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 (Do not check if a smaller reporting company)		Smaller reporting company o

     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, 2011: 770,247,634

 

 

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			26
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)			47
Item 5. Other Information			47
Item 6. Exhibits			47
Signatures			48
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

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

/d				= per day
Bbl				= barrels
BBtu				= billion British thermal units
Bcf				= billion cubic feet
GW				= gigawatts
GWh				= gigawatt hours
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
NGL				= natural gas liquids
TBtu				= trillion British thermal units

     When we refer to oil and natural gas 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,
		2011				2010				2011				2010
Operating revenues		$	1,236			$	1,018			$	2,225			$	2,419
Operating expenses
Cost of products and services			44				53				91				106
Operation and maintenance			323				285				628				586
Depreciation, depletion and amortization			262				242				516				460
Taxes, other than income taxes			78				54				154				123
			707				634				1,389				1,275
Operating income			529				384				836				1,144
Earnings from unconsolidated affiliates			32				111				62				139
Loss on debt extinguishment			(27	)			—				(68	)			—
Other income, net			82				57				181				117
Interest and debt expense			(239	)			(284	)			(479	)			(527	)
Income before income taxes			377				268				532				873
Income tax expense			38				82				57				268
Net income			339				186				475				605
Net income attributable to noncontrolling interests			(77	)			(29	)			(151	)			(60	)
Net income attributable to El Paso Corporation			262				157				324				545
Preferred stock dividends of El Paso Corporation			—				10				—				19
Net income attributable to El Paso Corporation’s common stockholders		$	262			$	147			$	324			$	526
Basic earnings per common share
Net income attributable to El Paso Corporation’s common stockholders		$	0.34			$	0.21			$	0.44			$	0.75
Diluted earnings per common share
Net income attributable to El Paso Corporation’s common stockholders		$	0.34			$	0.21			$	0.42			$	0.72
Dividends declared per El Paso Corporation’s common share		$	0.01			$	0.01			$	0.02			$	0.02

See accompanying notes.

EL PASO CORPORATION

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

		Quarters Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income		$	339			$	186			$	475			$	605
Pension and postretirement obligations:
Reclassification of net actuarial losses during period (net of income taxes of $7 and $14 in 2011 and $6 and $12 in 2010)			15				11				31				24
Cash flow hedging activities:
Unrealized mark-to-market gains (losses) arising during period (net of income taxes of $15 and $13 in 2011 and $23 and $25 in 2010)			(27	)			(37	)			(24	)			(40	)
Reclassification adjustments for changes in initial value to the settlement date (net of income taxes of $1 and $2 in 2011 and $1 and $2 in 2010)			4				2				7				4
Other comprehensive income (loss)			(8	)			(24	)			14				(12	)
Comprehensive income			331				162				489				593
Comprehensive income attributable to noncontrolling interests			(77	)			(29	)			(151	)			(60	)
Comprehensive income attributable to El Paso Corporation		$	254			$	133			$	338			$	533

See accompanying notes.

EL PASO CORPORATION

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

		June 30,				December 31,
		2011				2010
ASSETS
Current assets
Cash and cash equivalents (include $38 in 2011 and $31 in 2010 held by variable interest entities)		$	260			$	347
Accounts and notes receivable
Customer, net of allowance of $5 in 2011 and $4 in 2010			329				333
Affiliates			6				7
Other			183				160
Materials and supplies			180				169
Assets from price risk management activities			204				265
Deferred income taxes			284				165
Other			106				106
Total current assets			1,552				1,552
Property, plant and equipment, at cost
Pipelines (include $4,029 in 2011 and $3,232 in 2010 held by variable interest entities)			23,378				22,385
Oil and natural gas properties, at full cost			22,331				21,692
Other			477				416
			46,186				44,493
Less accumulated depreciation, depletion and amortization			23,617				23,421
Total property, plant and equipment, net			22,569				21,072
Other long-term assets
Investments in unconsolidated affiliates			1,689				1,673
Assets from price risk management activities			36				61
Other			1,112				912
			2,837				2,646
Total assets		$	26,958			$	25,270

See accompanying notes.

