates, adjusted for
cash distributions
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    15Asset and liability changesAccounts and notes receivable
    
    
    
    
    
    
    (216
    )
    
    
    6
    
    
    
    
    
    
    
    (210
    )Accounts payable
    
    
    
    
    
    
    31
    
    
    
    1
    
    
    
    
    
    
    
    32Price risk management activities
    
    
    
    
    
    
    (27
    )
    
    
    10
    
    
    
    
    
    
    
    (17
    )Affiliate income taxes
    
    
    (4
    )
    
    
    2
    
    
    
    (8
    )
    
    
    
    
    
    
    (10
    )Other asset changes
    
    
    3
    
    
    
    12
    
    
    
    (2
    )
    
    
    
    
    
    
    13Other liability changes
    
    
    3
    
    
    
    (41
    )
    
    
    5
    
    
    
    
    
    
    
    (33
    )Net cash provided by (used in) operating activities
    
    
    (81
    )
    
    
    725
    
    
    
    39
    
    
    
    
    
    
    
    683Cash flows from investing activitiesCapital expenditures
    
    
    
    
    
    
    (801
    )
    
    
    (26
    )
    
    
    
    
    
    
    (827
    )Net proceeds from the sale of assets
    
    
    178
    
    
    
    10
    
    
    
    
    
    
    
    (178
    )
    
    
    10Cash paid for acquisitions, net of cash acquired
    
    
    (1,025
    )
    
    
    (178
    )
    
    
    
    
    
    
    178
    
    
    
    (1,025
    )Proceeds from investment in consolidated subsidiaries
    
    
    1,141
    
    
    
    
    
    
    
    
    
    
    
    (1,141
    )
    
    
    Investment in consolidated subsidiaries
    
    
    (147
    )
    
    
    (6
    )
    
    
    
    
    
    
    153
    
    
    
    Change in note receivable from affiliate
    
    
    (627
    )
    
    
    80
    
    
    
    (52
    )
    
    
    547
    
    
    
    (52
    )Change in restricted cash
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Net cash used in investing activities
    
    
    (480
    )
    
    
    (895
    )
    
    
    (75
    )
    
    
    (441
    )
    
    
    (1,891
    )Cash flows from financing activitiesNet proceeds from borrowings under revolving credit facility
    
    
    495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495Dividends to parent
    
    
    (183
    )
    
    
    (1,141
    )
    
    
    
    
    
    
    1,141
    
    
    
    (183
    )Contributions from parent
    
    
    262
    
    
    
    147
    
    
    
    6
    
    
    
    (153
    )
    
    
    262Change in note payable with affiliate
    
    
    (3
    )
    
    
    1,073
    
    
    
    24
    
    
    
    (547
    )
    
    
    547Net cash provided by financing activities
    
    
    571
    
    
    
    79
    
    
    
    30
    
    
    
    441
    
    
    
    1,121Change in cash and cash equivalents
    
    
    10
    
    
    
    (91
    )
    
    
    (6
    )
    
    
    
    
    
    
    (87
    )Cash and cash equivalentsBeginning of period
    
    
    
    
    
    
    128
    
    
    
    19
    
    
    
    
    
    
    
    147End of period
    
    $
    10
    
    
    $
    37
    
    
    $
    13
    
    
    $
    
    
    
    $
    60
 52




---



##### Table of Contents



Non-Guarantor
    
    
    GuarantorIssuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activitiesNet income
    
    $
    261
    
    
    $
    322
    
    
    $
    
    
    
    $
    (322
    )
    
    $
    261Adjustments to reconcile net income to net cash from
operating activitiesDepreciation, depletion and amortization
    
    
    
    
    
    
    567
    
    
    
    18
    
    
    
    
    
    
    
    585Deferred income tax expense (benefit)
    
    
    (2
    )
    
    
    169
    
    
    
    2
    
    
    
    
    
    
    
    169Earnings from consolidated subsidiaries, adjusted for
cash distributions
    
    
    (322
    )
    
    
    
    
    
    
    
    
    
    
    322
    
    
    
    Earnings from unconsolidated affiliates, adjusted for
cash distributions
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Other
non-cash items
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Asset and liability changesAccounts and notes receivable
    
    
    
    
    
    
    (22
    )
    
    
    (2
    )
    
    
    1
    
    
    
    (23
    )Accounts payable
    
    
    (1
    )
    
    
    2
    
    
    
    (6
    )
    
    
    (1
    )
    
    
    (6
    )Price risk management activities
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Affiliate income taxes
    
    
    (49
    )
    
    
    (125
    )
    
    
    8
    
    
    
    
    
