UNITED
STATESSECURITIESAND EXCHANGE
COMMISSION
 Washington, D.C.
20549
 ________________
  Form 10-Q
 (Mark One)
 
 R
              QUARTERLY
      REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF
    1934For
      the quarterly period ended March 31, 2008OR£
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For the transition period
      from                                                                         to
 
 Commission
File Number 1-2700
 ________________
 El
Paso Natural GasCompany
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Delaware
              74-0608280(State
      or Other Jurisdiction
                of
      Incorporation or Organization)
              (I.R.S.
      Employer
                Identification
      No.)El
      Paso Building1001
      Louisiana Street
                Houston,
      Texas
              77002(Address
      of Principal Executive Offices)
              (Zip
      Code)
 
 Telephone
Number: (713) 420-2600
 
 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 R   No £
 
 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 o
                Accelerated
      filer o
                Non-accelerated
      filer þ
                Smaller
      reporting company o(Do not check if a smaller
      reporting company)
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes £ No R
 
 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 $1 per share. Shares outstanding on May 9, 2008:
1,000
 
 EL PASO NATURAL GAS COMPANY
MEETS THE CONDITIONS OFGENERAL
INSTRUCTION H(1)(a) AND (b) TO FORM 10-Q AND IS THEREFORE FILING
THIS
REPORT WITH A REDUCED DISCLOSURE FORMAT AS PERMITTED BY SUCH
INSTRUCTION.
 
     EL
PASO NATURAL GAS COMPANY
 
 TABLE
OF CONTENTS
 
 Caption
              
              PagePART
      I — Financial InformationItem  1.
              Financial
      Statements
              
              
              1Item  2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              10Item  3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              
              *Item  4.
              Controls
      and Procedures
              
              
              13PART
      II — Other InformationItem  1.
              Legal
      Proceedings
              
              
              14Item  1A.
              Risk
      Factors
              
              
              14Item  2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              
              *Item  3.
              Defaults
      Upon Senior Securities
              
              
              *Item  4.
              Submission
      of Matters to a Vote of Security Holders
              
              
              *Item  5.
              Other
      Information
              
              
              14Item  6.
              Exhibits
              
              
              14Signatures
              
              
              15
 ____________
 
 *
      We have not included a response to this item in this document since no
      response is required pursuant to the  reduced disclosure format
      permitted by General Instruction H to
  Form 10-Q.
  Below is
a list of terms that are common to our industry and used throughout this
document:
 
 /d
              = per
      day
              BBtu = billion
      British thermal units
 
 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” or “EPNG”, we are describing El Paso
      Natural Gas Company and/or our
subsidiaries.
 
 
 
   i
  PART
I — FINANCIAL INFORMATION
 
 Item 1. Financial
Statements
 
 EL
PASO NATURAL GAS COMPANY
 
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 (In millions)
 (Unaudited)
 
 Quarter
      Ended
                March 31,2008
              
              
              2007Operating
      revenues
              
              $
              141
              
              
              $
              145Operating
      expensesOperation and
      maintenance
              
              
              53
              
              
              
              45Depreciation and
      amortization
              
              
              20
              
              
              
              22Taxes, other than income
      taxes
              
              
              8
              
              
              
              881
              
              
              
              75Operating
      income
              
              
              60
              
              
              
              70Other
      income, net
              
              
              1
              
              
              
              1Interest
      and debt expense
              
              
              (23
              )
              
              
              (25
              )Affiliated
      interest income, net
              
              
              15
              
              
              
              16Income
      before income taxes
              
              
              53
              
              
              
              62Income
      taxes
              
              
              20
              
              
              
              23Net
      income
              
              $
              33
              
              
              $
              39
 
 See
accompanying notes.
    1
  EL
PASO NATURAL GAS COMPANY
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
millions, except share amounts)
 (Unaudited)
 
 March
      31,
                2008
              
              
              December 31,
                2008ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              —
              