EL PASO CORPORATION

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

		June 30,				December 31,
		2011				2010
LIABILITIES AND EQUITY
Current liabilities
Accounts payable
Trade		$	474			$	610
Affiliates			11				9
Other			423				386
Short-term financing obligations, including current maturities			618				489
Liabilities from price risk management activities			194				176
Asset retirement obligations			65				63
Accrued interest			203				202
Other			579				630
Total current liabilities			2,567				2,565
Long-term financing obligations, less current maturities			13,594				13,517
Other long-term liabilities
Liabilities from price risk management activities			387				397
Deferred income taxes			764				568
Other			1,436				1,461
			2,587				2,426
Commitments and contingencies (Note 8)
Preferred stock of subsidiaries			763				698
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 as of December 31, 2010; stated at liquidation value			—				750
Common stock, par value $3 per share; authorized 1,500,000,000 shares; issued 785,159,805 shares in 2011 and 719,743,724 shares in 2010			2,355				2,159
Additional paid-in capital			5,444				4,484
Accumulated deficit			(2,110	)			(2,434	)
Accumulated other comprehensive loss			(737	)			(751	)
Treasury stock (at cost); 15,053,056 shares in 2011 and 15,492,605 shares in 2010			(282	)			(291	)
Total El Paso Corporation stockholders’ equity			4,670				3,917
Noncontrolling interests			2,777				2,147
Total equity			7,447				6,064
Total liabilities and equity		$	26,958			$	25,270

See accompanying notes.

EL PASO CORPORATION

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

		Six Months Ended
		June 30,
		2011				2010
Cash flows from operating activities
Net income		$	475			$	605
Adjustments to reconcile net income to net cash from operating activities
Depreciation, depletion and amortization			516				460
Deferred income tax expense			73				270
Earnings from unconsolidated affiliates, adjusted for cash distributions			(31	)			(104	)
Loss on debt extinguishment			68				—
Other non-cash income items			(96	)			(22	)
Asset and liability changes			(9	)			(315	)
Net cash provided by operating activities			996				894
Cash flows from investing activities
Capital expenditures			(2,016	)			(1,502	)
Net proceeds from the sale of assets and investments			29				293
Increase in notes receivable			(112	)			(16	)
Other			—				27
Net cash used in investing activities			(2,099	)			(1,198	)
Cash flows from financing activities
Net proceeds from issuance of long-term debt			2,976				965
Payments to retire long-term debt and other financing obligations			(2,861	)			(1,060	)
Net proceeds from issuance of noncontrolling interests			948				549
Distributions to noncontrolling interest holders			(86	)			(39	)
Net proceeds from issuance of preferred stock of subsidiary			30				—
Distributions to holders of preferred stock of subsidiary			(10	)			(10	)
Dividends paid			(23	)			(33	)
Proceeds from stock option exercises			43				4
Other			(1	)			—
Net cash provided by financing activities			1,016				376
Change in cash and cash equivalents			(87	)			72
Cash and cash equivalents
Beginning of period			347				635
End of period		$	260			$	707

See accompanying notes.

EL PASO CORPORATION

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

		Six Months Ended
		June 30,
		2011				2010
El Paso Corporation stockholders’ equity:
Preferred stock:
Balance at beginning of period		$	750			$	750
Conversion of preferred stock			(750	)			—
Balance at end of period			—				750
Common stock:
Balance at beginning of period			2,159				2,148
Conversion of preferred stock			174				—
Other, net			22				10
Balance at end of period			2,355				2,158
Additional paid-in capital:
Balance at beginning of period			4,484				4,501
Conversion of preferred stock			576				—
Dividends			(14	)			(33	)
Issuances of noncontrolling interests (Note 10)			338				—
Other, including stock-based compensation			60				19
Balance at end of period			5,444				4,487
Accumulated deficit:
Balance at beginning of period			(2,434	)			(3,192	)
Net income attributable to El Paso Corporation			324				545
Balance at end of period			(2,110	)			(2,647	)
Accumulated other comprehensive income (loss):
Balance at beginning of period			(751	)			(718	)
Other comprehensive income (loss)			14				(12	)
Balance at end of period			(737	)			(730	)
Treasury stock, at cost:
Balance at beginning of period			(291	)			(283	)
Stock-based and other compensation			9				(7	)
Balance at end of period			(282	)			(290	)
Total El Paso Corporation stockholders’ equity at end of period			4,670				3,728
Noncontrolling interests:
Balance at beginning of period			2,147				785
Issuances of noncontrolling interests (Note 10)			610				549
Distributions to noncontrolling interests			(86	)			(39	)
Net income attributable to noncontrolling interests (Note 10)			106				50
Balance at end of period			2,777				1,345
Total equity at end of period		$	7,447			$	5,073

