##### Table of Contents



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 September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number 1-14365
 El Paso Corporation
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    76-0568816(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 El Paso Building1001 Louisiana StreetHouston, Texas
    
    77002(Address of Principal Executive Offices)
    
    (Zip Code)
 Telephone Number: (713) 420-2600
Internet Website: www.elpaso.com
 þ o
  Large accelerated filer: þ
    
    Accelerated filer: o
    
    Non-accelerated filer: o
    
    Smaller reporting company: o(Do not check if a smaller reporting company)
 o þ
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.




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##### 



EL PASO CORPORATION
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
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    49Item 4. Controls and Procedures
    
    
    51PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    52Item 1A. Risk Factors
    
    
    52Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 3. Defaults Upon Senior Securities
    
    
    53Item 4. Submission of Matters to a Vote of Security Holders
    
    
    53Item 5. Other Information
    
    
    53Item 6. Exhibits
    
    
    53Signatures
    
    
    54EX-12EX-31.AEX-31.BEX-32.AEX-32.B
   /d
    
    = per day
    
    Mcf
    
    = thousand cubic feetBbl
    
    = barrels
    
    Mcfe
    
    = thousand cubic feet of natural gas
equivalentsBBtu
    
    = billion British thermal units
    
    MMBtu
    
    = million British thermal unitsBcf
    
    = billion cubic feet
    
    MMcf
    
    = million cubic feetBcfe
    
    = billion cubic feet of
natural gas equivalents
    
    MMcfe
    
    = million cubic feet of natural gas equivalentsLNG
    
    = liquefied natural gas
    
    NGL
    
    = natural gas liquidsMBbls
    
    = thousand barrels
    
    TBtu
    
    = trillion British thermal units
   i




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##### Table of Contents



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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenues
    
    $
    1,598
    
    
    $
    1,166
    
    
    $
    4,020
    
    
    $
    3,386Operating expensesCost of products and services
    
    
    68
    
    
    
    55
    
    
    
    195
    
    
    
    170Operation and maintenance
    
    
    329
    
    
    
    348
    
    
    
    882
    
    
    
    978Depreciation, depletion and amortization
    
    
    292
    
    
    
    293
    
    
    
    903
    
    
    
    850Taxes, other than income taxes
    
    
    70
    
    
    
    53
    
    
    
    230
    
    
    
    185759
    
    
    
    749
    
    
    
    2,210
    
    
    
    2,183Operating income
    
    
    839
    
    
    
    417
    
    
    
    1,810
    
    
    
    1,203Earnings (losses) from unconsolidated affiliates
    
    
    52
    
    
    
    (6
    )
    
    
    141
    
    
    
    75Loss on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (287
    )Other income, net
    
    
    (3
    )
    
    
    73
    
    
    
    52
    
    
    
    179Minority interest
    
    
    (7
    )
    
    
    (1
    )
    
    
    (23
    )
    
    
    (1
    )Interest and debt expense
    
    
    (221
    )
    
    
    (228
    )
    
    
    (675
    )
    
    
    (742
    )Income before income taxes from continuing operations
    
    
    660
    
    
    
    255
    
    
    
    1,305
    
    
    
    427Income taxes
    
    
    215
    
    
    
    100
    
    
    
    450
    
    
    
    151Income from continuing operations
    
    
    445
    
    
    
    155
    
    
    
    855
    
    
    
    276Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    674Net income
    
    
    445
    
    
    
    155
    
    
    
    855
    
    
    
    950Preferred stock dividends
    
    
    9
    
    
    
    9
    
    
    
    28
    
    
    
    28Net income available to common stockholders
    
    $
    436
    
    
    $
    146
    
    
    $
    827
    
    
    $
    922Basic earnings per common shareIncome from continuing operations
    
    $
    0.63
    
    
    $
    0.21
    
    
    $
    1.19
    
    
    $
    0.36Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.97Net income per common share
    
    $
    0.63
    
    
    $
    0.21
    
    
    $
    1.19
    
    
    $
    1.33Diluted earnings per common shareIncome from continuing operations
    
    $
    0.58
    
    
    $
    0.20
    
    
    $
    1.12
    
    
    $
    0.35Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.96Net income per common share
    
    $
    0.58
    
    
    $
    0.20
    
    
    $
    1.12
    
    
    $
    1.31Dividends declared per common share
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.13
    
    
    $
    0.12
  1




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##### Table of Contents



EL PASO CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except for share amounts)
(Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assetsCash and cash equivalents
    
    $
    1,160
    
    
    $
    285Accounts and notes receivableCustomers, net of allowance of $10 in 2008 and $17 in 2007
    
    
    587
    
    
    
    468Affiliates
    
    
    164
    
    
    
    196Other
    
    
    211
    
    
    
    201Inventory
    
    
    168
    
    
    
    131Assets from price risk management activities
    
    
    388
    
    
    
    113Deferred income taxes
    
    
    181
    
    
    
