UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-14365

El Paso Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		76-0568816 (I.R.S. Employer Identification No.)
El Paso Building 1001 Louisiana Street Houston, Texas (Address of Principal Executive Offices)		77002 (Zip Code)

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

     Common stock, par value $3 per share. Shares outstanding on August 2, 2010: 704,007,309

 

 

EL PASO CORPORATION
TABLE OF CONTENTS

Caption		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			44
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. (Removed and Reserved)			46
Item 5. Other Information			46
Item 6. Exhibits			47
Signatures			48

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

/d		= per day
Bbl		= barrels
BBtu		= billion British thermal units
LNG		= liquefied natural gas
MBbls		= thousand barrels
Mcf		= thousand cubic feet
Mcfe		= thousand cubic feet of natural gas equivalents
MMBtu		= million British thermal units
MMcf		= million cubic feet
MMcfe		= million cubic feet of natural gas equivalents
GW		= gigawatts
GWh		= thousand megawatt hours
NGL		= natural gas liquids
TBtu		= trillion British thermal units
EX-12
EX-31.A
EX-31.B
EX-32.A
EX-32.B
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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

     When we refer to “us”, “we”, “our”, “ours”, “the company” or “El Paso”, we are describing El Paso Corporation and/or our subsidiaries.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

EL PASO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per common share amounts)
(Unaudited)

		Quarters Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Operating revenues		$	1,018			$	973			$	2,419			$	2,457
Operating expenses
Cost of products and services			53				52				106				113
Operation and maintenance			285				264				584				564
Ceiling test charges			—				12				2				2,080
Depreciation, depletion and amortization			242				197				460				453
Taxes, other than income taxes			54				57				123				125
			634				582				1,275				3,335
Operating income (loss)			384				391				1,144				(878	)
Earnings from unconsolidated affiliates			111				12				139				31
Other income, net			57				16				117				38
Interest and debt expense			(284	)			(253	)			(527	)			(508	)
Income (loss) before income taxes			268				166				873				(1,317	)
Income tax (benefit) expense			82				66				268				(460	)
Net income (loss)			186				100				605				(857	)
Net income attributable to noncontrolling interests			(29	)			(11	)			(60	)			(23	)
Net income (loss) attributable to El Paso Corporation			157				89				545				(880	)
Preferred stock dividends of El Paso Corporation			10				10				19				19
Net income (loss) attributable to El Paso Corporation’s common stockholders		$	147			$	79			$	526			$	(899	)
Basic earnings (loss) per common share
Net income (loss) attributable to El Paso Corporation’s common stockholders		$	0.21			$	0.11			$	0.75			$	(1.29	)
Diluted earnings (loss) per common share
Net income (loss) attributable to El Paso Corporation’s common stockholders		$	0.21			$	0.11			$	0.72			$	(1.29	)
Dividends declared per El Paso Corporation’s common share		$	0.01			$	0.05			$	0.02			$	0.10

See accompanying notes.

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

		June 30,				December 31,
		2010				2009
ASSETS
Current assets
Cash and cash equivalents (include $19 in 2010 and $149 in 2009 held by variable interest entities)		$	707			$	635
Accounts and notes receivable
Customer, net of allowance of $6 in 2010 and $8 in 2009			281				346
Affiliates			4				92
Other			166				115
Materials and supplies			169				175
Assets from price risk management activities			268				221
Deferred income taxes			189				298
Other			96				126
Total current assets			1,880				2,008
Property, plant and equipment, at cost
Pipelines (include $1,781 in 2010 and $1,179 in 2009 held by variable interest entities)			20,598				19,722
Natural gas and oil properties, at full cost			21,274				20,846
Other			408				314
			42,280				40,882
Less accumulated depreciation, depletion and amortization			23,249				22,987
Total property, plant and equipment, net			19,031				17,895
Other assets
Investments in unconsolidated affiliates			1,529				1,718
Assets from price risk management activities			135				123
Other			800				761
			2,464				2,602
Total assets		$	23,375			$	22,505

See accompanying notes.

EL PASO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
(Unaudited)

		June 30,				December 31,
		2010				2009
LIABILITIES AND EQUITY
Current liabilities
Accounts payable
Trade		$	381			$	459
Affiliates			7				7
Other			371				424
Short-term financing obligations, including current maturities			711				477
Liabilities from price risk management activities			204				269
Asset retirement obligations			149				158
Accrued interest			214				208
Other			656				684
Total current liabilities			2,693				2,686
Long-term financing obligations, less current maturities			13,083				13,391
Other
Liabilities from price risk management activities			451				462
Deferred income taxes			496				339
Other			1,434				1,491
			2,381				2,292
Commitments and contingencies (Note 9)
Preferred stock of subsidiary			145				145
Equity
El Paso Corporation stockholders’ equity:
Preferred stock, par value $0.01 per share; authorized 50,000,000 shares; issued 750,000 shares of 4.99% convertible perpetual stock; stated at liquidation value			750				750
Common stock, par value $3 per share; authorized 1,500,000,000 shares; issued 719,355,123 shares in 2010 and 716,041,302 shares in 2009			2,158				2,148
Additional paid-in capital			4,487				4,501
Accumulated deficit			(2,647	)			(3,192	)
Accumulated other comprehensive loss			(730	)			(718	)
Treasury stock (at cost); 15,388,683 shares in 2010 and 14,761,654 shares in 2009			(290	)			(283	)
Total El Paso Corporation stockholders’ equity			3,728				3,206
Noncontrolling interests			1,345				785
Total equity			5,073				3,991
Total liabilities and equity		$	23,375			$	22,505

See accompanying notes.