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). As 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) and should be read along with our 2010 Annual Report on Form 10-K. The financial statements as of June 30, 2011, and for the quarters and six months ended June 30, 2011 and 2010, are unaudited. The condensed consolidated balance sheet as of December 31, 2010 was derived from the audited balance sheet filed in our 2010 Annual Report on 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. Our financial statements for prior periods include reclassifications that were made to conform to the current year presentation, none of which impacted our reported net income or stockholders’ equity. Additionally, our statement of cash flows for the six months ended June 30, 2010 reflects a decrease in both net cash provided by operating activities and net cash used in investing activities related to the timing of certain capital expenditures which was considered immaterial to our 2010 consolidated financial statements. Due to the seasonal nature of our businesses, information for interim periods may not be indicative of our operating results for the entire year. Our disclosures in this Form 10-Q are an update to those provided in our 2010 Annual Report on Form 10-K.

     On May 24, 2011, we announced that our Board of Directors had granted initial approval of a plan to separate the Company into two publicly traded businesses by the end of 2011. The plan calls for a tax-free spin-off of our exploration and production business and related activities into a new publicly traded company separate from El Paso Corporation (EPC). The planned separation is subject to market, regulatory, tax and final approval by our Board of Directors and other customary conditions. Until the separation is complete, the results of operations, financial position and cash flows of our exploration and production business will be reported as continuing operations.

Significant Accounting Policies

     There were no changes in the significant accounting policies described in our 2010 Annual Report on Form 10-K and no significant accounting pronouncements issued but not yet adopted as of June 30, 2011.

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 in earnings from unconsolidated affiliates. In July 2011, we sold oil and natural gas properties located in Alabama for approximately $104 million.

3. Other Income, Net

     The following are the components of other income and other expense for the quarters and six months ended June 30:

		Quarters Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
						(In millions)
Other Income, Net
Allowance for equity funds used during construction		$	74			$	51			$	171			$	101
Other			8				6				10				16
Total		$	82			$	57			$	181			$	117

     Allowance for Equity Funds Used During Construction. As allowed by the Federal Energy Regulatory Commission (FERC), we capitalize a pre-tax carrying cost on equity funds related to the construction of long-lived assets in our FERC regulated business and reflect this amount as an increase in the cost of the asset on our balance sheet. We calculate this amount using the most recent FERC approved equity rate of return. These amounts are recovered over the depreciable lives of the long-lived assets to which they relate.

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,
		2011				2010				2011				2010
						(In millions, except rates)
Income tax expense		$	38			$	82			$	57			$	268
Effective tax rate			10	%			31	%			11	%			31	%

     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 in which they occur. 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, 2011, our effective tax rate was significantly lower than the statutory rate primarily due to the benefit to our anticipated annual effective tax rate of income attributable to nontaxable noncontrolling interests of El Paso Pipeline Partners, L.P. (EPB), dividend exclusions on earnings from unconsolidated affiliates where we anticipate receiving dividends and the favorable resolution of certain tax matters. 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 of 2010 from healthcare legislation enacted in March 2010.