              
              $
              —Accounts
      and notes receivableCustomer,
      net of allowance of $4 in 2008 and 2007
              
              
              71
              
              
              
              73Affiliates
              
              
              14
              
              
              
              6Other
              
              
              1
              
              
              
              1Materials
      and supplies
              
              
              42
              
              
              
              41Deferred
      income taxes
              
              
              11
              
              
              
              7Other
              
              
              6
              
              
              
              7Total
      current assets
              
              
              145
              
              
              
              135Property,
      plant and equipment, at cost
              
              
              3,707
              
              
              
              3,710Less
      accumulated depreciation and amortization
              
              
              1,320
              
              
              
              1,298Total
      property, plant and equipment, net
              
              
              2,387
              
              
              
              2,412Other
      assetsNotes
      receivable from affiliate
              
              
              1,015
              
              
              
              1,113Other
              
              
              128
              
              
              
              1331,143
              
              
              
              1,246Total
      assets
              
              $
              3,675
              
              
              $
              3,793LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      liabilitiesAccounts
      payableTrade
              
              $
              58
              
              
              $
              101Affiliates
              
              
              22
              
              
              
              17Other
              
              
              36
              
              
              
              33Taxes
      payable
              
              
              77
              
              
              
              56Accrued
      interest
              
              
              28
              
              
              
              20Accrued
      liabilities
              
              
              11
              
              
              
              20Regulatory
      liabilities
              
              
              33
              
              
              
              19Other
              
              
              14
              
              
              
              13Total
      current liabilities
              
              
              279
              
              
              
              279Long-term
      debt
              
              
              1,166
              
              
              
              1,166Other
      liabilitiesDeferred
      income taxes
              
              
              380
              
              
              
              370Other
              
              
              104
              
              
              
              116484
              
              
              
              486Commitments
      and contingencies (Note 2)Stockholder’s
      equityCommon
      stock, par value $1 per share; 1,000 shares authorized, issued
      and outstanding
              
              
              —
              
              
              
              —Additional
      paid-in capital
              
              
              1,268
              
              
              
              1,268Retained
      earnings
              
              
              478
              
              
              
              594Total
      stockholder’s equity
              
              
              1,746
              
              
              
              1,862Total
      liabilities and stockholder’s equity
              
              $
              3,675
              
              
              $
              3,793
 
 See
accompanying notes.
    2
  EL
PASO NATURAL GAS COMPANY
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In millions)
 (Unaudited)
 
 Quarter
      Ended
                March 31,2008
              
              
              2007Cash
      flows from operating activitiesNet
      income
              
              $
              33
              
              
              $
              39Adjustments
      to reconcile net income to net cash from operating
    activitiesDepreciation
      and amortization
              
              
              20
              
              
              
              22Deferred
      income taxes
              
              
              5
              
              
              
              19Other
      non-cash income items
              
              
              19
              
              
              
              3Asset
      and liability changes
              
              
              17
              
              
              
              6Net
      cash provided by operating activities
              
              
              94
              
              
              
              89Cash
      flows from investing activitiesAdditions
      to property, plant and equipment
              
              
              (34
              )
              
              
              (23
              )Net
      change in notes receivable from affiliate
              
              
              91
              
              
              
              (66
              )Other
              
              
              (1
              )
              
              
              1Net
      cash provided by (used) in investing activities
              
              
              56
              
              
              
              (88
              )Cash
      flows from financing activitiesDividend
      paid to parent
              
              
              (150
              )
              
              
              —Net
      cash used in financing activities
              
              
              (150
              )
              
              
              —Net
      change in cash and cash equivalents
              
              
              —
              
              
              
              1Cash
      and cash equivalentsBeginning
      of period
              
              
              —
              
              
              
              —End
      of period
              
              $
              —
              
              
              $
              1
 
 See
accompanying notes.
    3
  EL
PASO NATURAL GAS COMPANY
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 1. Basis
of Presentation and Significant Accounting Policies
 
 Basis of
Presentation
 
 We are an
indirect wholly owned subsidiary of El Paso Corporation (El Paso). 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 includes a summary of our
significant accounting policies and other disclosures. The financial statements
as of March 31, 2008, and for the quarters ended March 31, 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 business, information for interim
periods may not be indicative of our operating results for the entire
year.
 
