2. FINANCIAL AND OPERATING HIGHLIGHTS
($ in millions, except per share) For the Years Ended December 31,
2005 2004 2003
F I N A N C I A L R E S U LT S
Operating revenues $ 4,017 $ 5,539 $ 6,339
Operating income (187) 182 394
Loss from continuing operations (702) (829) (605)
Net loss available to common shareholders (633) (947) (1,883)
Basic and diluted earnings per share (0.98) (1.48) (3.15)
Total assets $ 31,838 $ 31,383 $ 36,968
Short-term financing obligations,
including current maturities 1,211 955 1,457
Long-term debt 17,023 18,241 20,275
Shareholders’ equity 3,389 3,438 4,346
Cash flow from operations 268 1,316 2,329
O P E R AT I N G R E S U LT S
Pipeline throughput volumes (Bbtu/d)
Company-owned pipeline systems 18,432 17,779 17,902
Equity investments 2,833 2,798 2,433
Total throughput 21,265 20,577 20,335
Exploration & Production (Bcfe)
Production 271.1 297.8 409.4
Unconsolidated affiliate production 8.8 – –
Reserves 2,415 2,181 2,474
Unconsolidated affiliate reserves 253 – –
The financial and operating highlights above are not necessarily indicative of results to be expected in the future and should be read
together with Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II,
Item 8, Financial Statements and Supplementary Data included in our 2005 Annual Report on Form 10-K.
3. LETTER TO SHAREHOLDERS
In December 2003, we launched an aggressive plan to return El Paso
to growth and profitability, laying out a series of mileposts along a two-year path. I’m
happy to report that going into 2006, El Paso’s turnaround is over. We’re living up to
the commitments we made in 2003. Last year I posed five criteria on which I thought
we would be judged: restoring our balance sheet through debt reduction; reducing costs;
turning around our exploration and production business; establishing businesses which
generate free cash flow after maintenance and growth capital; and creating a common
culture from our diverse histories. Each of these goals was accomplished.
the year with less than 25 percent of production coming
PIPELINES
Our pipeline franchise continued to “deliver the goods” from the onshore region and exited at 50 percent. Each
in 2005. In spite of dealing with the aftermaths of of these milestones demonstrates our efforts to lower risk
Hurricanes Ivan, Katrina, and Rita, we met profitability and increase predictability. We made several acquisitions
expectations while turning in an outstanding safety record. during the year, adding to reserves and creating a multi-
And, on time and on budget, we brought on new projects year inventory of drilling prospects that meets our return
in California, the Rockies, the Great Lakes, and at Elba requirements at prices substantially below current rates.
Island–our Georgia LNG terminal. We continued to Finally, we made two important Gulf of Mexico Deep
leverage our North American footprint by committing Shelf discoveries, which will come on stream early this
to new growth projects primarily in the Rockies, the year. All of this positions us to show significant growth
Mid-Continent, the Northeast, and at Elba Island. Already in 2006 and beyond.
fully contracted, these projects will provide lower-risk
earnings growth. In addition, Southern Natural Gas LEGACY ISSUES
Last year we put many of our legacy issues in the rearview
and Florida Gas Transmission concluded two important
mirror. We sold: the last of our power restructuring and
rate cases, and the first rate case in 10 years was filed for
most of our domestic power assets; our remaining mid-
El Paso Natural Gas.
stream business; and our turbine inventory. We announced
sales of power assets in Asia, Europe, Central America,
EXPLORATION AND PRODUCTION
2005 was a watershed year for our exploration and pro- and Brazil, some of which closed in 2005 with the balance
duction business. We entered the year after an extremely closing in the first half of 2006. We announced the sale of
challenging 2004 and exited with a great deal of momen- the bulk of our power trading book, the proceeds of which
tum that has us set for an outstanding 2006. Each operat- will come during the first half of 2006. And we sold our
ing region generated value for the capital spent. Early only remaining tolling agreement, Cordova. All told, we
poor performance in the Texas Gulf Coast region kept announced or closed $2.6 billion of non-strategic asset
the overall unit from achieving full-year production tar- sales in 2005. We continued to simplify our business:
gets, but this was turned around by year end. Reserves resolving litigation; concluding government investigations;
were up 22 percent; we replaced almost all of our produc- and delisting El Paso CGP stock, eliminating the cost
tion with the drillbit; our total finding and development of one public registrant which allowed us to move our
costs were $2.36 per Mcfe; and we increased our reserves- domestic oil and gas properties into a single company.