5. Earnings Per Share

     Basic and diluted earnings per common share were as follows for the quarters and six months ended June 30:

Quarters Ended June 30,

		2011								2010
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Net income attributable to El Paso Corporation		$	262			$	262			$	157			$	157
Preferred stock dividends of El Paso Corporation			—				—				(10	)			—
Interest on trust preferred securities			—				3				—				—
Net income attributable to El Paso Corporation’s common stockholders		$	262			$	265			$	147			$	157
Weighted average common shares outstanding			763				763				698				698
Effect of dilutive securities:
Options and restricted stock			—				11				—				5
Convertible preferred stock			—				—				—				58
Trust preferred securities			—				8				—				—
Weighted average common shares outstanding and dilutive securities			763				782				698				761
Basic and diluted earnings per common share:
Net income attributable to El Paso Corporation’s common stockholders		$	0.34			$	0.34			$	0.21			$	0.21

Six Months Ended June 30,

		2011								2010
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Net income attributable to El Paso Corporation		$	324			$	324			$	545			$	545
Preferred stock dividends of El Paso Corporation			—				—				(19	)			—
Interest on trust preferred securities			—				—				—				5
Net income attributable to El Paso Corporation’s common stockholders		$	324			$	324			$	526			$	550
Weighted average common shares outstanding			738				738				697				697
Effect of dilutive securities:
Options and restricted stock			—				11				—				5
Convertible preferred stock			—				22				—				58
Trust preferred securities			—				—				—				8
Weighted average common shares outstanding and dilutive securities			738				771				697				768
Basic and diluted earnings per common share:
Net income attributable to El Paso Corporation’s common stockholders		$	0.44			$	0.42			$	0.75			$	0.72

     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. Our potentially dilutive securities consist of employee stock options, restricted stock, trust preferred securities and convertible preferred stock. In March 2011, we converted our preferred stock to common stock as further described in Note 10. For the quarters and six months ended June 30, 2011 and 2010, certain of our employee stock options were antidilutive. Additionally, for the quarter ended June 30, 2010 and the six months ended June 30, 2011, our trust preferred securities were antidilutive.

6. Financial Instruments

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

		June 30, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
						(In millions)
Long-term financing obligations, including current maturities		$	14,212			$	15,799			$	14,006			$	14,686
Marketable securities in non-qualified compensation plans			21				21				20				20
Commodity-based derivatives			(246	)			(246	)			(186	)			(186	)
Interest rate derivatives			(95	)			(95	)			(61	)			(61	)
Other			(12	)			(12	)			(11	)			(11	)

     As of June 30, 2011 and December 31, 2010, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term financing obligations represent 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 our long-term financing obligations based on quoted market prices for the same or similar issues, including consideration of our credit risk related to those instruments.

     Our derivative financial instruments are further described in our 2010 Annual Report on Form 10-K and below:

	•		Production-Related Commodity Based Derivatives. As of June 30, 2011 and December 31, 2010, we have production-related derivatives (oil and natural gas swaps, collars, basis swaps and option contracts) to mitigate a portion of our commodity price risk and stabilize cash flows associated with forecasted sales of oil and natural gas production on 17,382 MBbl and 12,240 MBbl of oil and 200 TBtu and 283 TBtu of natural gas. None of these contracts are designated as accounting hedges.
	•		Other Commodity-Based Derivatives. As of June 30, 2011 and December 31, 2010, in our Marketing segment we have forwards, swaps and options contracts related to long-term natural gas and power. These contracts, the longest of which extends into 2019, include (i) obligations to sell natural gas to power plants ranging from 12,550 MMBtu/d to 95,000 MMBtu/d and (ii) an obligation 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 1,700 to 3,700 GWh, to provide annually approximately 1,700 GWh of power and approximately 71 GW of installed capacity in the PJM power pool. We have entered into contracts to economically mitigate our exposure to commodity price changes and locational price differences on substantially all of these natural gas and power volumes. None of these derivatives are designated as accounting hedges.
	•		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, 2011 and December 31, 2010, we had interest rate swaps that are designated as cash flow hedges that effectively convert the interest rate on approximately $1.3 billion 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, 2011 relates to debt associated with our Ruby pipeline project that began accruing interest on July 1, 2011 and have termination dates ranging from June 2013 to June 2017. These termination dates correspond to the estimated principal outstanding on the Ruby debt over the term of these swaps. For a further discussion of our Ruby financing, see Note 7.

