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

For the quarterly period ended June 30, 2008

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

For the transition period from                      to                     

El Paso Corporation

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 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. (Check one):

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

     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 4, 2008: 701,202,029

 

 

EL PASO CORPORATION
TABLE OF CONTENTS

Caption		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			46
Item 4. Controls and Procedures			48
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3. Defaults Upon Senior Securities			51
Item 4. Submission of Matters to a Vote of Security Holders			51
Item 5. Other Information			51
Item 6. Exhibits			51
Signatures			52
Thirteenth Supplemental Indenture
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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

/d		= per day		Mcfe		= thousand cubic feet of natural gas equivalents
Bbl		= barrels		MMBtu		= million British thermal units
BBtu		= billion British thermal units		MMcf		= million cubic feet
Bcf		= billion cubic feet		MMcfe		= million cubic feet of natural gas equivalents
LNG		= liquefied natural gas		NGL		= natural gas liquids
MBbls		= thousand barrels		TBtu		= trillion British thermal units
Mcf		= thousand cubic feet

     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,
		2008				2007				2008				2007
Operating revenues		$	1,153			$	1,198			$	2,422			$	2,220
Operating expenses
Cost of products and services			71				60				127				115
Operation and maintenance			282				329				553				630
Depreciation, depletion and amortization			298				286				611				557
Taxes, other than income taxes			81				72				160				132
			732				747				1,451				1,434
Operating income			421				451				971				786
Earnings from unconsolidated affiliates			52				44				89				81
Loss on debt extinguishment			—				(86	)			—				(287	)
Other income, net			33				60				55				106
Minority interest			(7	)			1				(16	)			—
Interest and debt expense			(221	)			(231	)			(454	)			(514	)
Income before income taxes from continuing operations			278				239				645				172
Income taxes			87				70				235				51
Income from continuing operations			191				169				410				121
Discontinued operations, net of income taxes			—				(3	)			—				674
Net income			191				166				410				795
Preferred stock dividends			—				10				19				19
Net income available to common stockholders		$	191			$	156			$	391			$	776
Basic earnings per common share
Income from continuing operations		$	0.27			$	0.23			$	0.56			$	0.15
Discontinued operations, net of income taxes			—				—				—				0.97
Net income per common share		$	0.27			$	0.23			$	0.56			$	1.12
Diluted earnings per common share
Income from continuing operations		$	0.25			$	0.22			$	0.54			$	0.15
Discontinued operations, net of income taxes			—				—				—				0.96
Net income per common share		$	0.25			$	0.22			$	0.54			$	1.11
Dividends declared per common share		$	—			$	0.04			$	0.08			$	0.08

See accompanying notes.

EL PASO CORPORATION

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

		June 30,				December 31,
		2008				2007
ASSETS
Current assets
Cash and cash equivalents		$	274			$	285
Accounts and notes receivable
Customers, net of allowance of $11 in 2008 and $17 in 2007			829				468
Affiliates			145				196
Other			175				201
Inventory			143				131
Assets from price risk management activities			182				113
Deferred income taxes			458				191
Other			168				127
Total current assets			2,374				1,712
Property, plant and equipment, at cost
Pipelines			17,191				16,750
Natural gas and oil properties, at full cost			19,011				19,048
Other			306				530
			36,508				36,328
Less accumulated depreciation, depletion and amortization			17,340				16,974
Total property, plant and equipment, net			19,168				19,354
Other assets
Investments in unconsolidated affiliates			1,863				1,614
Assets from price risk management activities			207				302
Other			1,614				1,597
			3,684				3,513
Total assets		$	25,226			$	24,579

See accompanying notes.

EL PASO CORPORATION

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

		June 30,				December 31,
		2008				2007
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Trade		$	639			$	460
Affiliates			9				5
Other			477				502
Current maturities of long-term financing obligations			1,236				331
Liabilities from price risk management activities			785				267
Accrued interest			182				195
Other			739				653
Total current liabilities			4,067				2,413
Long-term financing obligations, less current maturities			11,223				12,483
Other
Liabilities from price risk management activities			1,064				931
Deferred income taxes			1,437				1,157
Other			1,566				1,750
			4,067				3,838
Commitments and contingencies (Note 8)
Minority interest			545				565
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 711,992,983 shares in 2008 and 709,192,605 shares in 2007			2,136				2,128
Additional paid-in capital			4,679				4,699
Accumulated deficit			(1,420	)			(1,834	)
Accumulated other comprehensive loss			(617	)			(272	)
Treasury stock (at cost); 9,378,210 shares in 2008 and 8,656,095 shares in 2007			(204	)			(191	)
Total stockholders’ equity			5,324				5,280
Total liabilities and stockholders’ equity		$	25,226			$	24,579

See accompanying notes.

EL PASO CORPORATION

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

		Six Months Ended
		June 30,
		2008				2007
Cash flows from operating activities
Net income		$	410			$	795
Less income from discontinued operations, net of income taxes			—				674
Income from continuing operations			410				121
Adjustments to reconcile net income to net cash from operating activities
Depreciation, depletion and amortization			611				557
Deferred income tax expense			236				42
Earnings from unconsolidated affiliates, adjusted for cash distributions			(8	)			40
Loss on debt extinguishment			—				287
Other non-cash income items			36				13
Asset and liability changes			33				(178	)
Cash provided by continuing activities			1,318				882
Cash used in discontinued activities			—				(17	)
Net cash provided by operating activities			1,318				865
Cash flows from investing activities
Capital expenditures			(1,175	)			(1,130	)
Cash paid for acquisitions			(336	)			(270	)
Net proceeds from the sale of assets and investments			659				80
Other			43				20
Cash used in continuing activities			(809	)			(1,300	)
Cash provided by discontinued activities			—				3,660
Net cash provided by (used in) investing activities			(809	)			2,360
Cash flows from financing activities
Net proceeds from issuance of long-term debt			2,670				3,666
Payments to retire long-term debt and other financing obligations			(3,071	)			(6,765	)
Dividends paid			(75	)			(75	)
Payments to minority interest holders			(12	)			—
Contributions from discontinued operations			—				3,360
Other			(32	)			4
Cash provided by (used in) continuing activities			(520	)			190
Cash used in discontinued activities			—				(3,643	)
Net cash used in financing activities			(520	)			(3,453	)
Change in cash and cash equivalents			(11	)			(228	)
Cash and cash equivalents
Beginning of period			285				537
End of period		$	274			$	309

See accompanying notes.