 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. The
adoption of the standard did not have an impact on our financial statements. We
elected to defer the adoption of SFAS No. 157 for our non-financial assets and
liabilities until January 1, 2009. We are currently evaluating the impact, if
any, that the deferred provisions of this standard will have on our financial
statements.
 
 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
plan from September 30 to December 31. We recorded an increase of $1 million,
net of income taxes of less than $1 million, to our January 1, 2008 retained
earnings balance upon the adoption of the measurement date provisions of this
standard.
 
 2. Commitments
and Contingencies
 
 Legal
Proceedings
 
 Sierra Pacific Resources and Nevada
Power Company v. El Paso et al.In April 2003, Sierra Pacific Resources
and Nevada Power Company filed a suit in the U.S. District Court for the
District of Nevada against us, our affiliates and unrelated third parties,
alleging that the defendants conspired to manipulate prices and supplies of
natural gas in the California-Arizona border market from 1996 to 2001. The trial
court twice dismissed the lawsuit. The U.S. Court of Appeals for the Ninth
Circuit, however, reversed the dismissal and remanded the matter to the trial
court. The defendants have filed with the trial court motions to dismiss on
other grounds. Our costs and legal exposure related to this lawsuit are not
currently determinable.
 
  4
  Baldonado et al. v. EPNG.In
August 2000, a main transmission line owned and operated by us ruptured at the
crossing of the Pecos River near Carlsbad, New Mexico. Individuals at the site
were fatally injured. In June 2003, a lawsuit entitled Baldonado et al. v. EPNGwas
filed in state court in Eddy County, New Mexico, on behalf of  26 firemen
and emergency medical service personnel who responded to the fire and who
allegedly have suffered psychological trauma. This case was dismissed by the
trial court, but was appealed to the New Mexico Court of Appeals. In June 2006,
the New Mexico Court of Appeals affirmed the dismissal of the plaintiff’s claims
for negligent infliction of emotional distress, but reversed the dismissal of
the claims for intentional infliction of emotional distress. In December 2007,
the New Mexico Supreme Court issued an opinion which ruled that a trial on the
merits could proceed on either the grounds of intentional or reckless infliction
of emotional distress. EPNG moved to reconsider the decision and in January
2008, removed the case to federal court on the basis of the federal question
created by the New Mexico Supreme Court’s decision. The plaintiffs have made a
motion to remand this matter which, if successful, would move it back to state
court. Our costs and legal exposure related to this lawsuit are currently not
determinable; however, we believe this matter will be fully covered by
insurance.
 
 Gas Measurement Cases.We and
a number of our affiliates 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, which 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.
 
 Bank of America.We are a
named defendant, along with Burlington Resources, Inc. (Burlington), now a
subsidiary of ConocoPhillips, in a class action lawsuit styled Bank of America, et al. v. El Paso
Natural Gas and Burlington Resources Oil and Gas
Company, L.P.,filed in October 2003 in the District Court of Kiowa
County, Oklahoma asserting royalty underpayment claims related to specified
shallow wells in Oklahoma, Texas and New Mexico. The Plaintiffs assert that
royalties were underpaid starting in the 1980s when the purchase price of gas
was lowered below the Natural Gas Policy Act maximum lawful prices. The
Plaintiffs assert that royalties were further underpaid by Burlington as a
result of post-production cost deductions taken starting in the late 1990s. This
action was transferred to Washita County District Court in 2004. A tentative
settlement reached in November 2005 was disapproved by the court in June 2007. A
class certification hearing is scheduled for January 2009. A companion case
styled Bank of America v. El
Paso Natural Gasinvolving similar claims made as to certain wells in
Oklahoma was settled in 2006.
 