    
    
    (166
    )Other asset changes
    
    
    1
    
    
    
    (20
    )
    
    
    2
    
    
    
    1
    
    
    
    (16
    )Other liability changes
    
    
    (1
    )
    
    
    (53
    )
    
    
    (7
    )
    
    
    (1
    )
    
    
    (62
    )Net cash provided by (used in) operating activities
    
    
    (113
    )
    
    
    850
    
    
    
    11
    
    
    
    
    
    
    
    748Cash flows from investing activitiesCapital expenditures
    
    
    
    
    
    
    (677
    )
    
    
    (42
    )
    
    
    
    
    
    
    (719
    )Net proceeds from the sale of assets and investments
    
    
    
    
    
    
    (9
    )
    
    
    23
    
    
    
    
    
    
    
    14Cash paid for acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    (49
    )Proceeds from investment in consolidated subsidiaries
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    Investment in consolidated subsidiaries
    
    
    (137
    )
    
    
    (14
    )
    
    
    
    
    
    
    151
    
    
    
    Change in note receivable from affiliate
    
    
    81
    
    
    
    174
    
    
    
    (1
    )
    
    
    (39
    )
    
    
    215Change in restricted cash
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (11
    )Net cash provided by (used in) investing activities
    
    
    49
    
    
    
    (526
    )
    
    
    (80
    )
    
    
    7
    
    
    
    (550
    )Cash flows from financing activitiesNet proceeds from the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (2
    )
    
    
    Dividends to parent
    
    
    (57
    )
    
    
    (105
    )
    
    
    
    
    
    
    105
    
    
    
    (57
    )Contributions from parent
    
    
    137
    
    
    
    137
    
    
    
    12
    
    
    
    (149
    )
    
    
    137Change in note payable with affiliate
    
    
    (16
    )
    
    
    (270
    )
    
    
    67
    
    
    
    39
    
    
    
    (180
    )Net cash provided by (used in) financing activities
    
    
    64
    
    
    
    (238
    )
    
    
    81
    
    
    
    (7
    )
    
    
    (100
    )Change in cash and cash equivalents
    
    
    
    
    
    
    86
    
    
    
    12
    
    
    
    
    
    
    
    98Cash and cash equivalentsBeginning of period
    
    
    
    
    
    
    42
    
    
    
    7
    
    
    
    
    
    
    
    49End of period
    
    $
    
    
    
    $
    128
    
    
    $
    19
    
    
    $
    
    
    
    $
    147
 53




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##### Table of Contents



Supplemental Selected Quarterly Financial Information (Unaudited)
  Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(1)
    
    Total(In millions)2006Operating revenues
    
    $
    385
    
    
    $
    405
    
    
    $
    399
    
    
    $
    429
    
    
    $
    1,618Operating income
    
    
    104
    
    
    
    98
    
    
    
    74
    
    
    
    87
    
    
    
    363Net income
    
    
    57
    
    
    
    44
    
    
    
    40
    
    
    
    55
    
    
    
    196
 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    Total(In millions)2005Operating revenues
    
    $
    364
    
    
    $
    395
    
    
    $
    395
    
    
    $
    389
    
    
    $
    1,543Operating income
    
    
    94
    
    
    
    106
    
    
    
    101
    
    
    
    76
    
    
    
    377Net income
    
    
    45
    
    
    
    49
    
    
    
    46
    
    
    
    22
    
    
    
    162
 
 (1)
    
    During the fourth quarter of 2006, we recognized additional operating revenue and
operating income of $20 million and net income of $13 million for additional amortization of
realized gains on hedges. This amount should have been recorded throughout 2005 and the first
three quarters of 2006. As amounts were not material to the current or historical periods,
the adjustment was recorded in the fourth quarter of 2006. 
 Supplemental Natural Gas and Oil Operations (Unaudited)
  Capitalized
Costs.
 United
    
    
    BrazilStates
    
    

&
Egypt(1)
    
    
    Worldwide2006Natural gas and oil properties:Costs subject to amortization
    
    $
    15,582
    
    
    $
    460
    
    
    $
    16,042Costs not subject to amortization
    
    
    333
    
    
    
    77
    
    
    
    41015,915
    
    
    
    537
    
    
    
    16,452Less accumulated depreciation, depletion and amortization
    
    
    11,124
    
    
    
    202
    
    
    
    11,326Net capitalized costs
    
    $
    4,791
    
    
    $
    335
    
    
    $
    5,1262005Natural gas and oil properties:Costs subject to amortization
    
    $
    14,764
    
    
    $
    371
    
    
    $
    15,135Costs not subject to amortization
    
    
    384
    
    
    