EL PASO CORPORATION

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

										Six Months
		Quarters Ended								Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net income		$	191			$	166			$	410			$	795
Pension and postretirement obligations:
Unrealized actuarial losses arising during period (net of income taxes of $1 in 2008)			—				—				(2	)			—
Reclassification adjustments (net of income taxes of $3 and $5 in 2008 and $4 and $7 in 2007)			5				7				10				13
Cash flow hedging activities:
Unrealized mark-to-market gains (losses) arising during period (net of income taxes of $152 and $222 in 2008 and $28 and $19 in 2007)			(272	)			50				(395	)			(33	)
Reclassification adjustments for changes in initial value to the settlement date (net of income taxes of $21 and $22 in 2008 and $9 and $24 in 2007)			37				(15	)			39				(40	)
Investments available for sale:
Unrealized gains on investments available for sale arising during period (net of income taxes of $2 in 2007)			—				—				—				3
Realized gains on investments available for sale arising during period (net of income taxes of $8 in 2007)			—				(15	)			—				(15	)
Other comprehensive income (loss)			(230	)			27				(348	)			(72	)
Comprehensive income (loss)		$	(39	)		$	193			$	62			$	723

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. You should read this Quarterly Report on Form 10-Q along with our 2007 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, 2008, and for the quarters and six months ended June 30, 2008 and 2007, are unaudited. We derived the condensed consolidated balance sheet as of December 31, 2007, from the audited balance sheet filed in our 2007 Annual Report on Form 10-K. In our opinion, we have made all adjustments 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. Our financial statements for prior periods include reclassifications that were made to conform to the current period presentation. Those reclassifications did not impact our reported net income or stockholders’ equity.

   Significant Accounting Policies

     The information below provides an update of our significant accounting policies and accounting pronouncements issued but not yet adopted as discussed in our 2007 Annual Report on Form 10-K.

     Fair Value Measurements. On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, for our financial assets and liabilities. We elected to defer the adoption of SFAS No. 157 for our non-financial assets and liabilities until January 1, 2009. The impact of adopting SFAS No. 157 was both a pre-tax increase to operating revenues of $6 million and to other comprehensive income of $4 million, and a reduction of our liabilities of $10 million, which represented the impact of the consideration of our credit standing in determining the value of our price risk management liabilities.

     Measurement Date of Postretirement Benefits. Effective January 1, 2008, we adopted the measurement date provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106, and 132(R) and changed the measurement date of our postretirement benefit plans from September 30 to December 31. We recorded a $5 million decrease, net of income taxes of $2 million, to the January 1, 2008 accumulated deficit and a $3 million decrease, net of income taxes of $2 million, to the January 1, 2008 accumulated other comprehensive loss upon the adoption of the measurement date provisions of this standard to reflect an additional three months of net periodic benefit cost based on our September 30, 2007 measurement.

     Derivative Instruments. In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133, which requires expanded disclosures about derivative instruments. This standard requires companies to disclose their purpose for using derivative instruments, how those derivatives are accounted for under SFAS No. 133, and where the impacts of those derivatives are reflected in the financial statements. The provisions of this standard are effective for fiscal years beginning after November 15, 2008, and we are currently evaluating the impact that the adoption of this standard will have on our financial statement disclosures.

 2. Acquisitions and Divestitures

   Acquisitions

     Gulf LNG. In February 2008, we paid $295 million to complete the acquisition of a 50 percent interest in the Gulf LNG Clean Energy Project, an LNG terminal which is currently under construction in Pascagoula, Mississippi. The terminal is expected to be placed in service in late 2011 at an estimated total cost of $1.1 billion. In addition, we have a commitment to loan Gulf LNG up to $150 million under which we advanced $7 million as of June 30, 2008. Our partner in this project has a commitment to loan up to $64 million. We account for our investment in Gulf LNG using the equity method.

     Exploration and Production properties. In June 2008, we acquired interests in onshore domestic natural gas and oil properties for approximately $43 million. In January 2007, we acquired operated natural gas and oil producing properties and undeveloped acreage in south Texas for approximately $254 million.

   Divestitures

     Under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classify assets to be disposed of as discontinued operations when they have received appropriate approvals to be disposed of by our management or Board of Directors and when they meet other criteria. Cash flows from our discontinued businesses are reflected as discontinued operating, investing, and financing activities in our statement of cash flows. To the extent these operations do not maintain separate cash balances, we reflect the net cash flows generated from these businesses as a contribution to our continuing operations in cash from continuing financing activities.

     Continuing operations asset sales. During the six months ended June 30, 2008, we sold natural gas and oil properties primarily in our Gulf of Mexico and Texas Gulf Coast regions for net cash proceeds of approximately $640 million. We also sold two power investments located in Central America and Asia. During the six months ended June 30, 2007, we received approximately $80 million of proceeds from the sales of assets and investments, primarily related to the sale of a pipeline lateral and our investment in the New York Mercantile Exchange (NYMEX).