 Oklahoma Tax Commission v. El Paso
Natural Gas Company.EPNG has
been named as a defendant in a lawsuit filed in Tulsa County, Oklahoma, which
alleges that EPNG and other defendants failed to file required reports of
production, failed to pay gross production, petroleum and excise taxes, and
failed to make payments on oil produced from unknown sources in the South Erick
Field, Washita County, Oklahoma.  EPNG denies that any amounts are due and
contends that the claims are covered by a contractual indemnification agreement
with a co-defendant.
 
  5
  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. 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. At March 31,
2008, we accrued approximately $5 million for our outstanding legal
matters.
 
 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. At March 31, 2008, we had
accrued approximately $25 million for expected remediation costs and associated
onsite, offsite and groundwater technical studies and for related environmental
legal costs; however, we estimate that our exposure could be as high as
$45 million. Our accrual includes $22 million for environmental
contingencies related to properties we previously owned.
 
 Our
accrual represents a combination of two estimation methodologies. First, where
the most likely outcome can be reasonably estimated, that cost has been accrued.
Second, where the most likely outcome cannot be estimated, a range of costs is
established 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.
 
 Below is
a reconciliation of our accrued liability from January 1, 2008 to March 31,
2008 (in millions):
 
 Balance
      at January 1, 2008
              
              $
              25Additions/adjustments
      for remediation activities
              
              
              1Payments
      for remediation activities
              
              
              (1
              )Balance
      at March 31, 2008
              
              $
              25
 
 For the
remainder of 2008, we estimate that our total remediation expenditures will be
approximately $5 million, which will be expended under government directed
clean-up programs.
 
 Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) Matters.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 three active sites under the 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. As of March 31, 2008, we have
estimated our share of the remediation costs at these sites to be between $12
million and $16 million. 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
environmental reserve discussed above.
 
  6
  Chromium Review.In April
2004, the State of Arizona’s Department of Environmental Quality (ADEQ)
requested information regarding the historical use of chromium containing
compounds in our operations. In June 2004, we responded fully to the
request and began working with the ADEQ on this matter. We commenced a study of
our facilities in Arizona, Texas and New Mexico, as well as on tribal lands in
Arizona and New Mexico to determine if there were any issues concerning the
usage of chromium. Of the 12 Arizona sites that were investigated, nine were
found not to have chromium contamination above regulatory thresholds and no
further action is required. Of the three remaining sites, one was already
enrolled in Arizona’s Voluntary Remediation Program (VRP) and is subject to
an Aquifer Protection Program (APP) Permit and is being investigated under
the requirements of that permit.  The second site has been entered in
the VRP and has been further investigated with VRP approval. We have
performed further investigation on the chromium levels at the third
site and are evaluating the results to determine if this location should be
entered into the VRP. Additional work has been conducted at these three
sites as directed by the ADEQ. We investigated eight Texas sites that previously
used chromium of which two sites will require further investigation for chromium
impacts to soil and groundwater. We investigated 13 New Mexico sites of which
four sites will require further investigation. None of the sites on the tribal
lands were determined to require further investigation. We will be coordinating
the additional work at the Texas and New Mexico sites with the respective state
environmental agencies.
 
 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.
 
 Rates
and Regulatory Matters
 
 EPNG Rate Case.In August
2007, EPNG received approval of the settlement of its rate case from the Federal
Energy Regulatory Commission (FERC). The settlement provided benefits for both
EPNG and its customers for a three year period ending December 31, 2008. Under
the terms of the settlement, EPNG is required to file no later than June 30,
2008, a new rate case for rates to be effective January 1, 2009. EPNG received
approval from the FERC and began billing the settlement rates on October 1,
2007. In the first quarter of 2008, we paid the remaining $10 million in rate
refunds owed to our customers pursuant to the settlement.
 