to-production ratio by more than 50 percent. We entered And we continued to focus on cost reductions: vacating
1
4. OUR
a location and renegotiating a significant obligation for energy supply back on stream, so our customers’ needs
rented Houston office space, consolidating into down- could be met. And meet them we did. Safely. Dependably.
town buildings that we own; significantly reducing our At the lowest cost possible. Because of the tireless efforts
insurance costs; and continuing the reduction of our of El Paso employees, we’re already back to 85 percent
holding company. of pre-hurricane capacity.
The obvious benefits of this reduction in size and com- While our affected employees focused on our customers’
plexity are cost reductions and balance sheet improve- needs, the rest of us focused on theirs. El Paso helicopters
ment. But the more important, albeit less quantifiable, rescued our people and their families. Our pipeline crews
long-term benefits relate to our ability to focus exclusively used chainsaws to cut through debris in order to get people
on our two core businesses. Each of these businesses is to safety. We housed families and provided them with initial
blessed with significant growth opportunities, and ridding household basics. Around the country, our employees
ourselves of everything outside of the core will result in stepped forward and donated their time and their finan-
better execution on those opportunities and more share- cial resources. Then, systemwide, employees adopted
holder value. The effects of our efforts to continue to affected families, helping to meet their needs for the
simplify our business in 2005 were to create a significant longer term. Recovery did not happen in a few weeks or
amount of “noise” in our financial statements, as we even months. Our employees will feel the effects for years.
posted gains and losses on sales and mark-to-market And we will be here, helping them each step of the way.
earnings impacts from things like Cordova. This made Every once in a while an unplanned event becomes a
the performance of our underlying business units difficult defining moment. Our response to those hurricanes
to discern at best. This “noise factor” should be substan- says more about who we are and what we aspire to
tially reduced in 2006 as a result of necessary steps taken be than 100 slogans on 100 posters.
in 2005, thereby enhancing our investors’ ability to see
the true value of our two core businesses. 2006 AND BEYOND
Our 2006 goals are simple and straightforward: Earn
$1 a share; continue our two-year trajectory of debt
A STORY THAT NEEDS TO BE TOLD
We take our Purpose as a company very literally: To reduction to $14 billion net; fund our two core businesses
provide natural gas and related energy products safely, with adequate maintenance capital and significant growth
efficiently, and dependably. Approximately a third of capital; generate significant free cash flow after capital
the natural gas transported in the U.S. touches our spending; and return El Paso to its rightful position as
system. One of the biggest challenges to that purpose one of North America’s leading energy companies. I have
in our company’s 75-year plus history came in 2005. confidence that we will achieve each of these. In addition,
we’ll continue to create opportunities for growth against
While repairs for 2004 Hurricane Ivan were underway,
a backdrop of increasing demand for natural gas and
we were hit successively with Katrina and Rita. The
the infrastructure needed to transport it. The successful
devastation to the Gulf of Mexico coastline and to
completion of these objectives will create significant
the energy-related infrastructure was unimaginable.
shareholder value.
Damage to our physical facilities was extensive.
On behalf of all of us at El Paso, thank you for the trust
More than 300 El Paso employees and their families
you put in us every day as stewards of your investment.
were affected by the storms, a number of them losing
everything they possessed. What our employees did in
the aftermath of these storms was nothing short of heroic.
Having lost all of their worldly possessions–physically
displaced and emotionally wrecked–they worked
24 hours a day, seven days a week to put the nation’s DOUGLAS L. FOSHEE
President and Chief Executive Officer
2
5. El Paso Corporation strives to be the place to work by offering challenging
THE
PLACE TO opportunities, competitive benefits and compensation, and by providing the
WORK employees of Team El Paso with the chance to impact their communities.
Although we have operations across the United States and internationally
in Brazil and Mexico, the true strength of our company lies not in our scope,
but in our diversity. We believe that successfully executing our business
strategies depends upon contributions from people with dramatically
different experiences, backgrounds, education, and perspectives.