     Discontinued Operations. In February 2007, we sold ANR, our Michigan storage assets and our 50 percent interest in Great Lakes Gas Transmission for approximately $3.7 billion. During the first quarter of 2007, we recorded a gain on the sale of $648 million, net of taxes of $354 million. Included in the net assets of these discontinued operations as of the date of sale were net deferred tax liabilities assumed by the purchaser. Below is summarized income statement information regarding our discontinued operations:

		ANR and
		Related
		Operations
		(In millions)
Six Months Ended June 30, 2007
Revenues		$	101
Costs and expenses			(43	)
Other expense			(7	)
Interest and debt expense			(10	)
Income taxes			(15	)
Income from operations			26
Gain on sale, net of income taxes of $354 million(1)			648
Net income from discontinued operations		$	674

3. Income Taxes

     Income taxes included in our income from continuing operations for the periods ended June 30 were as follows:

		Quarters								Six Months
		Ended								Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In millions, except for rates)
Income taxes		$	87			$	70			$	235			$	51
Effective tax rate			31	%			29	%			36	%			30	%

     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. Significant tax items are recorded in the period that the item occurs.

     In the second quarter of 2008, our effective tax rate was primarily impacted by the tax impact of the settlement of legacy litigation matters. For the six months ended June 30, 2008, this impact was largely offset by the tax impact of adjusting our postretirement benefit obligations.  Our 2007 overall effective tax rate on continuing operations was lower than the statutory rate of 35 percent primarily due to tax benefits associated with tax law changes and dividend exclusions on earnings from unconsolidated affiliates where we anticipate receiving dividends.  These reductions were partially offset by state income taxes (net of federal income tax effects) and the reversal of deferred tax assets on certain foreign investments.

     We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With a few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1999. In June 2008, the Internal Revenue Service’s examination of El Paso’s U.S. income tax returns for 2003 and 2004 was settled at the appellate level with approval by the Joint Committee on Taxation. The settlement of issues raised in this examination did not materially impact our results of operations, financial condition or liquidity. For our remaining open tax years, our unrecognized tax benefits (liabilities for uncertain tax matters) could increase or decrease our income tax expense and effective income tax rates as these matters are finalized, although we are unable to estimate the range of potential impacts these matters could have on our financial statements.

     As of January 1, 2008 and June 30, 2008, we had unrecognized tax benefits of $157 million and $125 million.  The reduction in these amounts was primarily associated with the settlement of the 2003 and 2004 Internal Revenue Service audits and was recorded as an adjustment to additional paid in capital. Approximately $132 million as of January 1, 2008 and $121 million as of June 30, 2008 (net of federal tax benefits) would favorably affect our income tax expense and our effective income tax rate if recognized in future periods. While the amount of our unrecognized tax benefits could change in the next twelve months, we do not expect this change to have a significant impact on our results of operations or financial position.

4. Earnings Per Share

     We calculated basic and diluted earnings per common share as follows:

		2008								2007
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Quarters Ended June 30
Income from continuing operations		$	191			$	191			$	169			$	169
Convertible preferred stock dividends(1)			—				—				(10	)			—
Income from continuing operations available to common stockholders			191				191				159				169
Discontinued operations, net of income taxes			—				—				(3	)			(3	)
Net income available to common stockholders		$	191			$	191			$	156			$	166
Weighted average common shares outstanding			698				698				696				696
Effect of dilutive securities:
Options and restricted stock			—				5				—				4
Convertible preferred stock			—				58				—				57
Weighted average common shares outstanding and dilutive securities			698				761				696				757
Earnings per common share:
Income from continuing operations		$	0.27			$	0.25			$	0.23			$	0.22
Discontinued operations, net of income taxes			—				—				—				—
Net income		$	0.27			$	0.25			$	0.23			$	0.22

		2008								2007
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Six Months Ended June 30
Income from continuing operations		$	410			$	410			$	121			$	121
Convertible preferred stock dividends			(19	)			—				(19	)			(19	)
Income from continuing operations available to common stockholders			391				410				102				102
Discontinued operations, net of income taxes			—				—				674				674
Net income available to common stockholders		$	391			$	410			$	776			$	776
Weighted average common shares outstanding			698				698				695				695
Effect of dilutive securities:
Options and restricted stock			—				4				—				4
Convertible preferred stock			—				58				—				—
Weighted average common shares outstanding and dilutive securities			698				760				695				699
Earnings per common share:
Income from continuing operations		$	0.56			$	0.54			$	0.15			$	0.15
Discontinued operations, net of income taxes			—				—				0.97				0.96
Net income		$	0.56			$	0.54			$	1.12			$	1.11

     We exclude potentially dilutive securities (such as employee stock options, restricted stock, convertible preferred stock and trust preferred securities) from the determination of diluted earnings per share when their impact on income from continuing operations per common share is antidilutive. For the quarter and six months ended June 30, 2008 and 2007, certain of our employee stock options and our trust preferred securities were antidilutive. Also, our convertible preferred stock for the six months ended June 30, 2007 was antildilutive. For a further discussion of our potentially dilutive securities, see our 2007 Annual Report on Form 10-K.

5. Fair Value Measurements

     On January 1, 2008, we adopted the provisions of SFAS No. 157, Fair Value Measurements, and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, for our financial assets and liabilities. SFAS No. 157 expands the disclosure requirements for financial instruments and other derivatives recorded at fair value, and also requires that a company’s own credit risk be considered in determining the fair value of those instruments. The adoption of SFAS No. 157 resulted in a $6 million increase in operating revenues, a $4 million pre-tax increase in other comprehensive income, and a $10 million reduction of our liabilities to reflect the consideration of our credit risk on our liabilities that are recorded at fair value. SFAS No. 159 provided us the option to record most financial assets and liabilities at fair value on an instrument-by-instrument basis with changes in their fair value reported through the income statement. The adoption of SFAS No. 159 had no impact on our financial statements as we elected not to apply fair value accounting at adoption for our applicable financial assets and liabilities.