 Rate of Return Proxy
Groups.  In April 2008, the FERC adopted a new policy that will
allow master limited partnerships to be included in rate of return proxy
groups for determining rates for services provided by interstate natural gas and
oil pipelines.  The FERC uses a discounted cash flow model that
incorporates the use of proxy groups to develop a range of reasonable returns
earned on equity interests in companies with corresponding risks. The FERC then
assigns a rate of return on equity within that range to reflect specific risks
of that pipeline when compared to the proxy group companies.  The
FERC’s policy statement concludes among other items that (i) there should be no
cap on the level of distributions included in the current discounted cash flow
methodology and (ii) there should be a downward adjustment to the long-term
growth rate used for the equity cost of capital of natural gas pipeline master
limited partnerships. The FERC is not exploring other methods of
determining a pipeline’s equity cost of capital at this time. We believe this
ruling will not have a material impact on our financial position or results of
operations.
 
  7
  Other
Matters
 
 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. An interim agreement with the Navajo
Nation expired at the end of December 2006. Negotiations on the terms of the
long-term agreement are continuing. In addition, we continue to preserve other
legal, regulatory and legislative alternatives, which include continuing to
pursue our application with the Department of the Interior for renewal of our
rights-of-way on Navajo Nation lands. It is uncertain whether our negotiations,
or other alternatives, will be successful, or if successful, what the ultimate
cost will be of obtaining the rights-of-way and whether we will be able to
recover these costs in our rates.
 
 Tuba City Uranium Milling
Facility. For a period of approximately ten years beginning in the mid to
late 1950s, Rare Metals Corporation of America, a historical affiliate,
conducted uranium mining and milling operations in the vicinity of Tuba City,
Arizona, under a contract with the United States government as part of the Cold
War nuclear program. The site of the Tuba City uranium mill, which is on land
within the Navajo Indian Reservation, reverted to the Navajo Nation after the
mill closed in 1966. The tailings at the mill site were encapsulated and a
ground water remediation system was installed by the U.S. Department of Energy
(DOE) under the Federal Uranium Mill Tailings Radiation Control Act of 1978. In
May 2007, we filed suit against the DOE and other federal agencies requesting a
judicial determination that the DOE was fully and legally responsible for any
remediation of any waste associated with historical uranium production activity
at two sites in the vicinity of the mill facilities near Tuba City, Arizona. We
are also cooperating with the Navajo Nation in joint legislative efforts to
achieve appropriations for the DOE to assess and remediate the sites. Pending
the potential remedial response by the United States government, we are
undertaking certain interim site control measures in coordination with the
Navajo Nation.
 
 While the
outcome of these matters cannot be predicted with certainty, based on current
information, we do not expect the ultimate resolution of these matters to have a
material adverse effect on our financial position, operating results or cash
flows. It is possible that new information or future developments could require
us to reassess our potential exposure related to these matters. The impact of
these changes may have a material effect on our results of operations, our
financial position, and our cash flows in the periods these events
occur.
 
 Guarantees
 
 We are or
have been involved in various ownership and other contractual arrangements that
sometimes require us to provide additional financial support that results in the
issuance of financial and performance guarantees. As of March 31, 2008, we
had approximately $11 million of financial and performance guarantees not
otherwise recorded in our financial statements.
 