    107
    
    
    
    49115,148
    
    
    
    478
    
    
    
    15,626Less accumulated depreciation, depletion and amortization
    
    
    10,731
    
    
    
    183
    
    
    
    10,914Net capitalized costs
    
    $
    4,417
    
    
    $
    295
    
    
    $
    4,712
 
 (1)
    
    Capitalized costs for Egypt were $4 million as of December 31, 2006. Total
Costs Incurred.
 54




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##### Table of Contents



United
    
    
    BrazilStates
    
    

&
Egypt
    
    
    Worldwide2006Property acquisition costsProved properties
    
    $
    2
    
    
    $
    2
    
    
    $
    4Unproved properties
    
    
    34
    
    
    
    1
    
    
    
    35Exploration costs
    
    
    323
    
    
    
    53
    
    
    
    376Development costs
    
    
    738
    
    
    
    40
    
    
    
    778Costs expended in 2006
    
    
    1,097
    
    
    
    96
    
    
    
    1,193Asset retirement obligation costs
    
    
    3
    
    
    
    
    
    
    
    3Total costs incurred(1)
    
    $
    1,100
    
    
    $
    96
    
    
    $
    1,1962005Property acquisition costsProved properties
    
    $
    643
    
    
    $
    8
    
    
    $
    651Unproved properties
    
    
    143
    
    
    
    1
    
    
    
    144Exploration costs
    
    
    143
    
    
    
    15
    
    
    
    158Development costs
    
    
    503
    
    
    
    6
    
    
    
    509Costs expended in 2005
    
    
    1,432
    
    
    
    30
    
    
    
    1,462Asset retirement obligation costs
    
    
    1
    
    
    
    
    
    
    
    1Total costs incurred(1)
    
    $
    1,433
    
    
    $
    30
    
    
    $
    1,463Unconsolidated investment in Four Star(2)
    
    $
    769
    
    
    $
    
    
    
    $
    7692004Property acquisition costsProved properties
    
    $
    33
    
    
    $
    69
    
    
    $
    102Unproved properties
    
    
    32
    
    
    
    3
    
    
    
    35Exploration costs
    
    
    185
    
    
    
    25
    
    
    
    210Development costs
    
    
    395
    
    
    
    1
    
    
    
    396Costs expended in 2004
    
    
    645
    
    
    
    98
    
    
    
    743Asset retirement obligation costs
    
    
    30
    
    
    
    3
    
    
    
    33Total costs incurred(1)
    
    $
    675
    
    
    $
    101
    
    
    $
    776
 
 (1)
    
    The table above includes capitalized internal costs incurred in connection with
the acquisition, development and exploration of natural gas and oil
reserves of $50 million,
$47 million and $44 million and capitalized interest of $30 million, $30 million and $22
million for the years ended December 31, 2006, 2005 and 2004.(2)
    
    In 2005 amount includes $179 million of deferred income tax adjustments related to the
acquisitions of full-cost pool properties and $217 million related to
the acquisition of our unconsolidated investment in Four Star.  55




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##### Table of Contents



Natural Gas and Oil Reserves.
  Oil and Condensate
    
    NGLNatural Gas (in Bcf)
    
    (in MBbls)
    
    (in MBbls)
    
    EquivalentUnited
    


    
    
    
    
    
    United
    


    
    
    
    
    
    United
    
    VolumesStates(1)
    
Brazil
    
    Worldwide
    
    States(1)
    

Brazil
    
    Worldwide
    
    States(1)(3
    
    (in Bcfe)ConsolidatedJanuary 1, 2004
    
    
    2,061
    
    
    
    
    
    
    
    2,061
    
    
    
    32,371
    
    
    
    20,543
    
    
    
    52,914
    
    
    
    15,985
    
    
    
    2,474Revisions of previous estimates(1)
    
    
    (172
    )
    
    
    
    
    
    
    (172
    )
    
    
    (999
    )
    
    
    252
    
    
    
    (747
    )
    
    
    724
    
    
    
    (172
    )Extensions, discoveries and
other
    
    
    79
    
    
    
    38
    
    
    
    117
    
    
    
    2,214
    
    
    
    1,848
    
    
    
    4,062
    
    
    
    58
    
    
    
    142Purchases of reserves in place
    
    
    15
    
    
    
    38
    
    
    
    53
    
    
    
    
    
    
    
    1,848
    
    
    
    1,848
    
    
    
    
    
    
    
    64Sales of reserves in place
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )
    
    
    (1,276
    )
    
    
    
    
    
    
    (1,276
    )
    
    
    (47
    )
    