EL PASO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

		Six Months Ended
		June 30,
		2010				2009
Cash flows from operating activities
Net income (loss)		$	605			$	(857	)
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation, depletion and amortization			460				453
Ceiling test charges			2				2,080
Deferred income tax expense (benefit)			270				(470	)
Earnings from unconsolidated affiliates, adjusted for cash distributions			(104	)			4
Other non-cash income items			(24	)			26
Asset and liability changes			(223	)			(63	)
Net cash provided by operating activities			986				1,173
Cash flows from investing activities
Capital expenditures			(1,594	)			(1,363	)
Cash paid for acquisitions, net of cash acquired			(10	)			—
Net proceeds from the sale of assets and investments			293				300
Other			21				(3	)
Net cash used in investing activities			(1,290	)			(1,066	)
Cash flows from financing activities
Net proceeds from issuance of long-term debt			965				983
Payments to retire long-term debt and other financing obligations			(1,060	)			(1,214	)
Net proceeds from issuance of noncontrolling interests			549				184
Dividends paid			(33	)			(89	)
Distributions to noncontrolling interest holders			(39	)			(19	)
Distributions to holders of preferred stock of subsidiary			(10	)			—
Other			4				(6	)
Net cash provided by (used in) financing activities			376				(161	)
Change in cash and cash equivalents			72				(54	)
Cash and cash equivalents
Beginning of period			635				1,024
End of period		$	707			$	970

See accompanying notes.

EL PASO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
(Unaudited)

		Six Months Ended
		June 30,
		2010				2009
El Paso Corporation stockholders’ equity:
Preferred stock:
Balance at beginning and end of period		$	750			$	750
Common stock:
Balance at beginning of period			2,148				2,138
Other, net			10				9
Balance at end of period			2,158				2,147
Additional paid-in capital:
Balance at beginning of period			4,501				4,612
Dividends			(33	)			(89	)
Other, including stock-based compensation			19				14
Balance at end of period			4,487				4,537
Accumulated deficit:
Balance at beginning of period			(3,192	)			(2,653	)
Net income (loss) attributable to El Paso Corporation			545				(880	)
Balance at end of period			(2,647	)			(3,533	)
Accumulated other comprehensive income (loss):
Balance at beginning of period			(718	)			(532	)
Other comprehensive income (loss)			(12	)			(118	)
Balance at end of period			(730	)			(650	)
Treasury stock, at cost:
Balance at beginning of period			(283	)			(280	)
Stock-based and other compensation			(7	)			(1	)
Balance at end of period			(290	)			(281	)
Total El Paso Corporation stockholders’ equity at end of period			3,728				2,970
Noncontrolling interests:
Balance at beginning of period			785				561
Distributions paid to noncontrolling interests			(39	)			(19	)
Issuances of noncontrolling interests			549				184
Net income attributable to noncontrolling interests (Note 11)			50				23
Balance at end of period			1,345				749
Total equity at end of period		$	5,073			$	3,719

See accompanying notes.

EL PASO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)

		Quarters Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income (loss)		$	186			$	100			$	605			$	(857	)
Pension and postretirement obligations:
Reclassification of net actuarial losses during period (net of income taxes of $6 and $12 in 2010 and $4 and $8 in 2009)			11				7				24				14
Cash flow hedging activities:
Unrealized mark-to-market gains (losses) arising during period (net of income taxes of $23 and $25 in 2010 and $7 and $8 in 2009)			(37	)			8				(40	)			10
Reclassification adjustments for changes in initial value to the settlement date (net of income taxes of $1 and $2 in 2010 and $34 and $80 in 2009)			2				(60	)			4				(142	)
Other comprehensive income (loss)			(24	)			(45	)			(12	)			(118	)
Comprehensive income (loss)			162				55				593				(975	)
Comprehensive income attributable to noncontrolling interests			(29	)			(11	)			(60	)			(23	)
Comprehensive income (loss) attributable to El Paso Corporation		$	133			$	44			$	533			$	(998	)

See accompanying notes.

EL PASO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

     We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the United States Securities and Exchange Commission (SEC). Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by U.S. generally accepted accounting principles (GAAP). You should read this report along with our 2009 Annual Report on Form 10-K, which contains a summary of our significant accounting policies and other disclosures. The financial statements as of June 30, 2010, and for the quarters and six months ended June 30, 2010 and 2009, are unaudited. We derived the condensed consolidated balance sheet as of December 31, 2009, from the audited balance sheet filed in our 2009 Annual Report on Form 10-K. In our opinion, we have made adjustments, all of which are of a normal, recurring nature to fairly present our interim period results. Due to the seasonal nature of our businesses, information for interim periods may not be indicative of our operating results for the entire year.

Significant Accounting Policies

     The following is an update of our significant accounting policies and accounting pronouncements issued but not yet adopted as discussed in our 2009 Annual Report on Form 10-K.