Being the neighbor to have means the employees of Team El Paso make a
THE
NEIGHBOR positive impact in areas where we operate. We maintain the highest levels
TO HAVE of safety for our employees, our facilities, and communities. As a company
responsible for finding and delivering natural resources, we are committed
to the highest levels of environmental stewardship. We’re also dedicated to
improving the quality of life in the towns and cities where we live and work
through financial and volunteer support for a variety of local causes, large
and small.
As the company to own, Team El Paso employees are committed to building
THE
COMPANY long-term value for our shareholders. Our employees are dedicated energy
TO OWN professionals. Their expertise is critical to the development and delivery of
vital new supplies of energy for the nation. Achieving that mission means
executing on a disciplined financial and operational plan, year in and year
out, to create value for our shareholders from each of our businesses.
6. 1
PIPELINES
THERE ARE 2 WAYS
55,500 1/
3
miles of pipeline
of daily U.S.
LARG EST of daily U.S.
throughput
throughput
U.S. pipeline
7. 2
E X P L O R AT I O N & P R O D U C T I O N
TO LOOK AT OUR COM PANY
2.7 TRILLION CUBIC
KEY NATURAL GAS FT. EQUIVALENT
BAS I NS of proved reserves
20
Onshore > U.S.
TOP
Offshore > Gulf of Mexico
> Brazil
among domestic independents
8. OVERVIEW El Paso provides natural gas and
U. S. N A T U R A L
GAS MARKET
Growth in the power generation
sector will drive natural gas demand We own North America’s largest natural gas
Over the next decade, new natural gas-
pipeline system and one of North America’s
fired power generation plants will drive
largest independent natural gas producers.
demand growth. These new power plants
are expected to require an additional
Key Data Highlights
3.6 trillion cubic feet of natural gas
Our Pipelines segment provides • Our systems connect the nation’s
annually by 2015.
natural gas transmission and premier natural gas supply regions
related services through eight to the largest consuming regions in
Consumption & Supply* wholly owned pipeline systems the United States: the Northeast, the
Demand Growth 2005–2015
and four 50%-owned systems. Midwest, the Southeast, the Southwest,
the Gulf Coast, and California.
APPROXIMATE
WHOLLY OWNED PIPELINES MILES OF PIPELINE
• Our pipelines provide access to
Power +3.6 Tcf Tennessee Gas Pipeline 14,200
supplies and markets in Mexico
El Paso Natural Gas 11,000
Residential +.08 Tcf and Canada.
ANR Pipeline 10,500
Commercial +0.5 Tcf
Southern Natural Gas 8,000 • The size, connectivity, and geographic
Industrial +0 Tcf
Colorado Interstate Gas 4,000 diversity of our pipeline system create
Wyoming Interstate 600 opportunities for growth through
*El Paso estimates Mojave Pipeline 400 major expansion projects or new
Cheyenne Plains Gas Pipeline 400 pipeline systems.
The Rockies and LNG will fill the
APPROXIMATE
supply gap 50%-OWNED PIPELINES MILES OF PIPELINE
Florida Gas Transmission 4,900
We expect the most significant addi-
Great Lakes Gas Transmission 2,100
tions to the U.S. natural gas supply will
San Fernando Pipeline 75
come from the Rockies and Mid-Continent Samalayuca Pipeline 25
producing regions. Additionally, new LNG
capacity will play an increasingly impor- Key Data Highlights
tant role in meeting the demand for Our Exploration & Production • We conduct a balanced program of
natural gas. segment owns substantial lease- development drilling, exploration, and
hold acreage in the United States, acquisitions, principally in the United
managed as three geographic States and Brazil.
Significant infrastructure
regions. We also have a major • We have a five-year drilling inventory that
investment required
presence offshore Brazil. provides solid returns using conservative
In order to satisfy growing demand for
natural gas price assumptions.
REGION TOTAL NET ACREAGE
natural gas, significant capital investment
• Our proved natural gas and oil reserves
Onshore 1,735,444
in exploration and production, pipelines, were about 2.7 trillion cubic feet equiv-
Texas Gulf Coast 188,680
storage, and new LNG facilities will be alent* at year end 2005, up 22 percent
Offshore 857,419
from the previous year.
required. El Paso Corporation will continue Brazil 364,030
* Includes reserves form unconsolidated subsidiaries.
to have opportunities in all of these areas.