    
    (29
    )Production
    
    
    (238
    )
    
    
    (7
    )
    
    
    (245
    )
    
    
    (4,979
    )
    
    
    (320
    )
    
    
    (5,299
    )
    
    
    (3,519
    )
    
    
    (298
    )December 31, 2004
    
    
    1,724
    
    
    
    69
    
    
    
    1,793
    
    
    
    27,331
    
    
    
    24,171
    
    
    
    51,502
    
    
    
    13,201
    
    
    
    2,181Revisions of previous estimates
    
    
    (43
    )
    
    
    (2
    )
    
    
    (45
    )
    
    
    260
    
    
    
    7,927
    
    
    
    8,187
    
    
    
    1,148
    
    
    
    11Extensions, discoveries and
other
    
    
    183
    
    
    
    5
    
    
    
    188
    
    
    
    8,145
    
    
    
    772
    
    
    
    8,917
    
    
    
    169
    
    
    
    242Purchases of reserves in place
    
    
    192
    
    
    
    
    
    
    
    192
    
    
    
    13,338
    
    
    
    
    
    
    
    13,338
    
    
    
    772
    
    
    
    276Sales of reserves in place
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )
    
    
    (969
    )
    
    
    
    
    
    
    (969
    )
    
    
    (89
    )
    
    
    (24
    )Production
    
    
    (207
    )
    
    
    (16
    )
    
    
    (223
    )
    
    
    (4,877
    )
    
    
    (620
    )
    
    
    (5,497
    )
    
    
    (2,639
    )
    
    
    (271
    )December 31, 2005
    
    
    1,831
    
    
    
    56
    
    
    
    1,887
    
    
    
    43,228
    
    
    
    32,250
    
    
    
    75,478
    
    
    
    12,562
    
    
    
    2,415Revisions of
previous
estimates(1)
    
    
    8
    
    
    
    (1
    )
    
    
    7
    
    
    
    (1,514
    )
    
    
    (365
    )
    
    
    (1,879
    )
    
    
    (1,834
    )
    
    
    (15
    )Extensions, discoveries and
other
    
    
    254
    
    
    
    8
    
    
    
    262
    
    
    
    5,012
    
    
    
    209
    
    
    
    5,221
    
    
    
    958
    
    
    
    299Purchases of reserves in place
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    90
    
    
    
    
    
    
    
    90
    
    
    
    32
    
    
    
    2Sales of reserves in place
    
    
    (17
    )
    
    
    
    
    
    
    (17
    )
    
    
    (230
    )
    
    
    
    
    
    
    (230
    )
    
    
    (174
    )
    
    
    (20
    )Production
    
    
    (213
    )
    
    
    (7
    )
    
    
    (220
    )
    
    
    (5,907
    )
    
    
    (247
    )
    
    
    (6,154
    )
    
    
    (1,532
    )
    
    
    (266
    )December 31, 2006
    
    
    1,864
    
    
    
    56
    
    
    
    1,920
    
    
    
    40,679
    
    
    
    31,847
    
    
    
    72,526
    
    
    
    10,012
    
    
    
    2,415Proved developed reservesDecember 31, 2004
    
    
    1,287
    
    
    
    54
    
    
    
    1,341
    
    
    
    19,641
    
    
    
    2,613
    
    
    
    22,254
    
    
    
    11,943
    
    
    
    1,546December 31, 2005
    
    
    1,404
    
    
    
    27
    
    
    
    1,431
    
    
    
    28,581
    
    
    
    1,144
    
    
    
    29,725
    
    
    
    11,010
    
    
    
    1,675December 31, 2006
    
    
    1,469
    
    
    
    23
    
    
    
    1,492
    
    
    
    29,616
    
    
    
    824
    
    
    
    30,440
    
    
    
    8,665
    
    
    
    1,727Unconsolidated investment in Four
StarDecember 31, 2006Net proved developed and
undeveloped reserves
    
    
    167
    
    
    
    
    
    
    
    167
    
    
    
    2,947
    
    
    
    
    
    
    
    2,947
    
    
    
    6,209
    
    
    
    222Proved developed reserves
    
    
    139
    
    
    
    
    
    
    
    139
    
    
    
    2,874
    
    
    
    
    
    
    
    2,874
    
    
    
    5,095
    
    
    
    187December 31, 2005Net proved developed and
undeveloped reserves
    
    
    193
    
    
    
    
    
    
    
    193
    
    
    
    3,349
    
    
    
    
    
    
    
    3,349
    
    
    
    6,668
    
    
    
    253Proved developed reserves
    
    
    158
    
    
    
    
    
    
    
    158
    
    
    