     Transfers of Financial Assets. On January 1, 2010, we adopted an accounting standards update for financial asset transfers. Among other items, this update requires the sale of an entire financial asset or a proportionate interest in a financial asset in order to qualify for sale accounting. These changes were effective for sales of financial assets occurring on or after January 1, 2010. In January 2010, we terminated our prior accounts receivable sales programs under which we previously sold senior interests in certain of our pipeline accounts receivable to a third party financial institution (through wholly-owned special purpose entities). As a result, the adoption of this accounting standards update did not have a material impact on our financial statements. Upon termination of the prior accounts receivable sales programs, we entered into new accounts receivable sales programs under which we sell certain of our pipeline accounts receivable in their entirety to the third party financial institution (through wholly-owned special purpose entities). The transfer of these receivables qualifies for sale accounting under the provisions of these accounting standard updates. We present the cash flows related to the prior and new accounts receivable sales programs as operating cash flows in our statements of cash flows. For further information, see Note 13.

     Variable Interest Entities. On January 1, 2010, we adopted an accounting standards update for variable interest entities that revise how companies determine the primary beneficiary of these entities, among other changes. Companies are now required to use a qualitative approach based on their responsibilities and power over the entities’ operations, rather than a quantitative approach in determining the primary beneficiary as previously required. Additionally, the primary beneficiary is required to retrospectively present qualifying assets and liabilities of variable interest entities separately on the balance sheet. Other than the required change in presentation on our balance sheet, the adoption of this accounting standards update did not have a material impact on our financial statements. For a further discussion of our involvement with variable interest entities, see Note 13.

2. Divestitures

     During the second quarter of 2010, we completed the sale of certain of our interests in Mexican pipeline and compression assets for approximately $300 million and recorded a pretax gain of approximately $80 million. During 2009, we (i) sold our investment in the Argentina-to-Chile pipeline to our partners in the project for approximately $32 million, (ii) sold non-core natural gas producing properties located in our Central and Western regions for approximately $95 million, and (iii) sold our interest in the Porto Velho power generation facility in Brazil to our partner in the project for total consideration of $179 million, including $78 million in notes receivable. In the second quarter of 2009, we sold the notes, including accrued interest, to a third party financial institution for $57 million and recorded a loss of approximately $22 million.

3. Ceiling Test Charges

     We are required to conduct quarterly impairment tests of our capitalized costs in each of our full cost pools. During the quarters and six months ended June 30, 2010 and 2009, we recorded the following ceiling test charges:

		Quarters Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(In millions)
Full cost pool:
U.S.		$	—			$	—			$	—			$	2,031
Brazil			—				—				—				28
Egypt			—				12				2				21
Total		$	—			$	12			$	2			$	2,080

     During 2009, the calculation of these charges was based on spot commodity prices at the end of each quarter, as required at that time. As a result of our adoption of the SEC’s final rule on the Modernization of Oil and Gas Reporting, effective December 31, 2009, we began using a 12-month average price (calculated as the unweighted arithmetic average of the price on the first day of each month within the 12-month period prior to the end of the reporting period) when performing these ceiling tests. In calculating our ceiling test charges, we are also required to hold prices constant over the life of the reserves, even though actual prices of natural gas and oil are volatile and change from period to period.

4. Income Taxes

     Income taxes for the quarters and six months ended June 30 were as follows:

		Quarters Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(In millions, except rates)
Income tax (benefit) expense		$	82			$	66			$	268			$	(460	)
Effective tax rate			31	%			40	%			31	%			35	%

     Effective Tax Rate. We compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss, except for significant unusual or infrequently occurring items, which are recorded in the period that the item occurs. Changes in tax laws or rates are recorded in the period of enactment. Our effective tax rate is affected by items such as income attributable to nontaxable noncontrolling interests, dividend exclusions on earnings from unconsolidated affiliates where we anticipate receiving dividends, the effect of state income taxes (net of federal income tax effects), and the effect of foreign income which can be taxed at different rates.

     For the quarter and six months ended June 30, 2010, our effective tax rate was impacted by the sale of certain of our interests in Mexican pipeline and compression assets and income attributable to nontaxable noncontrolling interests. Partially offsetting these items was $18 million of additional deferred income tax expense recorded in the first quarter from healthcare legislation enacted in March 2010 which reduces the tax deduction for retiree prescription drug expenses to the extent they are reimbursed under the Medicare subsidy program. For the six months ended June 30, 2009, our effective tax rate was relatively consistent with the statutory rate and the customary relationship between our pretax accounting income and income tax expense. However, during the second quarter of 2009, our effective tax rate was primarily impacted by the sale and writedown of certain foreign investments for which there was no U.S. tax impact.

5. Earnings Per Share

     We calculated basic and diluted earnings (loss) per common share as follows for the quarters and six months ended June 30:

		2010								2009
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Net income attributable to El Paso Corporation		$	157			$	157			$	89			$	89
Preferred stock dividends of El Paso Corporation			(10	)			—				(10	)			(10	)
Net income attributable to El Paso Corporation’s common stockholders		$	147			$	157			$	79			$	79
Weighted average common shares outstanding			698				698				696				696
Effect of dilutive securities:
Options and restricted stock			—				5				—				3
Convertible preferred stock			—				58				—				—
Weighted average common shares outstanding and dilutive securities			698				761				696				699
Basic and diluted earnings per common share:
Net income attributable to El Paso Corporation’s common stockholders		$	0.21			$	0.21			$	0.11			$	0.11

		2010								2009
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Net income (loss) attributable to El Paso Corporation		$	545			$	545			$	(880	)		$	(880	)
Preferred stock dividends of El Paso Corporation			(19	)			—				(19	)			(19	)
Interest on trust preferred securities			—				5				—				—
Net income (loss) attributable to El Paso Corporation’s common stockholders		$	526			$	550			$	(899	)		$	(899	)
Weighted average common shares outstanding			697				697				695				695
Effect of dilutive securities:
Options and restricted stock			—				5				—				—
Convertible preferred stock			—				58				—				—
Trust preferred securities			—				8				—				—
Weighted average common shares outstanding and dilutive securities			697				768				695				695
Basic and diluted earnings (loss) per common share:
Net income (loss) attributable to El Paso Corporation’s common stockholders		$	0.75			$	0.72			$	(1.29	)		$	(1.29	)