6
9. related energy products in a safe, efficient, and dependable manner.
1
PIPELINES
Outlook
• Our national footprint means we are able
to capture significant infrastructure growth
opportunities as they occur; in 2006, we
will spend about $450 million on growth
projects in our Pipelines segment.
• Our commitment to LNG includes owner-
ship of one of four regasification terminals
in the continental United States. We are
continuing to expand our presence in this
growing market.
• We will continue to invest maintenance
capital to maintain the value and ensure
the safety of our pipeline systems; in
ANR Pipeline Elba Island LNG Great Lakes Southern Natural Gas
2006 we will invest about $575 million
Transmission (50%)
Cheyenne Plains Pipeline El Paso Natural Gas Tennessee Gas Pipeline
in pipeline maintenance. Mexico Joint Ventures
Colorado Interstate Gas Florida Gas Wyoming Interstate
Transmission (50%) Mojave Pipeline
2
EXPLORATION & PRODUCTION
Outlook
We will remain focused on creating value
through our drilling program and strategic
acquisitions. During 2006, we intend to:
• Deliver consistent returns on
invested capital.
• Increase our proved reserves by
5 to 10 percent.
• Raise annual production by Brazil
8 to 11 percent. Onshore Region
Texas Gulf Coast Region
• Continue to develop onshore areas
GOM/SLA Region
with longer-lived reserves.
7
10. 1
PIPELINES
The El Paso pipeline group’s 55,500-mile interstate pipeline
system connects the nation’s most prolific natural gas supply
regions with the largest consuming regions in the United States,
transporting about one-third of
daily natural gas consumption in
the country.
I NDUSTRY-LEADI NG PI PE LI NE FRANC H IS E
We are proud of our interstate pipeline franchise and El Paso is also an industry leader in the area of safe
operations and pipeline integrity. We continue invest-
our industry-leading position. Our pipeline system is
the largest in the country, representing about a quarter ing the capital necessary to be able to internally
of all U.S. natural gas pipeline capacity and mileage inspect all of our onshore pipelines greater than six
infrastructure. Just as importantly, our presence in inches in diameter across our entire system–from
key markets and access to superior natural gas supply coast to coast. That goes well beyond the require-
sources, combined with the scope of our operations, ments of the Pipeline Safety Act of 2005, but as
put us in a very strong competitive position for the the nation’s largest pipeline franchise we believe
future. And we are more than just pipes. that setting that standard is the right thing to do.
So we do.
We are a leading provider of underground natural gas
storage, as well as LNG storage and regasification.
This allows us to not only offer the depth and flex-
ibility of services that the market demands, but also
to participate in investment opportunities all along
the infrastructure value chain.
8
11. We are also a leading player in underground storage El Paso is a major player in LNG
• El Paso is the largest operator of working gas • During 2006, we will complete a major expansion of
storage in the U.S. Elba, doubling its size.
• We operate more than 400 Bcf of total underground • We have just announced another expansion to
storage, representing more than 10 percent of the double its size again by 2010–2012. Together with
total in the country. new pipelines away from Elba, this represents a
$1.1 billion investment.
• Much of our storage is in the market area, which
is particularly valuable in serving the increasing • All of the capacity at Elba, including the expansions,
power generation needs. is held under long-term contracts.
STRE NGTH
CONNECTIVITY
DIVERSE KEY
S U P P LY R E G I O N S MARKETS
• Strong presence in all major basins • Access all significant growth markets
• Most takeaway capacity in Gulf of Mexico • Highly integrated with major customers
OUTSTANDI NG PROS PECTS FOR G ROWTH
for pipelines, storage, and LNG regasification facili-
The demands for natural gas infrastructure going for-
ties, representing about $1.7 billion a year of required
ward are tremendous, and we are well-positioned to
play a key role in meeting that demand. An INGAA investment. We expect to get our share of that
(Interstate Natural Gas Association of America)- growth, as we plan to successfully invest $450 million
sponsored study expects $25 billion of natural gas or more of growth capital in our pipeline franchise
infrastructure to be invested over the next 15 years annually over the course of the next several years.