     We use various methods to determine the fair values of our financial instruments and other derivatives which depend 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 these instruments. 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 the fair value of our instruments. 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 and our corresponding instruments classified by level are further described below:

	•		Level 1 instruments’ fair values are based on quoted prices in actively traded markets. Included in this level are our marketable securities invested in non-qualified compensation plans whose fair value is determined using quoted prices of these instruments.
	•		Level 2 instruments’ fair values are 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). Included in this level are our production-related natural gas and oil derivatives and certain of our other natural gas derivatives (such as natural gas supply arrangements) whose fair values are based on commodity pricing data obtained from an independent pricing source.
	•		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. For these instruments, we use available pricing data adjusted for liquidity and/or contractual terms to develop an estimate of forward price curves. The curves are then used to estimate the value of settlements in future periods based on contractual settlement quantities and dates. Our valuation of these instruments considers specific contractual terms, statistical and simulation analysis, present value concepts and other internal assumptions related to (i) contract maturities that extend beyond the periods in which quoted market prices are available; (ii) the uniqueness of the contract terms and (iii) the lack of viable market participants. Since a significant portion of the fair value of our power-related derivatives, foreign currency swaps and certain of our remaining natural gas derivatives with longer terms or in less liquid markets than similar Level 2 derivatives, rely on the techniques discussed above, we classify these instruments as Level 3 instruments.

     Listed below are the fair values of our financial instruments classified in each level at June 30, 2008 (in millions):

		Level 1				Level 2				Level 3				Total
Assets
Marketable securities invested in non-qualified compensation plans		$	20			$	—			$	—			$	20
Production-related natural gas and oil derivatives			—				3				—				3
Other natural gas derivatives			—				44				46				90
Power-related derivatives			—				—				164				164
Foreign currency swaps			—				—				132				132
Total assets		$	20			$	47			$	342			$	409

		Level 1				Level 2				Level 3				Total
Liabilities
Production-related natural gas and oil derivatives		$	—			$	(714	)		$	—			$	(714	)
Other natural gas derivatives			—				(183	)			(209	)			(392	)
Power-related derivatives			—				—				(736	)			(736	)
Interest rate swaps			—				(7	)			—				(7	)
Other			—				—				(67	)			(67	)
Total liabilities			—				(904	)			(1,012	)			(1,916	)
Total		$	20			$	(857	)		$	(670	)		$	(1,507	)

     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, 2008 (in millions):

Quarter Ended June 30, 2008

														Change in fair
						Change in fair				Change in fair				value reflected in
		Balance at				value reflected in				value reflected in				long-term
		Beginning of				operating				operating				financing				Settlements,				Balance at End of
		Period				revenues(1)				expenses(2)				obligations(3)				Net				Period
Assets		$	332			$	58			$	—			$	(39	)		$	(9	)		$	342
Liabilities			(913	)			(154	)			13				—				42				(1,012	)
Total		$	(581	)		$	(96	)		$	13			$	(39	)		$	33			$	(670	)
Six Months Ended June 30, 2008
Assets		$	250			$	90			$	—			$	20			$	(18	)		$	342
Liabilities			(839	)			(224	)			(31	)			—				82				(1,012	)
Total		$	(589	)		$	(134	)		$	(31	)		$	20			$	64			$	(670	)

6. Price Risk Management Activities

     The following table summarizes the carrying value of the derivatives used in our price risk management activities. In the table below, derivatives designated as accounting hedges consist of instruments used to hedge our natural gas and oil production. Other commodity-based derivative contracts relate to derivative contracts not designated as accounting hedges, such as options and swaps, other natural gas and power purchase and supply contracts, and derivatives related to our legacy energy trading activities. Interest rate and foreign currency derivatives consist of swaps that are primarily designated as accounting hedges of our interest rate and foreign currency risk on long-term debt.

		June 30,				December 31,
		2008				2007
		(In millions)
Net assets (liabilities):
Derivatives designated as accounting hedges		$	(581	)		$	(23	)
Other commodity-based derivative contracts			(1,004	)			(869	)
Total commodity-based derivatives			(1,585	)			(892	)
Interest rate and foreign currency derivatives			125				109
Net liabilities from price risk management activities(1)		$	(1,460	)		$	(783	)

7. Long-Term Financing Obligations and Other Credit Facilities

		June 30,				December 31,
		2008				2007
		(In millions)
Current maturities of long-term financing obligations		$	1,236			$	331
Long-term financing obligations			11,223				12,483
Total		$	12,459			$	12,814

     Long Term Financing Obligations. During the second quarter of 2008, we repurchased approximately $289 million of our subsidiary debt obligations and issued $600 million of unsecured senior notes that mature in June 2018. Interest accrues on the issued notes at a rate of 7.25% per year and is payable semiannually. We applied the net proceeds from these notes to reduce outstanding borrowings under our credit facilities.

     Credit Facilities. As of June 30, 2008, we had available capacity under various credit agreements of approximately $1.5 billion. During the second quarter of 2008, we made net repayments of $275 million under our $1.5 billion revolving credit facility bringing the debt outstanding to zero. As of June 30, 2008, we had approximately $0.3 billion of letters of credit issued under this facility. Additionally, as of June 30, 2008, (i) substantially all of the $1.0 billion of capacity under our various other unsecured revolving credit facilities was used to issue letters of credit and (ii) approximately $0.7 billion was outstanding under our El Paso Exploration & Production Company (EPEP) $1.0 billion revolving credit facility.

     During 2008, El Paso Pipeline Partners, L.P. (EPB), our master limited partnership (MLP), had net additional borrowings of $40 million under its credit facility. As of June 30, 2008, the total amount outstanding under the facility was $495 million. The EPB borrowings are not recourse to El Paso and the facility is solely available for use by EPB and its subsidiaries.

     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, 2008, we had outstanding letters of credit of approximately $1.3 billion of which approximately $1.0 billion secure our recorded obligations related to price risk management activities.

8. Commitments and Contingencies

Legal Proceedings

     ERISA Class Action Suits. In December 2002, a purported class action lawsuit entitled William H. Lewis, III v. El Paso Corporation, et al. was filed in the U.S. District Court for the Southern District of Texas alleging that our communication with participants in our Retirement Savings Plan included various misrepresentations and omissions that caused members of the class to hold and maintain investments in El Paso stock in violation of the Employee Retirement Income Security Act (ERISA). Various motions have been filed and we are awaiting the court’s ruling. We have insurance coverage for this lawsuit, subject to certain deductibles and co-pay obligations. We have established accruals for this matter which we believe are adequate.