     We exclude potentially dilutive securities from the determination of diluted earnings per share (as well as their related income statement impacts) when their impact on net income attributable to El Paso Corporation per common share is antidilutive. Potentially dilutive securities consist of employee stock options, restricted stock, convertible preferred stock and trust preferred securities. For the quarter and six months ended June 30, 2010, and the quarter ended June 30, 2009, certain of our employee stock options were antidilutive. Additionally, our trust preferred securities were antidilutive for the quarters ended June 30, 2010 and 2009 and our convertible preferred stock was antidilutive for the quarter ended June 30, 2009. For the six months ended June 30, 2009, we incurred losses attributable to El Paso Corporation and, accordingly, excluded all of our potentially dilutive securities from the determination of diluted earnings per share.

6. Fair Value of Financial Instruments

     On January 1, 2009, we adopted accounting standard updates regarding how companies should consider their own credit in determining the fair value of their liabilities that have third party credit enhancements related to them and recorded a $34 million gain (net of $18 million of taxes), or $0.05 per share, in 2009 as a result of adopting these new accounting updates.

     We use various methods to determine the fair values of our financial instruments and other derivatives that are measured at fair value on a recurring basis. The fair value of an instrument depends on a number of factors, including the availability of observable market data over the contractual term of the underlying instrument. For some of our instruments, the fair value is calculated based on directly observable market data or data available for similar instruments in similar markets. For other instruments, the fair value may be calculated based on these inputs as well as other assumptions related to estimates of future settlements of the instrument. We separate our financial instruments and other derivatives into three levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. Our assessment of an instrument can change over time based on the maturity or liquidity of the instrument, which could result in a change in the classification of the instruments between levels.

Each of these levels is described below:

	•		Level 1 instruments’ fair values are based on quoted prices for the instruments in actively traded markets.
	•		Level 2 instruments’ fair values are primarily based on pricing data representative of quoted prices for similar assets and liabilities in active markets (or identical assets and liabilities in less active markets).
	•		Level 3 instruments’ fair values are partially calculated using pricing data that is similar to Level 2 above, but their fair value also reflects adjustments for being in less liquid markets or having longer contractual terms.

     During the quarter and six months ended June 30, 2010, there have been no changes to the types of instruments or the levels in which they are classified. For a further description of these levels and our corresponding instruments classified by level, see our 2009 Annual Report on Form 10-K.

     Listed below are the fair values of our financial instruments that are recorded at fair value classified in each level at June 30, 2010 and December 31, 2009:

		June 30, 2010																December 31, 2009
		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
		(In millions)
Assets
Commodity-based derivatives
Production-related natural gas and oil derivatives		$	—			$	292			$	—			$	292			$	—			$	169			$	—			$	169
Other natural gas derivatives			—				57				18				75				—				106				21				127
Power-related derivatives			—				—				25				25				—				—				37				37
Interest rate derivatives			—				11				—				11				—				11				—				11
Marketable securities invested in non-qualified compensation plans			21				—				—				21				20				—				—				20
Total assets			21				360				43				424				20				286				58				364
Liabilities
Commodity-based derivatives
Production-related natural gas and oil derivatives			—				(19	)			—				(19	)			—				(42	)			—				(42	)
Other natural gas derivatives			—				(92	)			(109	)			(201	)			—				(153	)			(133	)			(286	)
Power-related derivatives			—				—				(373	)			(373	)			—				—				(386	)			(386	)
Interest rate derivatives			—				(62	)			—				(62	)			—				(17	)			—				(17	)
Other			—				—				(12	)			(12	)			—				—				(31	)			(31	)
Total liabilities			—				(173	)			(494	)			(667	)			—				(212	)			(550	)			(762	)
Total		$	21			$	187			$	(451	)		$	(243	)		$	20			$	74			$	(492	)		$	(398	)

     On certain derivative contracts recorded as assets in the table above, we are exposed to the risk that our counterparties may not perform or post the required collateral, if any, with us. We have assessed this counterparty risk in light of the collateral our counterparties have posted with us and determined that our exposure is primarily related to our production-related derivatives and is limited to nine financial institutions, each of which has a current Standard & Poor’s credit rating of A or better.

     The following table presents the changes in our financial assets and liabilities included in Level 3 for the quarters and six months ended June 30, 2010:

						Change in Fair Value				Change in Fair Value
		Balance at				Reflected in				Reflected in								Balance at
		Beginning of				Operating				Operating				Settlements,				End of
		Period				Revenues(1)				Expenses(2)				Net				Period
		(In millions)
Quarter Ended June 30, 2010
Assets		$	42			$	1			$	—			$	—			$	43
Liabilities			(490	)			(44	)			3				37				(494	)
Total		$	(448	)		$	(43	)		$	3			$	37			$	(451	)
Six Months Ended June 30, 2010
Assets		$	58			$	(14	)		$	—			$	(1	)		$	43
Liabilities			(550	)			(11	)			(1	)			68				(494	)
Total		$	(492	)		$	(25	)		$	(1	)		$	67			$	(451	)