     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 designated as fair value hedges 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 which is offset by changes in the fair value of the related hedged items. As of June 30, 2011 and December 31, 2010, these interest rate swaps converted the interest rate on approximately $162 million and $184 million of debt from a fixed rate to a variable rate of LIBOR plus 4.18%.

     Fair Value Measurement. We separate the fair values of our financial instruments 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 and classification of an instrument within a level can change over time based on the maturity or liquidity of the instrument. During the quarter and six months ended June 30, 2011, there have been no changes to the inputs and valuation techniques used to measure fair value, the types of instruments, or the levels in which they are classified. Our marketable securities in non-qualified compensation plans and other are reflected at fair value on our balance sheets as other long-term assets, other current liabilities and other long-term liabilities. We net our derivative assets and liabilities for counterparties where we have a legal right of offset and classify our derivatives as either current or non-current assets or liabilities based on their anticipated settlement date. At June 30, 2011 and December 31, 2010, cash collateral held was not material. The following table presents the fair value of our financial instruments at June 30, 2011 and December 31, 2010 (in millions).

		June 30, 2011																December 31, 2010
		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Assets
Commodity-based derivatives
Production-related oil and natural gas derivatives		$	—			$	285			$	—			$	285			$	—			$	373			$	—			$	373
Other natural gas derivatives			—				116				16				132				—				139				18				157
Power-related derivatives			—				—				23				23				—				—				31				31
Total commodity-based derivative assets			—				401				39				440				—				512				49				561
Interest rate derivatives designated as hedges
Fair value hedges			—				5				—				5				—				8				—				8
Impact of master netting arrangements			—				(194	)			(11	)			(205	)			—				(229	)			(14	)			(243	)
Total price risk management assets		$	—			$	212			$	28			$	240			$	—			$	291			$	35			$	326
Marketable securities in non-qualified compensation plans			21				—				—				21				20				—				—				20
Total net assets		$	21			$	212			$	28			$	261			$	20			$	291			$	35			$	346
Liabilities
Commodity-based derivatives
Production-related oil and natural gas derivatives		$	—			$	(159	)		$	—			$	(159	)		$	—			$	(136	)		$	—			$	(136	)
Other natural gas derivatives			—				(133	)			(67	)			(200	)			—				(162	)			(90	)			(252	)
Power-related derivatives			—				—				(327	)			(327	)			—				—				(359	)			(359	)
Total commodity-based derivative liabilities			—				(292	)			(394	)			(686	)			—				(298	)			(449	)			(747	)
Interest rate derivatives designated as hedges
Cash flow hedges			—				(100	)			—				(100	)			—				(69	)			—				(69	)
Impact of master netting arrangements			—				194				11				205				—				229				14				243
Total price risk management liabilities		$	—			$	(198	)		$	(383	)		$	(581	)		$	—			$	(138	)		$	(435	)		$	(573	)
Other			—				—				(13	)			(13	)			—				—				(12	)			(12	)
Total net liabilities		$	—			$	(198	)		$	(396	)		$	(594	)		$	—			$	(138	)		$	(447	)		$	(585	)
Total		$	21			$	14			$	(368	)		$	(333	)		$	20			$	153			$	(412	)		$	(239	)

     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. Based on our assessment of counterparty risk in light of the collateral our counterparties have posted with us (primarily in the form of letters of credit), we have 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 quarter and six months ended June 30, 2011:

						Change in Fair Value				Change in Fair Value
		Balance at				Reflected in				Reflected in								Balance at
		Beginning of				Operating				Operating								End of
		Period				Revenues(1)				Expenses(2)				Settlements				Period
						(In millions)
Quarter Ended June 30, 2011
Assets		$	32			$	(3	)		$	—			$	(1	)		$	28
Liabilities			(416	)			(5	)			(5	)			30				(396	)
Total		$	(384	)		$	(8	)		$	(5	)		$	29			$	(368	)
Six Months Ended June 30, 2011
Assets		$	35			$	(6	)		$	—			$	(1	)		$	28
Liabilities			(447	)			(3	)			(6	)			60				(396	)
Total		$	(412	)		$	(9	)		$	(6	)		$	59			$	(368	)