    191Other
    
    
    140
    
    
    
    127Total current assets
    
    
    2,999
    
    
    
    1,712Property, plant and equipment, at costPipelines
    
    
    17,561
    
    
    
    16,750Natural gas and oil properties, at full cost
    
    
    19,479
    
    
    
    19,048Other
    
    
    323
    
    
    
    53037,363
    
    
    
    36,328Less accumulated depreciation, depletion and amortization
    
    
    17,595
    
    
    
    16,974Total property, plant and equipment, net
    
    
    19,768
    
    
    
    19,354Other assetsInvestments in unconsolidated affiliates
    
    
    1,830
    
    
    
    1,614Assets from price risk management activities
    
    
    240
    
    
    
    302Other
    
    
    1,589
    
    
    
    1,5973,659
    
    
    
    3,513Total assets
    
    $
    26,426
    
    
    $
    24,579
  2




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##### Table of Contents



EL PASO CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except for share amounts)
(Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payableTrade
    
    $
    447
    
    
    $
    460Affiliates
    
    
    7
    
    
    
    5Other
    
    
    573
    
    
    
    502Current maturities of long-term financing obligations
    
    
    1,079
    
    
    
    331Liabilities from price risk management activities
    
    
    256
    
    
    
    267Accrued interest
    
    
    232
    
    
    
    195Other
    
    
    786
    
    
    
    653Total current liabilities
    
    
    3,380
    
    
    
    2,413Long-term financing obligations, less current maturities
    
    
    12,258
    
    
    
    12,483OtherLiabilities from price risk management activities
    
    
    833
    
    
    
    931Deferred income taxes
    
    
    1,660
    
    
    
    1,157Other
    
    
    1,621
    
    
    
    1,7504,114
    
    
    
    3,838Commitments and contingencies (Note 8)Minority interest
    
    
    559
    
    
    
    565Stockholders equityPreferred 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
    
    
    
    750Common stock, par value $3 per share; authorized 1,500,000,000 shares; issued
712,119,118 shares in 2008 and 709,192,605 shares in 2007
    
    
    2,136
    
    
    
    2,128Additional paid-in capital
    
    
    4,649
    
    
    
    4,699Accumulated deficit
    
    
    (975
    )
    
    
    (1,834
    )Accumulated other comprehensive loss
    
    
    (167
    )
    
    
    (272
    )Treasury stock (at cost); 13,900,806 shares in 2008 and 8,656,095 shares in 2007
    
    
    (278
    )
    
    
    (191
    )Total stockholders equity
    
    
    6,115
    
    
    
    5,280Total liabilities and stockholders equity
    
    $
    26,426
    
    
    $
    24,579
  3




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EL PASO CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activitiesNet income
    
    $
    855
    
    
    $
    950Less income from discontinued operations, net of income taxes
    
    
    
    
    
    
    674Income from continuing operations
    
    
    855
    
    
    
    276Adjustments to reconcile net income to net cash from operating activitiesDepreciation, depletion and amortization
    
    
    903
    
    
    
    850Deferred income taxes
    
    
    470
    
    
    
    127Earnings from unconsolidated affiliates, adjusted for cash distributions
    
    
    (12
    )
    
    
    81Loss on debt extinguishment
    
    
    
    
    
    
    287Other non-cash income items
    
    
    47
    
    
    
    (52
    )Asset and liability changes
    
    
    (212
    )
    
    
    (76
    )Cash provided by continuing activities
    
    
    2,051
    
    
    
    1,493Cash used in discontinued activities
    
    
    
    
    
    
    (31
    )Net cash provided by operating activities
    
    
    2,051
    
    
    
    1,462Cash flows from investing activitiesCapital expenditures
    
    
    (1,905
    )
    
    
    (1,796
    )Cash paid for acquisitions
    
    
    (362
    )
    
    
    (1,182
    )Net proceeds from the sale of assets and investments
    
    
    671
    
    
    
    82Net change in restricted cash
    
    
    35
    
    
    
    33Other
    
    
    44
    
    
    
    17Cash used in continuing activities
    
    
    (1,517
    )
    
    
    (2,846
    )Cash provided by discontinued activities
    
    
    
    
    
    
    3,660Net cash provided by (used in) investing activities
    
    
    (1,517
    )
    
    
    814Cash flows from financing activitiesNet proceeds from issuance of long-term debt
    
    
    4,083
    
    
    
    5,253Payments to retire long-term debt and other financing obligations
    
    
    (3,556
    )
    
    
    (7,286
    )Net proceeds from issuance of subsidiary equity
    
    
    15
    
    
    
    Payments to minority interest holders
    
    
    (20
    )
    
    
    Dividends paid
    
    
    (113
    )
    
    
    (112
    )Repurchase of shares
    
    
    (77
    )
    
    
    Contributions from discontinued operations
    
    
    
    
    
    
    3,346Other
    
    
    9
    
    
    
    4Cash provided by continuing activities
    
    
    341
    
    
    