     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 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 claims that our cash balance plan violated ERISA were dismissed by the trial court. Our costs and legal exposure related to this lawsuit are not currently determinable.

     Retiree Medical Benefits Matter. 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. The lawsuit was 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 that 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, in the first quarter of 2008, the trial court granted summary judgment and 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 and we adjusted our existing indemnification accrual using current actuarial assumptions and reclassified our liability as a postretirement benefit obligation. See Note 9 for a discussion of the impact of this matter. We 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. The first set of cases, involving similar allegations on behalf of commercial and residential customers, was transferred to a multi-district litigation proceeding (MDL) in the U.S. District Court for Nevada and styled In re: Western States Wholesale Natural Gas Antitrust Litigation. These cases were dismissed. The U.S. Court of Appeals for the Ninth Circuit, however, reversed the dismissal and ordered that these cases be remanded to the trial court. The second set of cases also involve similar allegations on behalf of certain purchasers of natural gas. These include Farmland Industries v. Oneok Inc., et al. (filed in state court in Wyandotte County, Kansas in July 2005) and Missouri Public Service Commission v. El Paso Corporation, et al. (filed in the circuit court of Jackson County, Missouri at Kansas City in October 2006), and the purported class action lawsuits styled: Leggett, et al. v. Duke Energy Corporation, et al. (filed in Chancery Court of Tennessee in January 2005); Ever-Bloom Inc., et al. v. AEP Energy Services Inc., et al. (filed in federal court for the Eastern District of California in September 2005); Learjet, Inc., et al. v. Oneok Inc., et al. (filed in state court in Wyandotte County, Kansas in September 2005); Breckenridge, et al. v. Oneok Inc., et al. (filed in state court in Denver County, Colorado in May 2006); Arandell, et al. v. Xcel Energy, et al. (filed in the circuit court of Dane County, Wisconsin in December 2006); and Heartland, et al. v. Oneok Inc., et al. (filed in the circuit court of Buchanan County, Missouri in March 2007). The Leggett case was dismissed by the Tennessee state court and has been appealed. The Missouri Public Service case was transferred to the MDL, but remanded back to state court, where a motion to dismiss has been filed. The remaining cases have all been transferred to the MDL proceeding. The Breckenridge Case has been dismissed, but a motion for reconsideration was filed. Motions for summary judgment in Learjet and Farmland were denied, but a motion for reconsideration has been filed. Discovery is proceeding in the MDL cases. Our costs and legal exposure related to these lawsuits and claims are not currently determinable.

     Gas Measurement Cases. A number of our subsidiaries were named defendants in actions that generally allege mismeasurement of natural gas volumes and/or heating content resulting in the underpayment of royalties. The first set of cases was filed in 1997 by an individual under the False Claims Act and have been consolidated for pretrial purposes (In re: Natural Gas Royalties Qui Tam Litigation, U.S. District Court for the District of Wyoming). These complaints allege an industry-wide conspiracy to underreport the heating value as well as the volumes of the natural gas produced from federal and Native American lands. In October 2006, the U.S. District Judge issued an order dismissing all claims against all defendants. An appeal has been filed.

     Similar allegations were filed in a second set of actions initiated in 1999 in Will Price, et al. v. Gas Pipelines and Their Predecessors, et al., in the District Court of Stevens County, Kansas. The plaintiffs currently seek certification of a class of royalty owners in wells on non-federal and non-Native American lands in Kansas, Wyoming and Colorado. Motions for class certification have been briefed and argued in the proceedings and the parties are awaiting the court’s ruling. The plaintiff seeks an unspecified amount of monetary damages in the form of additional royalty payments (along with interest, expenses and punitive damages) and injunctive relief with regard to future gas measurement practices. Our costs and legal exposure related to these lawsuits and claims are not currently determinable.

     MTBE. Certain of our subsidiaries used the gasoline additive methyl tertiary-butyl ether (MTBE) in some of their gasoline. Certain subsidiaries also produced, bought, sold and distributed MTBE. A number of lawsuits have been filed throughout the U.S. regarding the potential impact of MTBE on water supplies. Some of our subsidiaries are among the defendants in approximately 81 such lawsuits. The plaintiffs, certain state attorneys general, various water districts and a limited number of individual water customers, generally seek remediation of their groundwater, prevention of future contamination, damages (including natural resource damages), punitive damages, attorney’s fees and court costs. Although these suits had been consolidated for pre-trial purposes in multi-district litigation in the U.S. District Court for the Southern District of New York, a limited number of cases have since been remanded to separate state court proceedings. It is possible many of the other cases will also be remanded. We have reached an agreement with the plaintiffs to settle approximately 59 of the lawsuits. We have also reached an agreement with our insurers, whereby our insurers would fund substantially all of the consideration to be provided by our subsidiaries under the terms of the settlement with the plaintiffs. The settlement is subject to the approval of several courts, one of which has approved it. The settlement will become effective upon the approval of the remaining courts and the exhaustion of all appellate rights. Approximately 22 of the remaining lawsuits are not covered by the terms of this settlement. While the damages claimed in these remaining actions are substantial, there remains significant legal uncertainty regarding the validity of the causes of action asserted and the availability of the relief sought by the plaintiffs. We have tendered these remaining cases to our insurers. Our costs and legal exposure related to these remaining lawsuits are not currently determinable.

Government Investigations and Inquiries

     Reserve Revisions. In March 2004, we received a subpoena from the SEC requesting documents relating to our December 31, 2003 natural gas and oil reserve revisions. We originally self-reported this matter to the SEC and cooperated with the SEC in its investigation. On July 10, 2008, the SEC approved a settlement entered into by El Paso Corporation and two of its subsidiaries, El Paso Exploration and Production and El Paso CGP (which was formerly known as “The Coastal Corporation”), that fully resolves the previously disclosed SEC’s investigation of our oil and gas reserve estimates for periods prior to 2004. Pursuant to the terms of the settlement, no monetary fine or penalty has been imposed upon the companies and, without admitting or denying any wrongdoing, the companies consented to the entry of a cease and desist order with respect to various provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and related SEC rules.