 3. Transactions
with Affiliates
 
 Cash Management
Program.  We participate in El Paso’s cash management
program which matches short-term cash surpluses and needs of participating
affiliates, thus minimizing total borrowings from outside sources.  El Paso
uses the cash management program to settle intercompany transactions between
participating affiliates. We have historically advanced cash to El Paso in
exchange for an affiliated note receivable that is due upon demand. At March
31, 2008 and December 31, 2007, we had a note receivable from
El Paso of approximately $1.0billion
and $1.1 billion. During the first quarter of 2008, we utilized $150
million of our note receivable from the cash management program to pay a
dividend to our parent. We have classified $7 millionof our receivable as current on our balance sheet at March 31, 2008,
based on the anticipated settlement of this amount during the next twelve
months. The interest rate on this note at March 31, 2008 and December 31,
2007 was 4.3% and 6.5%.
  8
  Income
Taxes.  El Paso files consolidated U.S. federal and
certain state tax returns which include our taxable income. In certain states,
we file and pay taxes directly to the state taxing authorities. At March
31, 2008 and December 31, 2007, we had income taxes payable of
$69 million and $54 million. The majority of these balances, as well as our
deferred income taxes, will become payable to El Paso. During the first
quarter of 2007, El Paso billed us  $40 million through intercompany
accounts for certain tax attributes previously reflected as deferred income
taxes in our financial statements.
 
 Other Affiliate
Balances.  At March 31, 2008 and December 31, 2007, we had
contractual deposits from our affiliates of $8 million, included in other
current liabilities on our balance sheets.
 
 Affiliate Revenues and
Expenses. We enter into transactions with our affiliates within the
ordinary course of business. For a further discussion of our affiliated
transactions, see our 2007 Annual Report on Form 10-K. The following table shows
revenues and charges from our affiliates for the quarters ended March
31:
 
 2008
              
              
              2007(In
      millions)Revenues
      from affiliates
              
              $
              4
              
              
              $
              5Operation
      and maintenance expenses from affiliates
              
              
              14
              
              
              
              14Reimbursements
      of operating expenses charged to affiliates
              
              
              5
              
              
              
              4
  9
  Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 
 The
information required by this Item is presented in a reduced disclosure format
pursuant to General Instruction H to Form 10-Q. In addition, this Item
updates, and should be read in conjunction with the information disclosed in our
2007 Annual Report on Form 10-K, and our condensed consolidated financial
statements and the accompanying footnotes presented in Item 1 of this
Quarterly Report on Form 10-Q.
 
 Results
of Operations
 
 Our
management uses earnings before interest expense and income taxes (EBIT) as a
measure to assess the operating results and effectiveness of our business. We
believe EBIT is useful to investors because it allows them to evaluate more
effectively our operating performance using the same performance measure
analyzed internally by our management. We define EBIT as net income adjusted for
(i) items that do not impact our income from continuing operations, (ii) income
taxes, (iii) interest and debt expense and (iv) affiliated interest income. We
exclude interest and debt expense from this measure so that investors may
evaluate our operating results without regard to our financing methods. EBIT may
not be comparable to measurements used by other companies. Additionally, EBIT
should be considered in conjunction with net income and other performance
measures such as operating income and operating cash flows. Below is a
reconciliation of our EBIT to net income, our throughput volumes and an analysis
and discussion of our results for the quarter ended March 31, 2008 compared to
the same period in 2007.
 
 Operating
      Results:
              
              2008
              
              
              2007(In
      millions,
                except
      volumes)Operating
      revenues
              
              $
              141
              
              
              $
              145Operating
      expenses
              
              
              (81
              )
              
              
              (75
              )Operating
      income
              
              
              60
              
              
              
              70Other
      income, net
              
              
              1
              
              
              
              1EBIT
              
              
              61
              
              
              
              71Interest
      and debt expense
              
              
              (23
              )
              
              
              (25
              )Affiliated
      interest income, net
              
              
              15
              
              
              
              16Income
      taxes
              
              
              (20
              )
              
              
              (23
              )Net
      income
              
              $
              33
              
              
              $
              39Throughput
      volumes (BBtu/d)(1)
              
              
              4,125
              
              
              
              4,226
 ____________
 (1)Throughput volumes exclude
      throughput transported by the Mojave system on behalf of the EPNG
      system.
 