    1,205Cash used in discontinued activities
    
    
    
    
    
    
    (3,629
    )Net cash provided by (used in) financing activities
    
    
    341
    
    
    
    (2,424
    )Change in cash and cash equivalents
    
    
    875
    
    
    
    (148
    )Cash and cash equivalentsBeginning of period
    
    
    285
    
    
    
    537End of period
    
    $
    1,160
    
    
    $
    389
  4




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EL PASO CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 Nine MonthsQuarters Ended
    
    
    EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    445
    
    
    $
    155
    
    
    $
    855
    
    
    $
    950Pension 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 $2 and $7 in
2008 and $3 and $10 in 2007)
    
    
    3
    
    
    
    5
    
    
    
    13
    
    
    
    18Cash flow hedging activities:Unrealized mark-to-market gains
arising during period (net of
income taxes of $227 and $5 in 2008
and $22 and $3 in 2007)
    
    
    405
    
    
    
    39
    
    
    
    10
    
    
    
    6Reclassification adjustments for
changes in initial value to the
settlement date (net of income
taxes of $24 and $46 in 2008 and
$22 and $46 in 2007)
    
    
    42
    
    
    
    (38
    )
    
    
    81
    
    
    
    (78
    )Investments available for sale:Unrealized gains on investments
available for sale arising during
period (net of income taxes of $2
in 2007)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Realized gains on investments
available for sale arising during
period (net of income taxes of $8
in 2007)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Other comprehensive income (loss)
    
    
    450
    
    
    
    6
    
    
    
    102
    
    
    
    (66
    )Comprehensive income
    
    $
    895
    
    
    $
    161
    
    
    $
    957
    
    
    $
    884
  5




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EL PASO CORPORATION
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation and Significant Accounting Policies
 Basis of Presentation
  Significant Accounting Policies
  Fair Value Measurements. Fair Value Measurements
 Measurement Date of Postretirement Benefits Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans  an Amendment of FASB Statements No. 87, 88, 106, and 132(R)
 Derivative Instruments. Disclosures about Derivative Instruments and Hedging Activities  an amendment of
FASB Statement No. 133
 6




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2. Acquisitions and Divestitures
 Acquisitions
 Gulf LNG.
 Exploration and Production properties.
 Divestitures
  Discontinued Operations. Accounting for the Impairment or Disposal of
Long-Lived Assets
  ANR andRelatedOperations(In millions)Nine Months Ended September 30, 2007Revenues
    
    $
    101Costs and expenses
    
    
    (43
    )Other expense(1)
    
    
    (7
    )Interest and debt expense
    
    
    (10
    )Income taxes
    
    
    (15
    )Income from operations
    
    
    26Gain on sale, net of income taxes of $354 million
    
    
    648Net income from discontinued operations
    
    $
    674
 
 (1)
    
    Includes a loss of approximately $19 million associated with the extinguishment
of certain debt obligations. 7




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3. Income Taxes
  Quarters
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007(In millions, except for rates)Income taxes
    
    $
    215
    
    
    $
    100
    
    
    $
    450
    
    
    $
    151Effective tax rate
    
    
    33
    %
    
    
    39
    %
    
    
    34
    %
    
    
    35
    %
     8




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4. Earnings Per Share
  2008
    
    
    2007Basic
    
    
    Diluted
    
    
    Basic
    
    
    Diluted(In millions, except per share amounts)Quarters Ended September 30Income from continuing operations
    
    $
    445
    
    
    $
    445
    
    
    $
    155
    
    
    $
    155Convertible preferred stock dividends
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )
    
    
    Interest on trust preferred securities
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    Income from continuing operations available
to common stockholders
    
    
    436
    
    
    
    448
    
    
    
    146
    
    
    
    155Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income available to common stockholders.
    
    $
    436
    
    
    $
    448
    
    
    $
    146
    
    
    $
    155Weighted average common shares outstanding
    
    
    696
    
    
    
    696
    
    
    
    696
    
    
    
    696Effect of dilutive securities:Options and restricted stock
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    5Trust preferred securities
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    58Weighted average common shares outstanding
and dilutive securities
    
    
    696
    
    
    
    766
    
    
    
    696
    
    
    
    759Earnings per common share:Income from continuing operations
    
    $
    0.63
    
    
    $
    0.58
    
    
    $
    0.21
    
    
    $
    0.20Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.63
    
    
    $
    0.58
    
    
    $
    0.21
    
    
    $
    0.20
 2008
    
    
    2007Basic
    
    
    Diluted
    
    
    Basic
    
    
    Diluted(In millions, except per share amounts)Nine Months Ended September 30Income from continuing operations
    
    $
    855
    
    
    $
    855
    
    
    $
    276
    
    
    $
    276Convertible preferred stock dividends
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )Interest on trust preferred securities
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Income from continuing operations available
to common stockholders
    
    
    827
    
    
    
    863
    
    
    
    248
    
    
    
    248Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    674
    
    
    
    674Net income available to common stockholders.
    