    3,266
    
    
    
    
    
    
    
    3,266
    
    
    
    5,399
    
    
    
    210
 
 (1)
    
    Comprised of 54 Bcfe downward revisions due to
commodity price changes and 39 Bcfe positive revisions due
to performance.  56




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##### Table of Contents



Results of Operations
 United
    
    
    BrazilStates
    
    

&
Egypt
    
    
    Worldwide2006Net revenuesSales to
external customers
    
    $
    665
    
    
    $
    43
    
    
    $
    708Affiliated sales
    
    
    867
    
    
    
    (11
    )
    
    
    856Total
    
    
    1,532
    
    
    
    32
    
    
    
    1,564Cost of
sales (1)
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )Production
costs(2)
    
    
    (318
    )
    
    
    (7
    )
    
    
    (325
    )Depreciation, depletion and amortization
    
    
    (638
    )
    
    
    (19
    )
    
    
    (657
    )518
    
    
    
    6
    
    
    
    524Income tax expense
    
    
    (186
    )
    
    
    (2
    )
    
    
    (188
    )Results of operations from producing activities
    
    $
    332
    
    
    $
    4
    
    
    $
    336Equity earnings from unconsolidated investment in Four Star
    
    $
    10
    
    
    $
    
    
    
    $
    102005Net revenuesSales to external customers
    
    $
    741
    
    
    $
    62
    
    
    $
    803Affiliated sales
    
    
    748
    
    
    
    (9
    )
    
    
    739Total
    
    
    1,489
    
    
    
    53
    
    
    
    1,542Cost of
sales (1)
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )Production
costs(2)
    
    
    (256
    )
    
    
    (8
    )
    
    
    (264
    )Depreciation, depletion and amortization
    
    
    (598
    )
    
    
    (45
    )
    
    
    (643
    )573
    
    
    
    
    
    
    
    573Income tax expense
    
    
    (204
    )
    
    
    
    
    
    
    (204
    )Results of operations from producing activities
    
    $
    369
    
    
    $
    
    
    
    $
    369Equity earnings from unconsolidated investment in Four Star
    
    $
    19
    
    
    $
    
    
    
    $
    192004Net revenuesSales to external customers
    
    $
    953
    
    
    $
    26
    
    
    $
    979Affiliated sales
    
    
    574
    
    
    
    
    
    
    
    574Total
    
    
    1,527
    
    
    
    26
    
    
    
    1,553Cost of
sales (1)
    
    
    (60
    )
    
    
    
    
    
    
    (60
    )Production
costs(2)
    
    
    (215
    )
    
    
    
    
    
    
    (215
    )Depreciation, depletion and amortization
    
    
    (568
    )
    
    
    (18
    )
    
    
    (586
    )684
    
    
    
    8
    
    
    
    692Income tax expense
    
    
    (248
    )
    
    
    (3
    )
    
    
    (251
    )Results of operations from producing activities
    
    $
    436
    
    
    $
    5
    
    
    $
    441
 
 (1)

    
    Cost of sales is primarily transportation costs.(2)
    
    Production cost includes lease operating costs and production related taxes,
including ad valorem and severance taxes. 57




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##### Table of Contents



Standardized Measure of Discounted Future Net Cash Flows.
 United
    
    
    
    
    
    World-States
    
    

Brazil
    
    
    wide2006Future cash inflows(1)
    
    $
    12,349
    
    
    $
    1,977
    
    
    $
    14,326Future production costs
    
    
    (3,623
    )
    
    
    (431
    )
    
    
    (4,054
    )Future development costs
    
    
    (1,280
    )
    
    
    (506
    )
    
    
    (1,786
    )Future income tax expenses
    
    
    (1,089
    )
    
    
    (239
    )
    
    
    (1,328
    )Future net cash flows
    
    
    6,357
    
    
    
    801
    
    
    
    7,15810% annual discount for estimated timing of cash flows
    
    
    (2,302
    )
    
    
    (377
    )
    
    
    (2,679
    )Standardized measure of discounted future net cash flows
    
    $
    4,055
    
    
    $
    424
    
    
    $
    4,479Standardized measure of discounted future net cash
flows, including effects of hedging activities
    
    $
    4,225
    
    
    $
    424
    
    
    $
    4,6492005Future cash inflows(1)
    
    $
    18,175
    
    
    $
    1,992
    
    
    $
    20,167Future production costs
    
    
    (3,968
    )
    
    
    (453
    )
    
    
    (4,421
    )Future development costs
    
    
    (1,335
    )
    
    
    (309
    )
    
    
    (1,644
    )Future income tax expenses
    
    
    (3,160
    )
    