     Below are the impacts of our commodity-based and interest rate derivatives to our statements of income and statements of comprehensive income (loss) for the quarters and six months ended June 30:

		2011												2010
										Other												Other
		Operating				Interest				Comprehensive				Operating				Interest				Comprehensive
		Revenues				Expense				Income (Loss)				Revenues				Expense				Income (Loss)
										(In millions)
Quarters ended June 30,
Production-related derivatives		$	132			$	—			$	3			$	31			$	—			$	3
Other natural gas and power derivatives			(6	)			—				—				(43	)			—				—
Total interest rate derivatives			—				4				(34	)			—				4				(45	)
Total		$	126			$	4			$	(31	)		$	(12	)		$	4			$	(42	)
Six months ended June 30,
Production-related derivatives		$	23			$	—			$	6			$	284			$	—			$	6
Other natural gas and power derivatives			(7	)			—				—				(26	)			—				—
Total interest rate derivatives			—				8				(31	)			—				9				(46	)
Total		$	16			$	8			$	(25	)		$	258			$	9			$	(40	)

7. Debt, Other Financing Obligations and Other Credit Facilities

		June 30,				December 31,
		2011				2010
		(In millions)
Short-term financing obligations, including current maturities		$	618			$	489
Long-term financing obligations			13,594				13,517
Total		$	14,212			$	14,006

     Changes in Financing Obligations. During the six months ended June 30, 2011, we had the following changes in our financing obligations:

						Book Value				Cash
Company		Interest Rate				Increase (Decrease)				Received (Paid)
						(In millions)
Issuances
Ruby Pipeline, L.L.C. credit facility		variable				$	391			$	391
Southern Natural Gas Company, L.L.C. (SNG) notes due 2021			4.40 %				300				297
El Paso Exploration and Production Company (EPEP) revolving credit facility		variable					925				918
El Paso revolving credit facility		variable					571				562
El Paso Pipeline Partners Operating Company, L.L.C. (EPPOC) revolving credit facility		variable					815				808
Increases through June 30, 2011						$	3,002			$	2,976
Repayments, repurchases, and other
EPEP revolving credit facility		variable				$	(825	)		$	(825	)
El Paso revolving credit facility		variable					(796	)			(796	)
EPPOC revolving credit facility		variable					(715	)			(715	)
El Paso notes due 2011			7.00 %				(105	)			(105	)
El Paso notes due 2012 through 2032			7.25% - 12.00 %				(347	)			(410	)
Other		various					(8	)			(10	)
Decreases through June 30, 2011						$	(2,796	)		$	(2,861	)

     In July 2011, our debt increased by approximately $650 million net of an additional $274 million of debt we repurchased under our early tender offer. We anticipate spending up to an additional $438 million in August 2011 to buy back additional debt. In conjunction with these transactions we anticipate recording losses of approximately $100 million during the third quarter of 2011. The majority of the July debt increase diversified our sources of liquidity.

     Repurchase of Senior Notes. During the six months ended June 30, 2011, we repurchased approximately $350 million of our senior unsecured notes. In conjunction with these transactions, we recorded total losses on debt extinguishment of $27 million and $68 million during the quarter and six months ended June 30, 2011.

     Refinancing of Revolving Credit Facilities. During the six months ended June 30, 2011, we refinanced $3.25 billion in revolving credit facilities to extend their maturity to 2016. As part of the revolver refinancings, we reduced the overall borrowing capacity on the El Paso facility from $1.5 billion to $1.25 billion and increased the overall borrowing capacity on the EPPOC facility from $0.75 billion to $1.0 billion (expandable to $1.5 billion for certain expansion projects and acquisitions). Our cost to borrow under these facilities has increased to LIBOR plus 2.25 for El Paso, LIBOR plus 2.00 for EPB and LIBOR plus 1.50 to 2.50 for EPEP. The El Paso facility collateral support now includes the general partnership interests in EPB while certain collateral restrictions have been modified providing us the ability to sell up to 100 percent of our ownership interests in either El Paso Natural Gas Company (EPNG) or Tennessee Gas Pipeline Company (TGP), or some combination thereof, to EPB. Upon achieving investment grade status by one of the rating agencies, collateral support on the El Paso facility will be eliminated. As of June 30, 2011, we were in compliance with all of our debt covenants of which there were no material changes from those reported in our 2010 Annual Report on Form 10-K.