    $
    827
    
    
    $
    863
    
    
    $
    922
    
    
    $
    922Weighted average common shares outstanding
    
    
    697
    
    
    
    697
    
    
    
    695
    
    
    
    695Effect of dilutive securities:Options and restricted stock
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Trust preferred securities
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    Weighted average common shares outstanding
and dilutive securities
    
    
    697
    
    
    
    767
    
    
    
    695
    
    
    
    699Earnings per common share:Income from continuing operations
    
    $
    1.19
    
    
    $
    1.12
    
    
    $
    0.36
    
    
    $
    0.35Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    0.97
    
    
    
    0.96Net income
    
    $
    1.19
    
    
    $
    1.12
    
    
    $
    1.33
    
    
    $
    1.31
  9




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5. Fair Value Measurements
 Fair Value Measurements The Fair Value Option for Financial Assets and Financial Liabilities
  
    
    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 primarily based on pricing data representative of
quoted prices for similar assets and liabilities in active markets (or identical assets and
liabilities in less active markets). 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 third party pricing sources and our creditworthiness or that of our
counterparties.
    
    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 obtain pricing
data from third party pricing sources, adjust this data based on the liquidity of the
underlying forward markets over the contractual terms and use the adjusted pricing data 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; (iii) the limited availability of
forward pricing information in markets where there is a lack of viable participants, such
as in the Pennsylvania-New Jersey-Maryland (PJM) forward power market and the forward
market for ammonia; and (iv) our creditworthiness or that of our counterparties. 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.
 10




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Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsMarketable securities invested in non-qualified compensation plans
    
    $
    21
    
    
    $
    
    
    
    $
    
    
    
    $
    21Production-related natural gas and oil derivatives
    
    
    
    
    
    
    324
    
    
    
    
    
    
    
    324Other natural gas derivatives
    
    
    
    
    
    
    89
    
    
    
    31
    
    
    
    120Power-related derivatives
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    99Foreign currency swaps
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    85Total assets
    
    $
    21
    
    
    $
    413
    
    
    $
    215
    
    
    $
    649
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalLiabilitiesProduction-related natural gas and oil derivatives
    
    $
    
    
    
    $
    (84
    )
    
    $
    
    
    
    $
    (84
    )Other natural gas derivatives
    
    
    
    
    
    
    (217
    )
    
    
    (193
    )
    
    
    (410
    )Power-related derivatives
    
    
    
    
    
    
    
    
    
    
    (586
    )
    
    
    (586
    )Interest rate swaps
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Other
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    (72
    )Total liabilities
    
    
    
    
    
    
    (310
    )
    
    
    (851
    )
    
    
    (1,161
    )Total
    
    $
    21
    
    
    $
    103
    
    
    $
    (636
    )
    
    $
    (512
    )
   Change in fair
    
    
    Change in fair
    
    
    Change in fairvalue reflected
    
    
    value reflected
    
    
    value reflected inBalance at
    
    
    in
    
    
    in
    
    
    long-termBeginning of
    
    
    operating
    
    
    operating
    
    
    financing
    
    
    Settlements,
    
    
    Balance at End ofPeriod
    
    
    revenues(1)
    
    
    expenses(2)
    
    
    obligations(3)
    
    
    Net
    
    
    PeriodQuarter Ended September 30, 2008Assets
    
    $
    342
    
    
    $
    (63
    )
    
    $
    
    
    
    $
    (46
    )
    
    $
    (18
    )
    
    $
    215Liabilities
    
    
    (1,012
    )
    
    
    116
    
    
    
    (8
    )
    
    
    
    
    
    
    53
    
    
    
    (851
    )Total
    
    $
    (670
    )
    
    $
    53
    
    
    $
    (8
    )
    
    $
    (46
    )
    
    $
    35
    
    
    $
    (636
    )Nine Months Ended September 30, 2008Assets
    
    $
    250
    
    
    $
    25
    
    
    $
    
    
    
    $
    (24
    )
    
    $
    (36
    )
    
    $
    215Liabilities
    
    
    (839
    )
    
    
    (108
    )
    
    
    (39
    )
    
    
    
    
    
    
    135
    
    
    
    (851
    )Total
    
    $
    (589
    )
    
    $
    (83
    )
    
    $
    (39
    )
    
    $
    (24
    )
    
    $
    99
    
    
    $
    (636
    )
 
 (1)
    
    Includes approximately $49 million of net gains and $79 million of net losses
that had not been realized through settlements for the quarter and nine months ended September
30, 2008.(2)
    
    Includes approximately $8 million and $35 million of net losses that had not
been realized through settlements for the quarter and nine months ended September 30,
2008.(3)
    
    Includes approximately $46 million and $24 million of net losses that had not
been realized through settlements for the quarter and nine months ended September 30,
2008. 11