     In addition to the above proceedings, we and our subsidiaries and affiliates are named defendants in numerous lawsuits and governmental proceedings 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, 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, 2008, we had approximately $120 million accrued, which has not been reduced by $33 million of related insurance receivables, for outstanding legal and governmental proceedings.

Rates and Regulatory Matters

     Notice of Inquiry on Pipeline Fuel Retention Policies. In September 2007, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry regarding its policy about the in-kind recovery of fuel and lost and unaccounted for gas by natural gas pipeline companies. Under current policy, pipelines have options for recovering these costs. For some pipelines, the tariff states the recovery of a fixed percentage as a non-negotiable fee-in-kind retained from the volumes tendered for shipment by each shipper. There is also a tracker approach, where the pipeline’s tariff provides for prospective adjustments to the fuel retention rates from time-to-time, but does not include a mechanism to allow the pipeline to reconcile past over or under-recoveries of fuel. Finally, some pipelines’ tariffs provide for a tracker with a true-up approach, where provisions in a pipeline’s tariff allow for periodic adjustments to the fuel retention rates, and also provide for a true-up of past over and under-recoveries of fuel and lost and unaccounted for gas. In this proceeding, the FERC is seeking comments on whether it should change its current policy and prescribe a uniform method for all pipelines to use in recovering these costs. Our pipeline subsidiaries currently utilize a variety of these methodologies. At this time, we do not know what impact, if any, this proceeding may ultimately have on our pipeline subsidiaries.

     EPNG Rate Case. In June 2008, El Paso Natural Gas Company (EPNG) filed a rate case with the FERC as required under the settlement of its previous rate case. The filing proposes an increase in EPNG’s base tariff rates which would increase revenue by $83 million annually over current tariff rates. In August 2008, the FERC issued an order accepting and suspending the effective date of the proposed rates to January 1, 2009, subject to refund and the outcome of a hearing and technical conference.

     Notice of Proposed Rulemaking. On October 3, 2007, the Minerals Management Service (MMS) issued a Notice of Proposed Rulemaking for Oil and Gas and Sulphur Operations in the Outer Continental Shelf (OCS) — Pipelines and Pipeline Rights-of-Way. If adopted, the proposed rules would substantially revise MMS OCS pipeline and rights-of-way regulations. The proposed rules would have the effect of: (1) increasing the financial obligations of entities, like us, which have pipelines and pipeline rights-of-way in the OCS; (2) increasing the regulatory requirements imposed on the operation and maintenance of existing pipelines in the OCS; and (3) increasing the requirements and preconditions for obtaining new rights-of-way in the OCS.

     Greenhouse Gas Emissions. In July, 2008, the U.S. Environmental Protection Agency (EPA) requested public comments on the potential regulation of greenhouse gases (GHGs) under the Clean Air Act. Some of the regulatory alternatives identified by the EPA in its request for comments, if eventually promulgated as final rules, would likely impact our operations and financial results. It is uncertain whether the EPA will proceed with adopting final rules or whether the regulation of the GHGs will be addressed in federal and state legislation. Since it is uncertain what, if any, regulatory or legislative alternatives may be adopted, it is not possible at this time to determine whether and how such laws or regulations could impact our operations and financial results and whether those impacts will be material to our financial statements.

Other Matter

     Navajo Nation. Approximately 900 looped pipeline miles of the north mainline of our EPNG pipeline system are located on lands held in trust by the United States for the benefit of the Navajo Nation. Our rights-of-way on lands crossing the Navajo Nation are the subject of a pending renewal application filed in 2005 with the Department of the Interior’s Bureau of Indian Affairs. In June 2008, EPNG reached an agreement in principle on the fundamental economic terms of a tribal consent extension through October 2025. Based on the preliminary agreement, EPNG made payments to the Navajo Nation covering the period from January 2007 through October 2008. Negotiations on the remaining terms and conditions are continuing. We have filed with the FERC for recovery of these amounts in our recent rate case, but are uncertain as to whether such recovery will be allowed.

Environmental Matters

     We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remedy the effect on the environment of the disposal or release of specified substances at current and former operating sites. As of June 30, 2008, we had accrued approximately $244 million for environmental matters, which has not been reduced by $24 million for amounts to be paid directly under government sponsored programs. Our accrual includes approximately $236 million for expected remediation costs and associated onsite, offsite and groundwater technical studies and approximately $8 million for related environmental legal costs. Of the $244 million accrual, $20 million was reserved for facilities we currently operate and $224 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 $244 million to approximately $450 million. Our accrual represents a combination of two estimation methodologies. First, where the most likely outcome can be reasonably estimated, that cost has been accrued ($14 million). Second, where the most likely outcome cannot be estimated, a range of costs is established ($230 million to $436 million) and if no one amount in that range is more likely than any other, the lower end of the expected range has been accrued. Our environmental remediation projects are in various stages of completion. Our recorded liabilities reflect our current estimates of amounts we will expend to remediate these sites. 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, 2008
Sites		Expected				High
		(In millions)
Operating		$	20			$	26
Non-operating			200				376
Superfund			24				48
Total		$	244			$	450

     Below is a reconciliation of our accrued liability from January 1, 2008 to June 30, 2008 (in millions):

Balance as of January 1, 2008		$	260
Additions/adjustments for remediation activities			4
Payments for remediation activities			(20	)
Balance as of June 30, 2008		$	244

     For the remainder of 2008, we estimate that our total remediation expenditures will be approximately $41 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 $13 million in the aggregate for the years 2008 through 2012. These expenditures primarily relate to compliance with clean air regulations.