 EBIT
      Analysis:
              
              Revenue
              
              
              Expense
              
              
              EBIT
                ImpactFavorable/(Unfavorable)(In
      millions)Reservation
      and other services revenues
              
              $
              (4
              )
              
              $
              —
              
              
              $
              (4
              )Operating
      and general and administrative expenses
              
              
              —
              
              
              
              (5
              )
              
              
              (5
              )Operational
      gas
              
              
              —
              
              
              
              (3
              )
              
              
              (3
              )Depreciation
      and amortization expense
              
              
              —
              
              
              
              2
              
              
              
              2Total
      impact on EBIT
              
              $
              (4
              )
              
              $
              (6
              )
              
              $
              (10
              )
 
 Reservation and Other Services
Revenues.  Reservation and other services revenues on our
Mojave system were lower in 2008 compared to the same period in 2007, primarily
due to a decrease in tariff rates under its rate case settlement and the
expiration of certain firm contracts, both effective March 1, 2007.  For
a further discussion of our Mojave rate case, see our 2007 Annual Report on
Form 10-K.
  10
  Operating and General and
Administrative Expenses. During the quarter ended March 31, 2008, our
operating and general and administrative expenses increased primarily as a
result of increased repair, maintenance and payroll costs.
 
 Operational Gas. During the
quarter ended March 31, 2008, we established an allowance for uncollectible gas
imbalances.
 
 Depreciation and Amortization
Expense.During the quarter ended March 31, 2008, our depreciation and
amortization expense and related rates were lower than the same period in 2007
primarily resulting from the Mojave rate case that was settled in 2007. For a
further discussion of our Mojave rate case, see our 2007 Annual Report on Form
10-K.
 
 Interest
and Debt Expense
 
 Interest
and debt expense for the quarter ended March 31, 2008, was $2 million lower than
the same period in 2007 primarily due to interest recorded in 2007 on EPNG’s
rate refund and lower average interest rates on outstanding debt.
 
 Income
Taxes
 
 Our
effective tax rate of 38 percent and 37 percent for the quarter ended March 31,
2008 and 2007 were higher than the statutory rate of 35 percent primarily due to
the effect of state income taxes.
 
  11
  Liquidity
and Capital Expenditures
 
 Liquidity Overview.Our
liquidity needs are provided by cash flows from operating activities. In
addition, we participate in El Paso’s cash management program and depending
on whether we have short-term cash surpluses or requirements, we either advance
cash to El Paso or El Paso advances cash to us in exchange for an
affiliated note receivable or payable that is due upon demand. We have
historically advanced cash to El Paso, which we reflect in investing
activities in our statement of cash flows. During the first quarter of 2008, we
utilized $150 million of our note receivable from the cash management program to
pay a dividend to our parent. At March 31, 2008, we had a note receivable
from El Paso of approximately $1.0 billion of which
approximately $7 millionwas
classified as current as we anticipate settlement of this amount during the next
twelve months. See Item 1, Financial Statements, Note 3, for a further
discussion of El Paso’s cash management program.
 
 In addition to the cash management program, we are eligible to borrow amounts
available under El Paso’s $1.5 billion credit agreement and are only
liable for amounts we directly borrow. As of March 31, 2008, El Paso had
approximately $0.3 billion of letters of credit issued and $0.3 billion of debt
outstanding under this facility, none of which was issued or borrowed by us. For
a further discussion of this credit agreement, see our 2007 Annual Report on
Form 10-K.
 
 We
believe that cash flows from operating activities combined with amounts
available to us under El Paso’s cash management program and its credit
agreement, if necessary, will be adequate to meet our capital requirements and
our existing operating needs.
 