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##### Table of Contents



6. Price Risk Management Activities
  September 30,
    
    
    December 31,2008
    
    
    2007(In millions)Net assets (liabilities):Derivatives designated as accounting hedges
    
    $
    126
    
    
    $
    (23
    )Other commodity-based derivative contracts
    
    
    (663
    )
    
    
    (869
    )Total commodity-based derivatives
    
    
    (537
    )
    
    
    (892
    )Interest rate and foreign currency derivatives
    
    
    76
    
    
    
    109Net liabilities from price risk management activities(1)
    
    $
    (461
    )
    
    $
    (783
    )
 
 (1)
    
    Included in both current and non-current assets and liabilities on the balance
sheet. 7. Long-Term Financing Obligations and Other Credit Facilities
 September 30,
    
    
    December 31,2008
    
    
    2007(In millions)Current maturities of long-term financing obligations
    
    $
    1,079
    
    
    $
    331Long-term financing obligations
    
    
    12,258
    
    
    
    12,483Total
    
    $
    13,337
    
    
    $
    12,814
 Long Term Financing Obligations.
 Credit Facilities.
 Facility
    
    Credit Facility
    
    Available CapacityEl Paso revolving credit agreement
    
    $1.5 billion
    
    $0.6 billionEl Paso Exploration and Production (EPEP)
revolving credit facility
    
    $1.0 billion
    
    $0.1 billionUnsecured credit facilities
    
    $1.0 billion
    
    
    ____
  12




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##### Table of Contents



Restrictive Covenants.
 Letters of Credit.
 8. Commitments and Contingencies
 Legal Proceedings
 ERISA Class Action Suits. William
H. Lewis, III v. El Paso Corporation, et al.
 Cash Balance Plan Lawsuit. Tomlinson, et al. v. El Paso Corporation and El Paso Corporation Pension Plan
 Retiree Medical Benefits Matter. Yolton et al. v. El Paso
Tennessee Pipeline Co. and Case Corporation
 13




---



##### Table of Contents



Price Reporting Litigation.
 Gas Measurement Cases. In re: Natural Gas Royalties Qui
Tam Litigation,
 Will Price, et
al. v. Gas Pipelines and Their Predecessors, et al.,
 MTBE
 14




---



##### Table of Contents



Government Investigations and Inquiries
 Reserve Revisions.
  Rates and Regulatory Matters
 Notice of Inquiry on Pipeline Fuel Retention Policies
 EPNG Rate Case
 Notice of Proposed Rulemaking.
 Greenhouse Gas Emissions
 15




---



##### Table of Contents



Other Matter
 Navajo Nation.
 Environmental Matters
   September 30, 2008Sites
    
    Expected
    
    
    High(In millions)Operating
    
    $
    19
    
    
    $
    26Non-operating
    
    
    183
    
    
    
    346Superfund
    
    
    22
    
    
    
    45Total
    
    $
    224
    
    
    $
    417
 16




---



##### Table of Contents



Balance as of January 1, 2008
    
    $
    260Additions/adjustments for remediation activities
    
    
    (6
    )Payments for remediation activities
    
    
    (30
    )Balance as of September 30, 2008
    
    $
    224
  CERCLA Matters.
  Guarantees and Other Commitments
 Guarantees.
  17




---



##### Table of Contents



Purchase Obligations.
 Asset Retirement Obligations.
 9. Retirement Benefits
 Net Benefit Cost.
 Quarters Ended September 30,
    
    
    Nine Months Ended September 30,Other
    
    
    
    
    
    
    
    
    
    
    OtherPension
    
    
    Postretirement
    
    
    Pension
    
    
    PostretirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    Benefits2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Service cost
    
    $
    4
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    11
    
    
    $
    13
    
    
    $
    
    
    
    $
    Interest cost
    
    
    30
    
    
    
    30
    
    
    
    10
    
    
    
    6
    
    
    
    90
    
    
    
    90
    
    
    
    27
    
    
    
    19Expected return on plan
assets
    
    
    (47
    )
    
    
    (45
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (140
    )
    
    
    (136
    )
    
    
    (12
    )
    
    
    (12
    )Amortization of net
actuarial loss (gain)
    
    
    6
    
    
    
    11
    
    
    
    (1
    )
    
    
    
    
    
    
    18
    
    
    
    32
    
    
    
    (3
    )
    
    
    Amortization of prior
service
cost(1)
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    1
    
    
    
    (2
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    Net benefit cost (income)
    
    $
    (8
    )
    
    $
    (1
    )
    
    $
    5
    
    
    $
    3
    
    
    $
    (23
    )
    
    $
    (3
    )
    
    $
    11
    
    
    $
    7
 
 (1)
    
    As permitted, the amortization of any prior service cost is determined using a
straight-line amortization of the cost over the average remaining service period of employees
expected to receive benefits under the plan. Other Matters.
     18