     CERCLA Matters. As part of our environmental remediation projects, we have received notice that we could be designated, or have been asked for information to determine whether we could be designated, as a Potentially Responsible Party (PRP) with respect to 39 active sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or state equivalents. We have sought to resolve our liability as a PRP at these sites through indemnification by third-parties and settlements, which provide for payment of our allocable share of remediation costs. Because the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required, and in some cases we have asserted a defense to any liability, our estimates could change. Moreover, liability under the federal CERCLA statute is joint and several, meaning that we could be required to pay in excess of our pro rata share of remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in estimating our liabilities. Accruals for these matters are included in the previously indicated estimates for Superfund sites.

     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. We are involved in various joint ventures and other ownership arrangements that sometimes require financial and performance guarantees. In a financial guarantee, we are obligated to make payments if the guaranteed party fails to make payments under, or violates the terms of, the financial arrangement. In a performance guarantee, we provide assurance that the guaranteed party will execute on the terms of the contract. If they do not, we are required to perform on their behalf. We also periodically provide indemnification arrangements related to assets or businesses we have sold. These arrangements include, but are not limited to, indemnifications for income taxes, the resolution of existing disputes, and environmental matters.

     Our potential exposure under guarantee and indemnification agreements can range from a specified amount to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. For those arrangements with a specified dollar amount, we have a maximum stated value of approximately $834 million, which primarily relates to indemnification arrangements associated with the sale of ANR, 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 7. As of June 30, 2008, we have recorded obligations of $73 million related to our indemnification arrangements. This 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 fair value. We have provided a partial parental guarantee of our subsidiary’s obligations under this indemnification. We are unable to estimate a maximum exposure for our guarantee and indemnification agreements that do not provide for limits on the amount of future payments due to the uncertainty of these exposures.

     Other Purchase Obligations. We have entered into contracts to purchase approximately $1.0 billion of pipe associated with the Ruby Pipeline project and TGP’s Line 300 project which are anticipated to be placed in service between 2010 and 2011. Our estimated annual obligations under these agreements are approximately $0.3 billion for the remainder of 2008, $0.6 billion in 2009 and $0.1 billion in 2010.

9. Retirement Benefits

     Net Benefit Cost. The components of net benefit cost for our pension and postretirement benefit plans for the periods 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
		2008				2007				2008				2007				2008				2007				2008				2007
		(In millions)
Service cost		$	3			$	4			$	—			$	—			$	7			$	9			$	—			$	—
Interest cost			30				30				10				7				60				60				17				13
Expected return on plan assets			(46	)			(46	)			(4	)			(4	)			(93	)			(91	)			(8	)			(8	)
Amortization of net actuarial loss (gain)			6				11				(1	)			—				12				21				(2	)			—
Amortization of prior service cost(1)			—				—				(1	)			(1	)			(1	)			(1	)			(1	)			(1	)
Net benefit cost (income)		$	(7	)		$	(1	)		$	4			$	2			$	(15	)		$	(2	)		$	6			$	4

     Other Matters. In various court rulings prior to March 2008, we were required to indemnify Case Corporation for certain benefits paid to a closed group of Case retirees as further discussed in Note 8. In conjunction with those rulings, we recorded a liability for estimated amounts due under the indemnification using actuarial methods similar to those used in estimating our postretirement benefit plan obligations. This liability, however, was not included in our postretirement benefit obligations or disclosures.

     In March 2008, we received a summary judgment from the trial court on this matter that we effectively became the primary party that is obligated to pay for these benefit payments. As a result of the judgment, we adjusted our obligation using current actuarial assumptions, recording a $65 million reduction to current and non-current other liabilities and to operation and maintenance expense. We also reclassified this obligation from an indemnification liability to a postretirement benefit obligation, which increased our overall postretirement benefit obligations by $280 million.

     Due to the addition of the Case retirees described above, we now expect payments under our postretirement benefit plans, net of participant contributions and Medicare subsidies, to be approximately $62 million each year through 2012 and $287 million in total for the five year period from 2013 to 2017.

     For the remainder of 2008, we expect to contribute an additional $33 million to our other postretirement benefit plans.

10. Stockholders’ Equity

     The table below shows the amount of dividends paid and declared in 2008 (dollars in millions).

		Common Stock				Convertible Preferred Stock
		($0.04/Share)				(4.99%/Year)
Amount paid through June 30, 2008		$	56			$	19
Amount paid in July 2008		$	28			$	9
Dividends declared subsequent to June 30, 2008
Date of declaration		July 25, 2008				July 25, 2008
Payable to shareholders on record		September 5, 2008				September 15, 2008
Date payable		October 1, 2008				October 1, 2008

     Dividends on our common stock and preferred stock are treated as a reduction of additional paid-in-capital since we currently have an accumulated deficit. For the remainder of 2008, we expect dividends paid on our common and preferred stock will be taxable to our stockholders because we anticipate they will be paid out of current or accumulated earnings and profits for tax purposes. On May 15, 2008, our Board of Directors declared a dividend of $0.05 per share for our common shareholders. The dividend will be payable on October 1, 2008 to holders of record on September 5, 2008.

     The terms of our 750,000 outstanding shares of 4.99% convertible preferred stock prohibit the payment of dividends on our common stock unless we have paid or set aside for payment all accumulated and unpaid dividends on such preferred stock for all preceding dividend periods. In addition, although our credit facilities do not contain any direct restriction on the payment of dividends, dividends are included as a fixed charge in the calculation of our fixed charge coverage ratio under our credit facilities. If our fixed charge ratio were to exceed the permitted maximum level, our ability to pay additional dividends would be restricted.

11. Business Segment Information

     As of June 30, 2008, our business consists of two core segments, Pipelines and Exploration and Production. We also have Marketing and Power segments. Our segments are strategic business units that provide a variety of energy products and services. They are managed separately as each segment requires different technology and marketing strategies. Our corporate operations include our general and administrative functions, as well as other miscellaneous businesses and other various contracts and assets, all of which are immaterial. A further discussion of each segment follows.