 Capital Expenditures.Our
cash capital expenditures for the quarter ended March 31, 2008, and
our estimates of capital expenditures for the remainder of this year to
expand and maintain our systems are listed below. We expect to fund these
capital expenditures through a combination of internally generated funds and
repayments by El Paso of amounts we advanced under its cash management
program.
  Quarter
      Ended
                March 31, 2008
              
              
              2008
                Remaining
              
              
              Total(In
      millions)Maintenance
              
              $
              26
              
              
              $
              133
              
              
              $
              159Expansion
              
              
              8
              
              
              
              42
              
              
              
              50$
              34
              
              
              $
              175
              
              
              $
              209
 
 Commitments
and Contingencies
 
 See
Item 1, Financial Statements, Note 2, which is incorporated herein by
reference.
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Omitted
from this report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
 
  12
  Item 4. Controls
and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 As of
March 31, 2008, we carried out an evaluation under the supervision and with the
participation of our management, including our President and our Chief Financial
Officer, as to the effectiveness, design and operation of our disclosure
controls and procedures, as defined by the Securities Exchange Act of 1934, as
amended. This evaluation considered the various processes carried out under the
direction of our disclosure committee in an effort to ensure that information
required to be disclosed in the SEC reports we file or submit under the Exchange
Act is accurate, complete and timely. Our management, including our President
and our Chief Financial Officer, does not expect that our disclosure controls
and procedures or our internal controls will prevent and/or detect all errors
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. Based on the results of our evaluation, our President and our Chief
Financial Officer concluded that our disclosure controls and procedures are
effective at a reasonable level of assurance at March 31, 2008.
 
 Changes
in Internal Control Over Financial Reporting
 
 There
were no changes in our internal control over financial reporting that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting during the first quarter of 2008.
 
  13
  PART
II — OTHER INFORMATION
 
 Item 1. Legal
Proceedings
 
 See Part
I, Item 1, Financial Statements, Note 2, which is incorporated herein
by reference.
 
 Item 1A. Risk
Factors
 
 CAUTIONARY
STATEMENTS FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF
 THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
 
 This
report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
based on assumptions or beliefs that we believe to be reasonable; however,
assumed facts almost always vary from actual results, and differences between
assumed facts and actual results can be material, depending upon the
circumstances. Where, based on assumptions, we or our management express an
expectation or belief as to future results, that expectation or belief is
expressed in good faith and is believed to have a reasonable basis. We cannot
assure you, however, that the stated expectation or belief will occur, be
achieved or accomplished. The words “believe,” “expect,” “estimate,”
“anticipate,” and similar expressions will generally identify forward-looking
statements. All of our forward-looking statements, whether written or oral, are
expressly qualified by these cautionary statements and any other cautionary
statements that may accompany such forward-looking statements. In addition, we
disclaim any obligation to update any forward-looking statements to reflect
events or circumstances after the date of this report.
 
 Important
factors that could cause actual results to differ materially from estimates or
projections contained in forward-looking statements are described in our 2007
Annual Report on Form 10-K under Part I, Item 1A, Risk Factors. There have
been no material changes in these risk factors since that report.
 
 Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
 
 Omitted
from this report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
 
 Item 3. Defaults
Upon Senior Securities
 
 Omitted
from this report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
 
 Item 4. Submission
of Matters to a Vote of Security Holders
 
 Omitted
from this report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
 
 Item 5. Other
Information
 
 None.
 
 Item 6. Exhibits
 
 The
Exhibit Index is hereby incorporated herein by reference and sets forth a
list of those exhibits filed herewith.
    14
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, El Paso Natural
Gas Company has dulycaused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
 
 EL PASO NATURAL GAS
      COMPANYDate:
      May 9, 2008
              /s/James
      J. ClearyJames
      J. ClearyPresident(Principal
      Executive Officer)
  Date:
      May 9, 2008
              /s/John
      R. SultJohn
      R. SultSenior
      Vice President,Chief
      Financial Officer and Controller(Principal Accounting and Financial Officer)
                   15
  EL PASO
NATURAL GAS COMPANY
 
 EXHIBIT
INDEX
 
 Each
exhibit identified below is filed as a part of this report.
 
 Exhibit
                Number
              
              Description31.A
              
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.B
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.A
              
              Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.B
              
              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.