---



##### Table of Contents



10. Stockholders Equity
 Share Repurchase Program.
 Common and Preferred Stock Dividends.
 Common Stock
    
    Convertible Preferred StockAmount paid through September 30, 2008
    
    $
    85
    
    
    $
    28Amount paid in October 2008
    
    $
    34
    
    
    $
    9Dividends declared subsequent to September 30, 2008Date of declaration
    
    October 23, 2008
    
    October 23, 2008Payable to shareholders on record
    
    December 5, 2008
    
    December 15, 2008Date payable
    
    January 2, 2009
    
    January 2, 2009
   11. Business Segment Information
  Pipelines.
 Exploration and Production.
 Marketing.
 19




---



##### Table of Contents



Power.
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Segment EBIT
    
    $
    886
    
    
    $
    432
    
    
    $
    1,905
    
    
    $
    1,432Corporate and other
    
    
    (5
    )
    
    
    51
    
    
    
    75
    
    
    
    (263
    )Interest and debt expense
    
    
    (221
    )
    
    
    (228
    )
    
    
    (675
    )
    
    
    (742
    )Income taxes
    
    
    (215
    )
    
    
    (100
    )
    
    
    (450
    )
    
    
    (151
    )Income from continuing operations
    
    $
    445
    
    
    $
    155
    
    
    $
    855
    
    
    $
    276
  SegmentsExplorationand
    
    
    
    
    
    
    
    
    
    CorporatePipelines
    
    Production
    
    Marketing
    
    Power
    
    and Other(1)
    
    Total(In millions)Quarters Ended September 30,
2008Revenue from external customers
    
    $
    615
    
    
    $
    528
    (2)
    
    $
    450
    
    
    $
    
    
    
    $
    5
    
    
    $
    1,598Intersegment revenue
    
    
    13
    
    
    
    353
    (2)
    
    
    (361
    )
    
    
    
    
    
    
    (5
    )
    
    
    Operation and maintenance
    
    
    223
    
    
    
    90
    
    
    
    7
    
    
    
    4
    
    
    
    5
    
    
    
    329Depreciation, depletion and
amortization
    
    
    97
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    292Earnings from unconsolidated affiliates
    
    
    28
    
    
    
    10
    
    
    
    
    
    
    
    12
    
    
    
    2
    
    
    
    52EBIT
    
    
    278
    
    
    
    532
    
    
    
    82
    
    
    
    (6
    )
    
    
    (5
    )
    
    
    8812007Revenue from external customers
    
    $
    572
    
    
    $
    290
    (2)
    
    $
    284
    
    
    $
    
    
    
    $
    20
    
    
    $
    1,166Intersegment revenue
    
    
    14
    
    
    
    285
    (2)
    
    
    (293
    )
    
    
    
    
    
    
    (6
    )
    
    
    Operation and maintenance
    
    
    199
    
    
    
    106
    
    
    
    4
    
    
    
    5
    
    
    
    34
    
    
    
    348Depreciation, depletion and
amortization
    
    
    94
    
    
    
    194
    
    
    
    
    
    
    
    1
    
    
    
    4
    
    
    
    293Earnings (losses) from unconsolidated
affiliates
    
    
    28
    
    
    
    2
    
    
    
    
    
    
    
    (36
    )(3)
    
    
    
    
    
    
    (6
    )EBIT
    
    
    275
    
    
    
    232
    
    
    
    (8
    )
    
    
    (67
    )(3)
    
    
    51
    (4)
    
    
    483
 
 (1)
    
    Includes eliminations of intercompany transactions. Our intersegment revenues,
along with our intersegment operating expenses, were incurred in the normal course of business
between our operating segments. During the quarter ended September 30, 2008, we
recorded an intersegment revenue elimination of $5 million and
during the quarter ended September 30, 2007, we recorded an
intersegment revenue elimination of $6 million.(2)
    
    Revenues from external customers include gains and losses related to our price
risk management activities associated with our natural gas and oil production. Intersegment
revenues represent sales to our Marketing segment, which is responsible for marketing our
production to third parties.(3)
    
    Includes a loss associated with our equity investment in and note receivable
from the Porto Velho project, which is further discussed in Note 12.(4)
    
    Includes a $77 million gain associated with the reversal of a liability related
to The Coastal Corporations legacy crude oil marketing and trading business. 20




---



##### Table of Contents



SegmentsExplorationand
    
    
    
    
    
    
    
    
    
    CorporatePipelines
    
    Production
    
    Marketing
    
    Power
    
    and Other(1)
    
    Total(In millions)Nine Months Ended September 30, 2008Revenue from external customers
    
    $
    1,954
    
    
    $
    856
    (2)
    
    $
    1,194
    
    
    $
    
    
    
    $
    16
    
    
    $
    4,020Intersegment revenue
    
    
    40
    
    
    
    1,283
    (2)
    
    
    (1,308
    )
    
    
    
    
    
    
    (15
    )
    
    
    Operation and maintenance
    
    
    623
    
    
    
    303
    
    
    
    17
    
    
    