    
    (286
    )
    
    
    (3,446
    )Future net cash flows
    
    
    9,712
    
    
    
    944
    
    
    
    10,65610% annual discount for estimated timing of cash flows
    
    
    (3,660
    )
    
    
    (381
    )
    
    
    (4,041
    )Standardized measure of discounted future net cash flows
    
    $
    6,052
    
    
    $
    563
    
    
    $
    6,615Standardized measure of discounted future net cash
flows, including effects of hedging activities
    
    $
    5,573
    
    
    $
    560
    
    
    $
    6,1332004Future cash inflows(1)
    
    $
    11,895
    
    
    $
    1,077
    
    
    $
    12,972Future production costs
    
    
    (3,585
    )
    
    
    (135
    )
    
    
    (3,720
    )Future development costs
    
    
    (1,234
    )
    
    
    (274
    )
    
    
    (1,508
    )Future income tax expenses
    
    
    (1,184
    )
    
    
    (141
    )
    
    
    (1,325
    )Future net cash flows
    
    
    5,892
    
    
    
    527
    
    
    
    6,41910% annual discount for estimated timing of cash flows
    
    
    (2,004
    )
    
    
    (219
    )
    
    
    (2,223
    )Standardized measure of discounted future net cash flows
    
    $
    3,888
    
    
    $
    308
    
    
    $
    4,196Standardized measure of discounted future net cash
flows, including effects of hedging activities
    
    $
    3,547
    
    
    $
    305
    
    
    $
    3,852Unconsolidated investment in Four Star(2)Standardized measure of discounted future net cash flows2006
    
    $
    323
    
    
    $
    
    
    
    $
    3232005
    
    $
    617
    
    
    $
    
    
    
    $
    617
 
 (1)
    
    United States excludes $219 million of future cash
inflows in 2006 and $760 million and $524 million of future net
cash outflows in 2005 and 2004 attributable to hedging activities. Brazil
excludes $4 million and $5 million of future net cash outflows attributable to hedging
activities in 2005 and 2004.(2)
    
    Four Star was acquired in 2005.  58




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##### Table of Contents



Changes in Standardized Measure of Discounted Future Net Cash Flows
 Years Ended December 31,(1)2006
    
    
    2005
    
    
    2004Sales and transfers of natural gas and oil produced net of production costs
    
    $
    (1,516
    )
    
    $
    (1,477
    )
    
    $
    (1,470
    )Net changes in prices and production costs
    
    
    (2,891
    )
    
    
    2,884
    
    
    
    29Extensions, discoveries and improved recovery, less related costs
    
    
    549
    
    
    
    793
    
    
    
    268Changes in estimated future development costs
    
    
    (55
    )
    
    
    2
    
    
    
    4Previously estimated development costs incurred during the period
    
    
    192
    
    
    
    247
    
    
    
    156Revision of previous quantity estimates
    
    
    (38
    )
    
    
    47
    
    
    
    (453
    )Accretion of discount
    
    
    827
    
    
    
    476
    
    
    
    568Net change in income taxes
    
    
    1,123
    
    
    
    (1,093
    )
    
    
    257Purchases of reserves in place
    
    
    4
    
    
    
    956
    
    
    
    114Sale of reserves in place
    
    
    (42
    )
    
    
    (83
    )
    
    
    (75
    )Change in production rates, timing and other
    
    
    (289
    )
    
    
    (333
    )
    
    
    (94
    )Net change
    
    $
    (2,136
    )
    
    $
    2,419
    
    
    $
    (696
    )
 
 (1)

    
    This disclosure reflects changes in the standardized measure calculation
excluding the effects of hedging activities. 59




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##### Table of Contents



SCHEDULE II
 EL PASO EXPLORATION & PRODUCTION COMPANY
VALUATION AND QUALIFYING ACCOUNTS
 Years Ended December 31, 2006, 2005 and 2004
(In millions)
 ChargedBalance at
    
    to Costs
    
    
    
    
    
    Charged
    
    BalanceBeginning
    
    and
    
    
    
    
    
    to Other
    
    at EndDescription
    
    of Period
    
    Expenses
    
    Deductions
    
    Accounts
    
    of Period2006Allowance for doubtful accounts
    
    $
    10
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    8Valuation allowance on deferred tax assets
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Legal reserves and other contingencies
    
    
    22
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    23Environmental reserves
    
    
    5
    
    
    
    3
    
    
    
    (1
    )
    
    
    
    
    
    
    72005Allowance for doubtful accounts
    
    $
    12
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    (1
    )
    
    $
    10Legal reserves and other contingencies
    
    
    17
    
    
    
    7
    
    
    
    (2
    )
    
    
    
    
    
    
    22Environmental reserves
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52004Allowance for doubtful accounts
    
    $
    14
    
    
    $
    1
    
    
    $
    (4
    )
    
    $
    1
    
    
    $
    12Legal reserves and other contingencies
    
    
    20
    
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    17Environmental reserves
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
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ITEM 9B. OTHER INFORMATION
  
 PART III
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  All Other Fees
  Policy for Approval of Audit and Non-Audit Fees
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a) The following documents are filed as a part of this report:
 1.
    