     Credit Facilities/Letters of Credit. We have various credit facilities in place, including the above revolvers, which allow us to borrow funds or issue letters of credit. During the first six months of 2011, we increased the total letter of credit capacity under certain existing and new letter of credit facilities by $175 million with a weighted average fixed facility fee of 1.78 percent and maturities ranging from April 2012 to September 2014. As of June 30, 2011, the aggregate amount outstanding under all of our credit facilities was $0.4 billion (excluding $0.4 billion outstanding on the EPPOC $1.0 billion revolving credit facility) and $0.9 billion of letters of credit and surety bonds issued, including $0.4 billion related to our price risk management activities and $0.2 billion related to Ruby as discussed below. Our total available capacity under all of our facilities was approximately $2.5 billion as of June 30, 2011 (not including capacity available under the EPPOC $1.0 billion revolving credit facility). In July 2011, our $500 million unsecured credit facility matured.

     Ruby Pipeline Financing. During 2010, we entered into a seven-year amortizing $1.5 billion financing facility for our Ruby pipeline project (see Note 12) that requires principal payments at various dates through June 2017. As of June 30, 2011, we have utilized all of the available capacity under this 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 began converting the floating LIBOR interest rate to fixed interest rates in July 2011 on approximately $1.1 billion of total borrowings under this agreement. As of July 31, 2011, we also had $100 million outstanding ($170 million as of June 30, 2011) in letters of credit related to Ruby. Upon making certain permitting representations, and obtaining consents and/or waivers of certain customary conditions, our Ruby project financing obligations will become non-recourse to us.

8. 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. In 2010, a trial court dismissed all of the claims in this matter. The dismissal of the case has been appealed.

     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. Several of the cases have been settled or dismissed. The remaining cases, which were pending in Nevada, were dismissed. Appeals have been filed. Although damages in excess of $140 million have been alleged in total against all defendants in one of the remaining lawsuits where a damage number is provided, there remains significant uncertainty regarding the validity of the causes of action, the damages asserted and the level of damages, if any, that may be allocated to us. Therefore, our costs and legal exposure related to the remaining outstanding lawsuits and claims 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 against us and many other defendants, including remedial activities, damages, attorneys’ fees and costs. These cases were initially consolidated for pre-trial purposes in multi-district litigation (MDL) in the U.S. District Court for the Southern District of New York. Several cases were later remanded to state court. Eighty-eight of the cases have been settled or dismissed, and all of the settlements have been or are expected to be substantially funded by insurance. We have eleven remaining lawsuits, all pending in the MDL. Of these remaining lawsuits, it is likely that our insurers will assert denial of coverage on nine of the most-recently filed lawsuits. Based upon discovery conducted to date, our share of the relevant markets upon which alleged damages have been historically allocated among individual defendants is relatively small. In addition, there remains significant uncertainty regarding the validity of the causes of action, the damages asserted and the level of damages, if any, that may be allocated to us as well as availability of insurance coverages. Therefore, 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. 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, 2011, we had approximately $40 million accrued, which has not been reduced by $3 million of related insurance receivables, for all of our outstanding legal proceedings.

Rates and Regulatory Matters

     EPNG Rate Case. In April 2010, the FERC approved an offer of settlement which increased EPNG’s base tariff rates , effective January 1, 2009. As part of the settlement, EPNG made refunds to its customers in 2010. The settlement resolved all but four issues in the rate proceeding. In January 2011, the Presiding Administrative Law Judge issued a decision that for the most part found against EPNG on the four issues. EPNG has appealed those decisions to the FERC and may also seek review of any of the FERC’s decisions to the U.S. Court of Appeals. Although the final outcome is not currently determinable, we believe our accruals established for this matter are adequate.