    13
    
    
    
    (74
    )
    
    
    882Depreciation, depletion and
amortization
    
    
    295
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    903Earnings from unconsolidated affiliates
    
    
    74
    
    
    
    36
    
    
    
    
    
    
    
    28
    
    
    
    3
    
    
    
    141EBIT
    
    
    954
    
    
    
    1,078
    
    
    
    (131
    )
    
    
    4
    
    
    
    75
    
    
    
    1,9802007Revenue from external customers
    
    $
    1,803
    
    
    $
    778
    (2)
    
    $
    744
    
    
    $
    
    
    
    $
    61
    
    
    $
    3,386Intersegment revenue
    
    
    41
    
    
    
    877
    (2)
    
    
    (904
    )
    
    
    
    
    
    
    (14
    )
    
    
    Operation and maintenance
    
    
    541
    
    
    
    326
    
    
    
    7
    
    
    
    16
    
    
    
    88
    
    
    
    978Depreciation, depletion and
amortization
    
    
    279
    
    
    
    553
    
    
    
    2
    
    
    
    1
    
    
    
    15
    
    
    
    850Earnings (losses) from unconsolidated
affiliates
    
    
    83
    
    
    
    4
    
    
    
    
    
    
    
    (12
    )(3)
    
    
    
    
    
    
    75EBIT
    
    
    957
    
    
    
    646
    
    
    
    (138
    )
    
    
    (33
    )(3)
    
    
    (263
    )(4)
    
    
    1,169
 
 (1)
    
    Includes eliminations of intercompany transactions. Our intersegment revenues,
along with our intersegment operating expenses, were incurred in the normal course of business
between our operating segments. During the nine months ended September 30, 2008, we recorded
an intersegment revenue elimination of $16 million, and for the nine months ended September
20, 2007, we recorded an intersegment revenue elimination of $15 million.(2)
    
    Revenues from external customers include gains and losses related to our price
risk management activities associated with our natural gas and oil production. Intersegment
revenues represent sales to our Marketing segment, which is responsible for marketing our
production to third parties.(3)
    
    Includes a loss associated with our equity investment in and note receivable
from the Porto Velho project, which is further discussed in Note 12.(4)
    
    Debt and treasury management activities, which are part of Corporate and Other,
included debt extinguishment costs of $287 million for the nine months ended September 30,
2007, $86 million of which is related to refinancing of EPEPs $1.2 billion notes. This amount
also includes a $77 million gain associated with the reversal of a liability related to The
Coastal Corporations legacy crude oil marketing and trading business.  September 30,
    
    
    December 31,2008
    
    
    2007(In millions)Pipelines
    
    $
    14,834
    
    
    $
    13,939Exploration and Production
    
    
    8,236
    
    
    
    8,029Marketing
    
    
    479
    
    
    
    537Power
    
    
    467
    
    
    
    531Total segment assets
    
    
    24,016
    
    
    
    23,036Corporate and Other
    
    
    2,410
    
    
    
    1,543Total consolidated assets
    
    $
    26,426
    
    
    $
    24,579
 21




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##### Table of Contents



12. Investments in, Earnings from and Transactions with Unconsolidated Affiliates
  Earnings (Losses) fromUnconsolidated AffiliatesInvestment
    
    
    Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    December 31,
    
    
    September 30,
    
    
    September 30,Net Investment and Earnings (Losses)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)
    
    
    (In millions)Four Star (1)
    
    $
    659
    
    
    $
    698
    
    
    $
    10
    
    
    $
    2
    
    
    $
    36
    
    
    $
    4Citrus
    
    
    551
    
    
    
    576
    
    
    
    20
    
    
    
    21
    
    
    
    52
    
    
    
    65Gulf LNG(2)
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bolivia to Brazil Pipeline
    
    
    111
    
    
    
    105
    
    
    
    9
    
    
    
    3
    
    
    
    15
    
    
    
    8Gasoductos de Chihuahua
    
    
    167
    
    
    
    146
    
    
    
    8
    
    
    
    6
    
    
    
    21
    
    
    
    16Manaus/Rio Negro(3)
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    2Porto Velho(4)
    
    
    (63
    )
    
    
    (60
    )
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (24
    )Asian and Central American Investments(5)
    
    
    17
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    (1
    )Argentina to Chile Pipeline
    
    
    26
    
    
    
    21
    
    
    
    2
    
    
    
    1
    
    
    
    5
    
    
    
    4Other
    
    
    67
    
    
    
    46
    
    
    
    3
    
    
    
    (1
    )
    
    
    6
    
    
    
    1Total
    
    $
    1,830
    
    
    $
    1,614
    
    
    $
    52
    
    
    $
    (6
    )
    
    $
    141
    
    
    $
    75
 
 (1)
    
    Amortization of our purchase cost in excess of the underlying net assets of
Four Star was $13 million and $10 million for the quarters ended September 30, 2008 and 2007
and $40 million and $37 million for the nine months ended September 30, 2008 and 2007. For a
further discussion, see our 2007 Annual Report on Form 10-K.(2)
    