9
12. 2
E X P L O R AT I O N & P R O D U C T I O N
El Paso Exploration & Production Company operates in high-
quality basins across the United States and in Brazil. We’re gener-
ating solid returns on invested capital with a program balanced
between development drilling, exploration, and acquisitions.
deliver predictable
During 2006, we expect to
growth at attractive economic returns.
OUR PORTFOLIO OF BALANC E D OPPORTUNITI ES
Onshore Texas Gulf Coast Gulf of Mexico Brazil
The Onshore division is Our Texas Gulf Coast The Gulf of Mexico divi- Brazil provides El Paso
the foundation of our port- division has successfully sion is positioned to with significant exploration
folio, providing consistent refocused its operations provide stable production potential, and we expect
organic production and from deep, high-risk through its development to double our production
reserve growth through a exploration to medium- activities while providing here over the next four
low-risk drilling program. risk exploration and exposure to higher-risk, years. Our Brazilian team
A substantial portion of development in shallower higher-reward exploration. is accelerating an oil devel-
our drilling is in unconven- formations. We have El Paso has the industry’s opment in the Camamu
tional natural gas areas, substantial lease holdings fifth largest acreage posi- basin offshore Brazil. Over
and we are one of the in this area, as well as tion on the continental the next several years, we
largest coalbed methane significant seismic cover- shelf as well as one of will drill a number of high-
producers in the nation. age. We believe that the the industry’s most exten- impact projects that will
The future for this division geologic complexity of this sive seismic inventories. provide additional opportu-
is bright given a five-year area will provide us with nities and a solid organic
drilling inventory and solid drilling opportunities growth outlook.
an extensive lease- for many years.
hold position.
10
13. RESULTS
DE LIVE RI NG
Through the efforts of our technical staff we’ve built a low- to medium-risk program
for our exploration & production company that creates value for shareholders and
delivers predictable results. We monitor every aspect of our operation from our ability
to predict drilling success to achieving operating efficiencies such as reductions in
cycle time (the number of days from the start of a drilling operation to first sales
from a well). By aggressively focusing on cycle time in our onshore region in 2005,
we delivered 6,000 additional producing well days and helped to offset inflation in
drilling and service costs. We expect further progress in 2006.
2006
EXPLORATION % of Drilling Capital
HIGH RISK Gulf of Mexico
International
< 40%
Probability of Success
12%
EXPLORATION AND
DEVELOPMENT
Onshore
MEDIUM RISK
Texas Gulf Coast
Gulf of Mexico
International
20%
DEVELOPMENT
LOW RISK Onshore
Texas Gulf Coast
> 80%
68%
Probability of Success
BALANC E D DRI LLI NG PORTFOLIO TREATM E NT
We have built a multi-year inventory of drillable prospects that is economic using conservative natural gas price
During 2006, about 70 percent of our drilling capital will be spent on low-risk development
assumptions.
prospects, which are expected to replace production. The remaining capital is focused on medium- to high-risk
exploration and development drilling that provides additional growth potential.
Our ability to accurately evaluate risk is a key element of our success. On a monthly basis, we compare expected
success rates against actual results as well as pre-drill and post-drill reserve estimates. This discipline allows us to
ensure that our capital program is delivering value to shareholders.
11
14. BOARD OF DIRECTORS
Left to right: Anthony W. Hall, Jr.; John L. Whitmire; Thomas R. Hix; Robert F. Vagt; Joe B. Wyatt; Robert W. Goldman;
Ronald L. Kuehn, Jr.; Ferrell P. McClean; Juan Carlos Braniff; Douglas L. Foshee; James L. Dunlap; J. Michael Talbert;
Not pictured: William H. Joyce
Juan Carlos Braniff Thomas R. Hix J. Michael Talbert
Managing Partner, Business Consultant; Chairman of the Board,
Capital I Ltd. Partners Former Senior Vice President, Transocean Inc.
Finance and Chief Financial Officer,
James L. Dunlap Robert F. Vagt
Cooper Cameron Corporation
Business Consultant; President,
Former Vice Chairman, William H. Joyce Davidson College;
President and Chief Operating Officer, Chairman of the Board and Former President and
Ocean Energy/ Chief Executive Officer, Chief Operating Officer,
United Meridian Corporation Nalco Company Seagull Energy Corporation
Douglas L. Foshee Ronald L. Kuehn, Jr. John L. Whitmire
President and Chief Executive Officer, Chairman of the Board, Chairman of the Board,
El Paso Corporation El Paso Corporation CONSOL Energy, Inc.