     The following table reflects the carrying value and fair value of our financial instruments:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(In millions)
Financing obligations		$	13,794			$	14,183			$	13,868			$	14,151
Marketable securities invested in non-qualified compensation plans			21				21				20				20
Commodity-based derivatives			(201	)			(201	)			(381	)			(381	)
Interest rate derivatives			(51	)			(51	)			(6	)			(6	)
Other derivatives			(12	)			(12	)			(31	)			(31	)
Other			17				17				17				17

     As of June 30, 2010 and December 31, 2009, the carrying amounts of cash and cash equivalents, short-term borrowings, and trade receivables and payables represented fair value because of the short-term nature of these instruments. The carrying amounts of our restricted cash and noncurrent receivables approximate their fair value based on the nature of their interest rates and our assessment of the ability to recover these amounts. We estimated the fair value of debt based on quoted market prices for the same or similar issues, including consideration of our credit risk related to those instruments.

7. Price Risk Management Activities

     Our price risk management activities relate primarily to derivatives entered into to hedge or otherwise reduce (i) the commodity price exposure on our natural gas and oil production and (ii) interest rate exposure on our long-term debt. We also hold other derivatives not intended to hedge these exposures. When we enter into derivative contracts, we may designate the derivative as either a cash flow hedge or a fair value hedge. Hedges of cash flow exposure are designed to hedge forecasted sales transactions or limit the variability of cash flows to be received or paid related to a recognized asset or liability. Hedges of fair value exposure are entered into to protect the fair value of a recognized asset, liability or firm commitment.

     Financial Statement Presentation. For a detailed description on how our derivatives are reflected and accounted for on our balance sheet and statements of income, comprehensive income and cash flow, see our 2009 Annual Report on Form 10-K. The following table presents the fair value of our derivatives on a gross basis by contract type. We have not netted these contracts for counterparties where we have a legal right of offset or for cash collateral associated with these derivatives. At June 30, 2010 and December 31, 2009, cash collateral held was not material.

		Fair Value of Derivative Assets								Fair Value of Derivative Liabilities
		June 30, 2010				December 31, 2009				June 30, 2010				December 31, 2009
		(In millions)
Derivatives Designated as Hedges:
Interest rate derivatives
Cash flow hedges		$	—			$	1			$	(62	)		$	(17	)
Fair value hedges			11				10				—				—
Total derivatives designated as hedges			11				11				(62	)			(17	)
Derivatives not Designated as Hedges:
Commodity-based derivatives
Production-related			316				239				(43	)			(112	)
Other natural gas			311				519				(437	)			(678	)
Power-related			37				57				(385	)			(406	)
Total commodity-based derivatives			664				815				(865	)			(1,196	)
Interest rate derivatives			11				10				(11	)			(10	)
Total derivatives not designated as hedges			675				825				(876	)			(1,206	)
Impact of master netting arrangements			(283	)			(492	)			283				492
Total assets (liabilities) from price risk management activities			403				344				(655	)			(731	)
Other derivatives			—				—				(12	)			(31	)
Total derivatives		$	403			$	344			$	(667	)		$	(762	)

Commodity-Based Derivatives

     Production-Related Derivatives. We attempt to mitigate commodity price risk and stabilize cash flows associated with our forecasted sales of natural gas and oil production through the use of derivative natural gas and oil swaps, basis swaps and option contracts; however, we are subject to commodity price risks on a portion of our forecasted production. As of June 30, 2010 and December 31, 2009, we have production-related derivatives on 253 TBtu and 313 TBtu of natural gas and 4,382 MBbl and 4,016 MBbl of oil.

     Other Commodity-Based Derivatives. In our Marketing segment, we have long-term natural gas and power derivative contracts that include forwards, swaps and options that we either intend to manage until their expiration or liquidate to the extent it is economical and prudent. None of these derivatives are designated as accounting hedges. As of June 30, 2010 and December 31, 2009, these derivative contracts include (i) natural gas contracts that obligate us to sell natural gas to power plants and have various expiration dates ranging from 2012 to 2019, with expected obligations under individual contracts with third parties ranging from 12,550 MMBtu/d to 104,750 MMBtu/d and (ii) derivative power contracts that require us to swap locational differences in power prices between three power plants in the Pennsylvania-New Jersey-Maryland (PJM) eastern region with the PJM west hub on approximately 3,700 GWh from 2010 to 2012, 2,400 GWh for 2013 and 1,700 GWh from 2014 to April 2016. These contracts also require us to provide approximately 1,700 GWh of power per year and approximately 71 GW of installed capacity per year in the PJM power pool through April 2016. For these natural gas and power contracts, we have entered into contracts in previous years to economically mitigate our exposure to commodity price changes on substantially all of these volumes, although we continue to have exposure to changes in locational price differences between the PJM regions. During the third quarter of 2010, we entered into positions that eliminate a portion of the risk related to the locational price differences on these contracts.