    
    Financial statements.The following consolidated financial statements are included in Part II, Item 8 of this report:PageReports of Independent Registered Public Accounting Firms
    
    27Consolidated Statements of Income
    
    30Consolidated Balance Sheets
    
    31Consolidated Statements of Cash Flows
    
    32Consolidated Statements of Stockholders Equity
    
    33Consolidated Statements of Comprehensive Income
    
    33Notes to Consolidated Financial Statements2.
    
    
    Financial statement schedules and supplementary information required to be submittedSchedule II  Valuation and Qualifying accounts
    
    603.
    
    
    Exhibits
    
    64
  Undertaking
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SIGNATURES
 th
 EL PASO EXPLORATION & PRODUCTION COMPANYBy:
    /s/ BRENT J. SMOLIKBrent J. SmolikPresident  Signature
    
    Title
    
    Date/s/ BRENT J. SMOLIK
Brent J. Smolik
    
    President and Director
(Principal Executive Officer)
    
    February 28, 2007/s/ DANE E. WHITEHEAD
Dane E. Whitehead
    
    Senior Vice President,Chief Financial Officer
and Director
(Principal Financial Officer)
    
    February 28, 2007
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##### Table of Contents



EL PASO EXPLORATION & PRODUCTION COMPANY
 
 EXHIBIT INDEX
  ExhibitNumber
    
    Description3.A
    
    Amended and Restated Certificate of Incorporation as filed with the Delaware Secretary of State on
February 16, 2006 (Exhibit 3.A to our 2005 Form 10-K).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).4.A.4
    
    Third Supplemental Indenture, dated as of August 31, 2005, among El Paso Production Holding
Company, as Issuer, El Paso Production Company, El Paso Production GOM, Inc., El Paso Energy Raton
Corporation, Medicine Bow Energy Corporation, Medicine Bow Operating Company and MBOW Four Star
Corporation, as Subsidiary Guarantors, and Wilmington Trust Company, as Trustee (Exhibit 10.C to
our Form 8-K filed on September 1, 2005).4.A.5
    
    Fourth Supplemental Indenture, dated as of December 31, 2005, among El Paso Exploration &
Production Company, as Issuer, El Paso Production Company, Medicine Bow Energy Corporation,
Medicine Bow Operating Company, MBOW Four Star Corporation, El Paso E&P Company, L.P., El Paso
Production Oil & Gas Company, El Paso E&P Holdings, Inc., El Paso Production Resale Company, El
Paso Energy Oil Transmission, L.L.C. and El Paso Production Oil & Gas Gathering, L.P., as
Subsidiary Guarantors, and Wilmington Trust Company, as Trustee (Exhibit 4.A to our Form 8-K filed
January 4, 2006).4.A.6
    
    Fifth Supplemental Indenture, dated as of June 30, 2006, among El Paso Exploration & Production
Company, MBOW Four Star Corporation, El Paso Exploration & Production Management, Inc., El Paso E&P
Holding, Inc., El Paso E&P Company, L.P., El Paso Production Resale Company, El Paso Energy Oil
Transmission, L.L.C. and El Paso Production Oil & Gas Gathering, L.P., as Subsidiary Guarantors,
and Wilmington Trust Company, as Trustee. (Exhibit 4.A to our 2006 Second Quarter Form 10-Q).*4.A.7
    
    Sixth Supplemental Indenture, dated as of October 1, 2006, among El Paso Exploration & Production
Company, MBOW Four Star Corporation, El Paso Exploration & Production Management, Inc., El Paso E&P
Holdings, Inc., El Paso E&P Company, L.P., El Paso Production Resale Company, El Paso Energy Oil
Transmission, L.L.C., El Paso Production Oil & Gas Gathering, L.P., El Paso E&P International
Holding Company, El Paso Preferred Holdings Company, and El Paso E&P Finance Company, L.L.C., as
Subsidiary Guarantors, and Wilmington Trust Company, as Trustee.
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ExhibitNumber
    