     Pipelines. Provides natural gas transmission, storage, and related services, primarily in the United States. As of June 30, 2008, we conducted our activities primarily through seven wholly or majority owned interstate pipeline systems and equity interests in three interstate transmission systems. We also own or have interests in two underground natural gas storage facilities, an LNG terminalling facility, and an LNG terminalling facility which is under construction.

     Exploration and Production. Engaged in the exploration for and the acquisition, development and production of natural gas, oil and NGL in the United States, Brazil and Egypt.

     Marketing. Markets and manages the price risks associated with our natural gas and oil production as well as our remaining legacy trading portfolio.

     Power. Manages the risks associated with our remaining international power investments located primarily in South America and Asia. We continue to pursue the sale of these assets.

     Our management uses earnings before interest expense and income taxes (EBIT) to assess the operating results and effectiveness of our business segments which consist of both consolidated businesses and investments in unconsolidated affiliates. We believe EBIT is useful to our investors because it allows them to more effectively evaluate the operating performance using the same performance measure analyzed internally by our management. We define EBIT as net income or loss adjusted for (i) items that do not impact our income or loss from continuing operations, such as discontinued operations, (ii) income taxes and (iii) interest and debt expense. We exclude interest and debt expense so that investors may evaluate our operating results without regard to our financing methods or capital structure. EBIT may not be comparable to measures used by other companies. Additionally, EBIT should be considered in conjunction with net income and other performance measures such as operating income or operating cash flow. Below is a reconciliation of our EBIT to our income from continuing operations for the periods ended June 30:

		Quarters Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In millions)
Segment EBIT		$	458			$	574			$	1,019			$	1,000
Corporate and other			41				(104	)			80				(314	)
Interest and debt expense			(221	)			(231	)			(454	)			(514	)
Income taxes			(87	)			(70	)			(235	)			(51	)
Income from continuing operations		$	191			$	169			$	410			$	121

     The following table reflects our segment results for the periods ended June 30:

		Segments
						Exploration
						and												Corporate
		Pipelines				Production				Marketing				Power				and Other(1)				Total
		(In millions)
Quarters Ended June 30, 2008
Revenue from external customers		$	632			$	198	(2)		$	322			$	—			$	1			$	1,153
Intersegment revenue			14				457	(2)			(468	)			—				(3	)			—
Operation and maintenance			205				105				8				4				(40	)			282
Depreciation, depletion and amortization			99				197				—				—				2				298
Earnings from unconsolidated affiliates			25				16				—				11				—				52
EBIT			295				304				(153	)			12				41				499
2007
Revenue from external customers		$	600			$	268	(2)		$	301			$	—			$	29			$	1,198
Intersegment revenue			14				307	(2)			(317	)			—				(4	)			—
Operation and maintenance			181				110				3				7				28				329
Depreciation, depletion and amortization			91				189				1				—				5				286
Earnings (losses) from unconsolidated affiliates			29				3				—				13				(1	)			44
EBIT			318				235				5				16				(104	)(3)			470

		Segments
						Exploration
						and												Corporate
		Pipelines				Production				Marketing				Power				and Other(1)				Total
		(In millions)
Six Months Ended June 30, 2008
Revenue from external customers		$	1,339			$	328	(2)		$	744			$	—			$	11			$	2,422
Intersegment revenue			27				930	(2)			(947	)			—				(10	)			—
Operation and maintenance			400				213				10				9				(79	)			553
Depreciation, depletion and amortization			198				409				—				—				4				611
Earnings from unconsolidated affiliates			46				26				—				16				1				89
EBIT			676				546				(213	)			10				80				1,099
2007
Revenue from external customers		$	1,231			$	488	(2)		$	460			$	—			$	41			$	2,220
Intersegment revenue			27				592	(2)			(611	)			—				(8	)			—
Operation and maintenance			342				220				3				11				54				630
Depreciation, depletion and amortization			185				359				2				—				11				557
Earnings from unconsolidated affiliates			55				2				—				24				—				81
EBIT			682				414				(130	)			34				(314	)(3)			686

     Total assets by segment are presented below:

		June 30,				December 31,
		2008				2007
		(In millions)
Pipelines		$	14,537			$	13,939
Exploration and Production			7,663				8,029
Marketing			675				537
Power			498				531
Total segment assets			23,373				23,036
Corporate and Other			1,853				1,543
Total consolidated assets		$	25,226			$	24,579

12. Investments in, Earnings from and Transactions with Unconsolidated Affiliates

     We hold investments in unconsolidated affiliates which are accounted for using the equity method of accounting. The earnings from unconsolidated affiliates reflected in our income statement include (i) our share of net earnings directly attributable to these unconsolidated affiliates, and (ii) any impairments and other adjustments recorded by us. The information below related to our unconsolidated affiliates includes (i) our net investment and earnings (losses) we recorded from these investments, (ii) summarized financial information of our proportionate share of these investments, and (iii) revenues and charges with our unconsolidated affiliates.

										Earnings (Losses) from
										Unconsolidated Affiliates
										Quarters								Six Months
		Investment								Ended								Ended
		June 30,				December 31,				June 30,								June 30,
Net Investment and Earnings (Losses)		2008				2007				2008				2007				2008				2007
		(In millions)								(In millions)
Four Star (1)		$	688			$	698			$	16			$	3			$	26			$	2
Citrus			568				576				19				22				32				44
Gulf LNG(2)			295				—				—				—				—				—
Bolivia to Brazil Pipeline			110				105				3				2				6				5
Gasoductos de Chihuahua			159				146				6				6				13				10
Manaus/Rio Negro(3)			—				56				—				5				—				9
Porto Velho(4)			(62	)			(60	)			—				5				—				7
Asian and Central American Investments(4)(5)			17				26				6				(1	)			6				(1	)
Argentina to Chile Pipeline			24				21				2				2				3				3
Other			64				46				—				—				3				2
Total		$	1,863			$	1,614			$	52			$	44			$	89			$	81