     Listed below are the impacts of our commodity-based derivatives to our income statement and statement of comprehensive income for the quarters and six months ended June 30:

		2010								2009
						Other								Other
		Operating				Comprehensive				Operating				Comprehensive
		Revenues				Income				Revenues				(Loss)
		(In millions)
Quarters ended June 30,
Production-related derivatives(1)		$	31			$	3			$	55			$	(99	)
Other natural gas and power derivatives not designated as hedges			(43	)			—				18				—
Total commodity-based derivatives(2)		$	(12	)		$	3			$	73			$	(99	)
Six months ended June 30,
Production-related derivatives(1)		$	284			$	6			$	449			$	(227	)
Other natural gas and power derivatives not designated as hedges			(26	)			—				73				—
Total commodity-based derivatives(2)		$	258			$	6			$	522			$	(227	)

Interest Rate Derivatives

     We have long-term debt with variable interest rates that exposes us to changes in market-based interest rates. As of June 30, 2010 and December 31, 2009, we had interest rate swaps, which are designated as cash flow hedges that we used to convert the interest rate on approximately $1.3 billion and $169 million of debt from a floating LIBOR interest rate to a fixed interest rate. Approximately $1.1 billion of the debt hedged as of June 30, 2010, relates to Ruby debt obligations. These swaps begin accruing interest on July 1, 2011 and have termination dates ranging from June 2013 to June 2017 which correspond to the principal outstanding on the Ruby debt over the term of these swaps. For a further discussion of our Ruby hedges, see Note 8.

     We also have long-term debt with fixed interest rates that exposes us to paying higher than market rates should interest rates decline. We use interest rate swaps to protect the value of certain of these debt instruments by converting the fixed amounts of interest due under the debt agreements to variable interest payments. We record changes in the fair value of these derivatives in interest expense. As of June 30, 2010 and December 31, 2009, our hedges converted the interest rate on approximately $218 million of debt from a fixed rate to a variable rate of LIBOR plus 4.18% and we also had interest rate swaps not designated as hedges with a notional amount of $222 million for which changes in the fair value of these swaps were substantially eliminated by offsetting swaps contracts.

     Our interest rate derivatives decreased our other comprehensive income by $45 million and $46 million for the quarter and six months ended June 30, 2010 and increased our other comprehensive income by $5 million and $8 million for the quarter and six months ended June 30, 2009. Our interest rate derivatives did not have a significant impact to our interest expense during the quarter and six months ended June 30, 2010 and 2009, and we did not record any ineffectiveness on these derivatives during these periods. We do not anticipate that the accumulated other comprehensive loss associated with these derivatives to be reclassified to interest expense during the next twelve months will be significant to our financial statements.

Cross-Currency Derivatives

     During the second quarter of 2009, our Euro-denominated debt matured and we settled all of our related cross-currency swaps, which were designated as fair value hedges of this debt. During the quarter and six months ended June 30, 2009, these swaps resulted in an increase to our interest expense of approximately $1 million and $3 million and an increase of $3 million and a decrease of $21 million to our other income due to changing interest and foreign currency rates during the first half of 2009.

8. Debt, Other Financing Obligations and Other Credit Facilities

		June 30,				December 31,
		2010				2009
		(In millions)
Short-term financing obligations, including current maturities		$	711			$	477
Long-term financing obligations			13,083				13,391
Total		$	13,794			$	13,868

     Changes in Financing Obligations. During the six months ended June 30, 2010, we had the following changes in our financing obligations:

										Cash
						Book Value				Received
						Increase (Decrease)				(Paid)
Company		Interest Rate				(In millions)
Issuances
Elba Express Company L.L.C. credit facility		variable				$	19			$	19
Ruby Holding Company loan commitment(1)		13.00%					188				187
El Paso Pipeline Partners Operating Company, L.L.C. notes due 2020		6.50%					535				528
El Paso revolving credit facility		variable					193				193
El Paso Pipeline Partners L.P. (EPB) revolving credit facility		variable					38				38
Increases through June 30, 2010						$	973			$	965
Repayments, repurchases, and other
El Paso Exploration and Production Company revolving credit facility		variable				$	(469	)		$	(469	)
El Paso revolving credit facility		variable					(393	)			(393	)
EPB revolving credit facility		variable					(38	)			(38	)
El Paso notes due 2010		7.75% and 7.80%					(149	)			(149	)
Other		various					2				(11	)
Decreases through June 30, 2010						$	(1,047	)		$	(1,060	)

     Credit Facilities. We have various credit facilities in place which allow us to borrow funds or issue letters of credit. As of June 30, 2010, we had total available capacity of approximately $2.2 billion under these facilities (not including capacity available under the EPB $750 million revolving credit facility and all project financings).

     The availability of borrowings under our credit agreements and our ability to incur additional debt is subject to various financial and non-financial covenants and restrictions. These restrictions include potential limitations in the credit agreements of certain of our subsidiaries on their ability to declare and pay dividends and loan funds to us. Additionally, the revolving credit facilities of our exploration and production subsidiary are collateralized by certain of our natural gas and oil properties and has a borrowing base subject to revaluation on a semi-annual basis. There have been no significant changes to our restrictive covenants from those disclosed in our 2009 Annual Report on Form 10-K, and as of June 30, 2010, we were in compliance with all of our debt covenants.

     Letters of Credit. We enter into letters of credit in the ordinary course of our operating activities as well as periodically in conjunction with the sales of assets or businesses. As of June 30, 2010, we had total outstanding letters of credit issued under all of our facilities of approximately $0.9 billion. Included in this amount is approximately $0.6 billion of letters of credit securing our recorded obligations related to price risk management activities.