    Description*4.A.8
    
    Seventh Supplemental Indenture, dated as of January 12, 2007, among El Paso Exploration &
Production Company, MBOW Four Star Corporation, El Paso Exploration & Production Management, Inc.,
El Paso E&P Holdings, Inc., El Paso E&P Company, L.P., El Paso Production Resale Company, El Paso
Energy Oil Transmission, L.L.C., El Paso Production Oil & Gas Gathering, L.P., El Paso E&P
International Holding Company, El Paso Preferred Holdings Company, El Paso E&P Finance Company,
L.L.C., El Paso South Texas E&P Company, L.L.C., and El Paso E&P Zapata, L.P., as Subsidiary
Guarantors, and Wilmington Trust Company, as Trustee.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
    
    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.D
    
    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.E
    
    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.F
    
    Stock Purchase Agreement dated July 18, 2005 among the Registrant, Medicine Bow Energy Corporation
and the other parties identified therein (Exhibit 10.A to our Form 8-K filed on July 19, 2005)10.G
    
    Credit Agreement dated as of August 30, 2005, among El Paso Production Holding Company, El Paso
Production Company, El Paso Energy Raton Corporation and El Paso Production GOM, Inc. and Fortis
Capital Corp., The Royal Bank of Scotland plc and The Bank of Nova Scotia, and the Several Lenders
from time to time Parties thereto (Exhibit 10.A to our Form 8-K filed on September 1, 2005).10.H
    
    Amended and Restated Credit Agreement, dated as of October 19, 2005, among El Paso Production
Holding Company, El Paso Production Company, El Paso Energy Raton Corporation and El Paso
Production GOM, Inc., as Borrowers, and Fortis Capital Corp., The Royal Bank of Scotland plc, The
Bank of Nova Scotia, Societe Generale and WESTLB AG, New York Branch and the Several Lenders from
time to time Parties thereto, including the Form of Guarantee Agreement made by the Guarantors in
favor of Fortis Capital Corp., as agent for the Creditors (Exhibit 10.A to our Form 8-K filed on
October 24, 2005); First Amendment dated as of March 27, 2006, among El Paso Exploration &
Production Company, El Paso Production Company, El Paso E&P Company, L.P. and Fortis Capital Corp.,
as administrative agent for the Lenders party to that certain Amended and Restated Credit Agreement
dated as of October 19, 2005. (Exhibit 10.A to our 2006 First Quarter Form 10-Q).*10.I.1
    
    Second Amendment dated as of December 1, 2006, among El Paso Exploration & Production Company, El
Paso E&P Company, L.P. and Fortis Capital Corp., as administrative agent for the Lenders party to
that certain Amended and Restated Credit Agreement dated as of October 19, 2005.10.J
    
    Waiver and Consent dated as of September 29, 2006, among El Paso Exploration & Production Company,
El Paso E&P Company, L.P. and Fortis Capital Corp., as administrative agent for the Lenders party
to that certain Amended and Restated Credit Agreement dated as of October 19, 2005. (Exhibit 10.A
to our 2006 Third Quarter Form 10-Q).10.K
    
    Second Amendment dated as of December 1, 2006, among El Paso Exploration & Production Company, El
Paso E&P Company, L.P. and Fortis Capital Corp., as administrative agent for the Lenders party to
that certain Amended and Restated Credit Agreement dated as of October 19, 2005.10.L
    
    Credit Agreement, dated as of November 3, 2005, among El Paso Corporation and El Paso Production
Oil & Gas USA, L.P., as Borrowers, Fortis Capital Corp., as Administrative Agent, Arranger and
Bookrunner, and the several Lenders party from time to time thereto (Exhibit 10.A to our Form 8-K
filed January 4, 2006).
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##### Table of Contents



ExhibitNumber
    
    Description10.M
    
    First Amendment, Consent and Waiver Agreement, dated as of December 20, 2005, among El Paso
Corporation and El Paso Production Oil & Gas USA, L.P., as Borrowers, Fortis Capital Corp., as
Administrative Agent for the Lenders, and the several Lenders party from time to time thereto
(Exhibit 10.B to our Form 8-K filed January 4, 2006).21
    
    Omitted pursuant to the reduced disclosure format permitted by General Instruction I to Form 10-K.*23.A
    
    Consent of Ryder Scott*31.A
    
    Certification of Principal Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*31.B
    
    Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*32.A
    
    Certification of Principal Executive Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.*32.B
    
    Certification of Chief Financial Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.*99.A
    
    Ryder Scott reserve report for El Paso Exploration & Production Company as of December 31, 2006*99.B
    
    Ryder Scott reserve report for Four
Star Oil & Gas Company as of December 31, 2006
 Undertaking
  66