Robert W. Goldman Ferrell P. McClean Joe B. Wyatt
Business Consultant; Business Consultant; Chancellor Emeritus,
Former Senior Vice President, Former Managing Director Vanderbilt University
Finance and Chief Financial Officer, and Senior Advisor,
Conoco Inc. J.P. Morgan Chase & Co.’s
Global Oil & Gas Group
Anthony W. Hall, Jr.
Chief Administrative Officer,
City of Houston, Texas
12
15. MANAGEMENT TEAM
Left to right: D. Mark Leland, Executive Vice President and Chief Financial Officer; Susan B. Ortenstone, Senior Vice President,
Human Resources & Administration; Stephen C. Beasley, President, Eastern Pipeline Group; James J. Cleary, President, Western
Pipeline Group; Robert W. Baker, Executive Vice President and General Counsel; Lisa A. Stewart, President, El Paso Exploration
& Production and Non-Regulated Operations; Daniel B. Martin, Senior Vice President, El Paso Pipeline Group Operations;
Douglas L. Foshee, President and Chief Executive Officer, El Paso Corporation; James C. Yardley, President, Southern Pipeline Group
Principal Corporate Office Cautionary Statement Regarding Forward-looking Statements
This report includes forward-looking statements and projections, made in reliance
El Paso Corporation
on the safe harbor provisions of the Private Securities Litigation Reform Act of
1001 Louisiana Street 1995. The company has made every reasonable effort to ensure that the informa-
Houston, Texas 77002 tion and assumptions on which these statements and projections are based are
current, reasonable, and complete. However, a variety of factors could cause actual
713-420-2600
results to differ materially from the projections, anticipated results or other expec-
tations expressed in this report, including, without limitation, changes in unaudited
Stock Transfer Agent, Registrar,
and/or unreviewed financial information; our ability to implement and achieve our
Dividend Reinvestment Agent, and
objectives in the 2006 plan as set forth in this report, including achieving our debt-
Continuous Odd-lot Stock Sales Program Agent reduction targets, earnings and cash flow targets; changes in reserve estimates
Computershare Trust Company, N.A. based upon internal and third party reserve analyses; the effects of any changes
in accounting rules and guidance; our ability to meet production volume targets in
P O. Box 43010
.
our Exploration and Production segment; uncertainties and potential consequences
Providence, Rhode Island 02940-3010 associated with the outcome of governmental investigations, including, without lim-
877- 453 -1503 itation, those related to the reserve revisions and natural gas hedge transactions;
outcome of litigation, including shareholder derivative and class actions related
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to reserve revisions and restatements; our ability to comply with the covenants
in our various financing documents; our ability to obtain necessary governmental
Stock Exchange Listing
approvals for proposed pipeline projects and our ability to successfully construct
New York Stock Exchange Symbol: EP and operate such projects; the risks associated with recontracting of transportation
commitments by our pipelines; regulatory uncertainties associated with pipeline
El Paso Corporation has filed its CEO and CFO certifica- rate cases; actions by the credit rating agencies; the successful close of our financ-
tions required by section 302 of the Sarbanes-Oxley Act ing transactions; our ability to successfully exit the energy trading business; our
ability to close our announced asset sales on a timely basis; changes in commodity
of 2002 as exhibits to its Annual Report on Form 10-K
prices for oil, natural gas, and power; inability to realize anticipated synergies and
filed with the SEC on March 7 2006.
,
cost savings associated with restructurings and divestitures on a timely basis; gen-
eral economic and weather conditions in geographic regions or markets served by
the company and its affiliates, or where operations of the company and its affiliates
are located; the uncertainties associated with governmental regulation; political and
currency risks associated with international operations of the company and its affili-
ates; competition; and other factors described in the company’s (and its affiliates’)
Securities and Exchange Commission filings. While the company makes these state-
ments and projections in good faith, neither the company nor its management can
guarantee that anticipated future results will be achieved. Reference must be made
to those filings for additional important factors that may affect actual results. The
company assumes no obligation to publicly update or revise any forward-looking
statements made herein or any other forward-looking statements made by the
company, whether as a result of new information, future events, or otherwise.