     Ruby Pipeline Financing. In May 2010, we entered into a seven-year amortizing $1.5 billion financing facility for our Ruby pipeline project that requires principal payments at various dates through June 2017. In August 2010, we made an initial draw of approximately $250 million on the facility. Our initial interest rate on amounts borrowed is LIBOR plus 3 percent which increases to LIBOR plus 3.25 percent for years three and four, and to LIBOR plus 3.75 percent for years five through seven assuming we refinance $700 million of the facility by the end of year four. If we do not refinance $700 million by the end of year four, the rate will be LIBOR plus 4.25 percent for years five through seven. In conjunction with entering into this facility, we entered into interest rate swaps that begin in July 2011 and convert the floating LIBOR interest rate to fixed interest rates on approximately $1.1 billion of total borrowings under this agreement. For a further discussion of these swaps, see Note 7. We have provided a contingent completion and cost-overrun guarantee to Ruby lenders; however, upon the Ruby pipeline project becoming operational and making certain permitting representations, the project financing will become non-recourse to us.

9. Commitments and Contingencies

Legal Proceedings

     Cash Balance Plan Lawsuit. In December 2004, a purported class action lawsuit entitled Tomlinson, et al.v. El Paso Corporation and El Paso Corporation Pension Plan was filed in U.S. District Court for Denver, Colorado. The lawsuit alleges various violations of the Employee Retirement Income Security Act (ERISA) and the Age Discrimination in Employment Act as a result of our change from a final average earnings formula pension plan to a cash balance pension plan. The trial court has dismissed all of the claims. The dismissal of the case is subject to appeal.

     Retiree Medical Benefits Matters. In 2002, a lawsuit entitled Yolton et al. v. El Paso Tennessee Pipeline Co. and Case Corporation was filed in a federal court in Detroit, Michigan filed on behalf of a group of retirees of Case Corporation (Case) that alleged they are entitled to retiree medical benefits under a medical benefits plan for which we serve as plan administrator pursuant to a merger agreement with Tenneco Inc. Although we had asserted that our obligations under the plan were subject to a cap pursuant to an agreement with the union for Case employees, the trial court ruled that the benefits were vested and not subject to the cap. As a result, we were obligated to pay the amounts above the cap, but intend to pursue appellate options following the determination by the trial court of any damages incurred by the plaintiffs during the period when premium payments above the cap were paid by the retirees. We believe our accruals established for this matter are adequate.

     Price Reporting Litigation. Beginning in 2003, several lawsuits were filed against El Paso Marketing L.P. (EPM) alleging that El Paso, EPM and other energy companies conspired to manipulate the price of natural gas by providing false price information to industry trade publications that published gas indices. While some of the cases have been settled, several of the cases are in various stages of appellate proceedings as further described in our 2009 Annual Report on Form 10-K. In this regard, in April 2010, the Tennessee Supreme Court dismissed the lawsuit entitled Leggett, et al. v. Duke Energy Corporation, et al. Our costs and legal exposure related to the remaining lawsuits and claims which have not yet been settled are not currently determinable.

     MTBE. Certain of our subsidiaries used, produced, sold or distributed methyl tertiary-butyl ether (MTBE) as a gasoline additive. Various lawsuits were filed throughout the U.S. regarding the potential impact of MTBE on water supplies. The lawsuits have been brought by different parties, including state attorney generals, water districts and individual water companies seeking different remedies, including remedial activities, damages, attorneys’ fees and costs. These cases were initially consolidated for pre-trial purposes in multi-district litigation in the U.S. District Court for the Southern District of New York. Several cases were later remanded to state court. One case has been dismissed. We settled 60 cases in 2008 and 2009 which were covered by insurance. We have executed agreements to settle another 26 cases, which will be substantially funded by insurance. Following dismissal of these settled cases, we will have nine lawsuits that remain. It is likely that our insurers will assert denial of coverage on the six most-recently filed cases. Our costs and legal exposure related to the remaining lawsuits are not currently determinable.

     In addition to the above proceedings, we and our subsidiaries and affiliates are named defendants in numerous lawsuits and governmental proceedings and claims that arise in the ordinary course of our business. There are also other regulatory rules and orders in various stages of adoption, review and/or implementation. For each of these matters, we evaluate the merits of the case or claim, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If we determine that an unfavorable outcome is probable and can be estimated, we establish the necessary accruals. While the outcome of these matters, including those discussed above, cannot be predicted with certainty, and there are still uncertainties related to the costs we may incur, based upon our evaluation and experience to date, we believe we have established appropriate reserves for these matters. It is possible, however, that new information or future developments could require us to reassess our potential exposure related to these matters and adjust our accruals accordingly, and these adjustments could be material. As of June 30, 2010, we had approximately $48 million accrued, which has not been reduced by $2 million of related insurance receivables, for our outstanding legal and governmental proceedings.

Rates and Regulatory Matters

     EPNG Rate Case. In June 2008, El Paso Natural Gas Company (EPNG) filed a rate case with the FERC proposing an increase in EPNG’s base tariff rates. In August 2008, the FERC issued an order accepting the proposed rates effective January 1, 2009, subject to refund. In March 2010, EPNG filed an uncontested partial offer of settlement which was approved in April 2010. The settlement provides for an increase in EPNG’s base tariff rates over rates existing prior to January 1, 2009. Under the terms of the settlement, EPNG agreed to file its next general rate case to be effective as early as April 1, 2011, but not later than April 1, 2012. As part of the settlement, EPNG made an initial refund to its customers in April 2010, with the remaining refunds to be paid during August 2010. The refunds to be paid are fully reserved. The settlement resolves all but four issues in the proceeding. A hearing on the remaining issues was completed in June 2010 and the outcome is not currently determinable.