     In September 2010, EPNG filed a new rate case with the FERC proposing an increase in its base tariff rates which would increase revenue by approximately $100 million annually over previously effective tariff rates. It is uncertain whether such an increase will be achieved in the context of any settlement between EPNG and its customers or following the outcome of a hearing in the rate case. In October 2010, the FERC issued an order accepting and suspending the effective date of the proposed rates to April 1, 2011, subject to refund, the outcome of a hearing and other proceedings. Although the final outcome is not currently determinable, we believe our accruals established for this matter are adequate.

     TGP Rate Case. In November 2010, TGP filed a rate case with the FERC proposing an increase in its base tariff rates of approximately $200 million annually over previously effective tariff rates. It is uncertain whether such an increase will be achieved in the context of any settlement between TGP and its customers or following the outcome of a hearing in the rate case. In December 2010, the FERC issued an order accepting and suspending the effective date of the proposed rates to June 1, 2011, subject to refund, the outcome of a hearing and other proceedings. Although the final outcome is not currently determinable, we believe our accruals established for this matter are adequate.

     CIG Rate Case. In May 2011, Colorado Interstate Gas Company (CIG) reached a pre-filing settlement with all of its shippers of a rate case required under the terms of a previous settlement. CIG has filed the proposed settlement with the FERC which provides for CIG’s current tariff rates to continue until its next general rate case which will be effective after October 1, 2014 but no later than October 1, 2016. At this time, the FERC has not ruled on that petition and the outcome of this matter is not 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, 2011, our accrual was approximately $170 million for environmental matters, which has not been reduced by $19 million for amounts to be paid directly under government sponsored programs or through contractual arrangements with third parties. Our accrual includes approximately $167 million for expected remediation costs and associated onsite, offsite and groundwater technical studies and approximately $3 million for related environmental legal costs.

     Our estimates of potential liability range from approximately $170 million to approximately $355 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, 2011
Sites		Expected				High
		(In millions)
Operating		$	8			$	12
Non-operating			149				307
Superfund			13				36
Total		$	170			$	355

     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 28 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 2011, we estimate that our total remediation expenditures will be approximately $30 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 $24 million in the aggregate for the remainder of 2011 through 2015, including capital expenditures associated with the impact of the Environmental Protection Agency rule on emissions of hazardous air pollutants from reciprocating internal combustion engines which are subject to regulations with which we have to be in compliance by October 2013.

     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 have guarantees and indemnifications with a maximum stated value of approximately $0.8 billion, primarily related to indemnification arrangements associated with the sale of ANR Pipeline Company in 2007 and certain legacy assets. These amounts exclude guarantees for which we have issued related letters of credit discussed in Note 7. 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, 2011, we have recorded obligations of $18 million related to our guarantee and indemnification arrangements. 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.

     For a further discussion of our guarantees, indemnifications, purchase obligations, and other commercial commitments see our 2010 Annual Report on Form 10-K.

9. Retirement Benefits

     Components of Net Benefit Cost. The components of net benefit cost are as follows for the quarters and six months ended June 30:

		Quarters Ended June 30,																Six Months Ended June 30,
										Other																Other
		Pension								Postretirement								Pension								Postretirement
		Benefits								Benefits								Benefits								Benefits
		2011				2010				2011				2010				2011				2010				2011				2010
														(In millions)
Service cost		$	6			$	4			$	—			$	—			$	11			$	9			$	—			$	—
Interest cost			27				29				7				9				53				57				15				17
Expected return on plan assets			(37	)			(40	)			(3	)			(4	)			(73	)			(79	)			(7	)			(7	)
Amortization of net actuarial loss (gain)			23				18				(1	)			(1	)			46				37				(1	)			(2	)
Amortization of prior service cost			—				1				—				—				—				1				—				—
Net benefit cost		$	19			$	12			$	3			$	4			$	37			$	25			$	7			$	8