Environmental Matters

     We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remedy the effect of the disposal or release of specified substances at current and former operating sites. At June 30, 2010, we had accrued approximately $178 million for environmental matters, which has not been reduced by $22 million for amounts to be paid directly under government sponsored programs or through contractual arrangements with third parties. Our accrual includes approximately $174 million for expected remediation costs and associated onsite, offsite and groundwater technical studies and approximately $4 million for related environmental legal costs. Of the $178 million accrual, $12 million was reserved for facilities we currently operate and $166 million was reserved for non-operating sites (facilities that are shut down or have been sold) and Superfund sites.

     Our estimates of potential liability range from approximately $178 million to approximately $380 million. Our recorded environmental liabilities reflect our current estimates of amounts we will expend on remediation projects in various stages of completion. However, depending on the stage of completion or assessment, the ultimate extent of contamination or remediation required may not be known. As additional assessments occur or remediation efforts continue, we may incur additional liabilities. By type of site, our reserves are based on the following estimates of reasonably possible outcomes:

		June 30, 2010
Sites		Expected				High
		(In millions)
Operating		$	12			$	19
Non-operating			151				323
Superfund			15				38
Total		$	178			$	380

     Below is a reconciliation of our accrued liability from January 1, 2010 to June 30, 2010 (in millions):

Balance as of January 1, 2010		$	189
Additions/adjustments for remediation activities			6
Payments for remediation activities			(17	)
Balance as of June 30, 2010		$	178

     Superfund Matters. Included in our recorded environmental liabilities are projects where we have received notice that we have been designated or could be designated, as a Potentially Responsible Party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly known as Superfund, or state equivalents for 31 active sites. Liability under the federal CERCLA statute may be joint and several, meaning that we could be required to pay in excess of our pro rata share of remediation costs. We consider the financial strength of other PRPs in estimating our liabilities. Accruals for these issues are included in the previously indicated estimates for Superfund sites.

     For the remainder of 2010, we estimate that our total remediation expenditures will be approximately $29 million, most of which will be expended under government directed clean-up plans. In addition, we expect to make capital expenditures for environmental matters of approximately $5 million in the aggregate for the remainder of 2010 through 2014.

     It is possible that new information or future developments could require us to reassess our potential exposure related to environmental matters. We may incur significant costs and liabilities in order to comply with existing environmental laws and regulations. It is also possible that other developments, such as increasingly strict environmental laws, regulations and orders of regulatory agencies, as well as claims for damages to property and the environment or injuries to employees and other persons resulting from our current or past operations, could result in substantial costs and liabilities in the future. As this information becomes available, or other relevant developments occur, we will adjust our accrual amounts accordingly. While there are still uncertainties related to the ultimate costs we may incur, based upon our evaluation and experience to date, we believe our reserves are adequate.

Guarantees and Other Contractual Commitments

     Guarantees and Indemnifications. We are involved in various joint ventures and other ownership arrangements that sometimes require financial and performance guarantees. We also periodically provide indemnification arrangements related to assets or businesses we have sold for which our potential exposure can range from a specified amount to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. For a further discussion, see our 2009 Annual Report on Form 10-K. For those arrangements with a specified dollar amount, we have a maximum stated value of approximately $0.8 billion, primarily related to indemnification arrangements associated with the sale of ANR Pipeline Company in 2007, our Macae power facility in Brazil, and other legacy assets. These amounts exclude guarantees for which we have issued related letters of credit discussed in Note 8. Included in the above maximum stated value are certain indemnification agreements that have expired; however, claims were made prior to the expiration of the related claim periods. We are unable to estimate a maximum exposure of our guarantee and indemnification agreements that do not provide for limits on the amount of future payments due to the uncertainty of these exposures.

     As of June 30, 2010, we have recorded obligations of $24 million related to our guarantee and indemnification arrangements. Our liability consists primarily of an indemnification that one of our subsidiaries provided related to its sale of an ammonia facility that is reflected in our financial statements at its estimated fair value. We have provided a partial parental guarantee of our subsidiary’s obligations under this indemnification. We believe that our guarantee and indemnification agreements for which we have not recorded a liability are not probable of resulting in future losses based on our assessment of the nature of the guarantee, the financial condition of the guaranteed party and the period of time that the guarantee has been outstanding, among other considerations.

     Commitments, Purchase Obligations and Other Matters. In 2009, the FERC approved an amendment to the 1995 FERC settlement with Tennessee Gas Pipeline Company (TGP) that provides for interim refunds over a three year period of approximately $157 million for amounts collected related to certain environmental costs. These refunds are recorded as other current and non-current liabilities on our balance sheet and are expected to be paid over a three year period with interest. As of June 30, 2010, TGP has refunded approximately $39 million to their customers.

10. Retirement Benefits

     Net Benefit Cost. The components of net benefit cost for our pension and postretirement benefit plans for the quarters and six months ended June 30, are as follows:

		Quarters Ended June 30,																Six Months Ended June 30,
										Other																Other
		Pension								Postretirement								Pension								Postretirement
		Benefits								Benefits								Benefits								Benefits
		2010				2009				2010				2009				2010				2009				2010				2009
		(In millions)
Service cost		$	4			$	4			$	—			$	—			$	9			$	8			$	—			$	—
Interest cost			29				30				9				10				57				60				17				19
Expected return on plan assets			(40	)			(43	)			(4	)			(3	)			(79	)			(86	)			(7	)			(6	)
Amortization of net actuarial loss (gain)			18				11				(1	)			—				37				22				(2	)			—
Amortization of prior service cost			1				—				—				—				1				—				—				—
Net benefit cost		$	12			$	2			$	4			$	7			$	25			$	4			$	8			$	13