    In February 2008, we acquired a 50 percent interest in Gulf LNG. See Note
2.(3)
    
    We transferred ownership of these plants to the power purchaser in January
2008. Accordingly, we eliminated our equity investments in these entities and retained current
assets of $80 million and current liabilities of $24 million after the transfer. For a further
discussion, see Matters that Could Impact our Investmentsbelow.(4)
    
    During the third quarter of 2007, we recorded a $32 million impairment of our
investment in Porto Velho and a $25 million impairment of our note receivable from the project
based on ongoing developments in the Brazilian power markets. As of September 30, 2008 and
December 31, 2007, we had outstanding advances and receivables of $274 million and $335
million related to our investment in Porto Velho, not included above.(5)
    
    In the second quarter of 2008, we sold our interests in our Khulna and Tipitapa
power investments and recognized a pre-tax gain of $6 million. Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Summarized Financial Information
    
    2008
    
    2007
    
    2008
    
    2007(In millions)Operating results data:Operating revenues
    
    $
    196
    
    
    $
    222
    
    
    $
    576
    
    
    $
    638Operating expenses
    
    
    81
    
    
    
    132
    
    
    
    258
    
    
    
    375Income from continuing operations
    
    
    64
    
    
    
    51
    
    
    
    186
    
    
    
    164Net income(1)
    
    
    64
    
    
    
    51
    
    
    
    186
    
    
    
    164
 
 (1)
    
    Includes net income of less than $1 million for the quarters ended September
30, 2008 and 2007, and $1 million and $9 million for the nine months ended September 30, 2008
and 2007, related to our proportionate share of affiliates in which we hold a greater than 50
percent interest.  22




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##### Table of Contents



Matters that Could Impact Our Investments
 Porto Velho.
    Manaus /Rio Negro.
 23




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##### Table of Contents



Asian power investments.
 Investment in Bolivia.
 Investment in Argentina.
 24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 Financial and Operational Update.
 Outlook.
  
    
    We have made adjustments to our capital expenditures for the remainder of 2008. In
particular, we have reduced our anticipated capital expenditures for 2008 by $0.3 billion,
with our anticipated total year expenditures equal to approximately $3.5 billion.
    
    Our current estimate of our 2009 capital program is approximately $3 billion, with $1.7
billion of capital being spent in our pipeline business and
$1.3 billion in our exploration and production business. Production
volumes in 2009 are estimated to be approximately flat with 2008 volumes. Our $1.7
billion of planned pipeline capital reflects equity partnering on one or more of our
expansion projects. We also expect to sell several non-core assets generating cash proceeds of
approximately $150 million by mid-2009.
    
    Based upon our current and projected liquidity following our debt maturities that become
due in May 2009, we do not currently contemplate having to access the capital markets until
the second half of 2009. Although there are many different factors
that will determine our actual capital and liquidity requirements in
the future, we currently expect that we would seek to raise between
$500 million to $800 million of capital in the second half of 2009. However, we will be opportunistic in accessing the capital markets
prior to that time.
    
    To the extent the financial markets remain restricted into
the second half of 2009, any of the asset sales or
partnering opportunities set forth above are delayed or cannot be completed or there is a
further decline in commodity prices, we would review other alternatives, including
additional reductions in our discretionary capital program, secured financing arrangements,
seeking additional partners for one or more of our growth projects and the sale of additional
non-core assets.
 25




---



##### Table of Contents




    
    With our debt capital structure of 79% fixed interest rates and 21% floating interest
rates, we believe we have substantially mitigated our exposure to market changes in interest rates on interest costs.
    
    With regard to the risk of loss of demand due to potential recessionary pressures,
approximately three-fourths of our pipeline revenues are collected in the form of demand or reservation charges.
As a result, near-term declines in demand for natural gas or natural gas prices do not
materially impact our pipeline revenues. With regard to the risk of reductions in commodity
prices, we have hedges in place for 2009 that provide an average floor price of $9.02 per
MMBtu for 176 TBtu and 3.43 million barrels of oil hedged at an average price of $109.93 per
barrel. As a result, the risk of reductions in commodity prices is greatly mitigated for
2009. For example, based on our current positions, a change of $1 per MMBtu in the price of
natural gas would impact our anticipated annual operating cash flow by
approximately $50 million and a
change of $10 per barrel in the price of oil would impact our anticipated annual operating cash flow by
approximately $20 million. Additionally, our revolving credit facility at our exploration and production subsidiary
has a borrowing base that can be reduced in the event of lower oil or natural gas prices. 
However, we currently have other unsecured exploration and production properties and reserves that we could pledge
to maintain the current amounts available under this revolving credit facility.
    
    With regard to counterparty risk, we continually monitor the financial situation of our
major lenders, trading counterparties, customers, joint interest partners, vendors and
suppliers, and enforce our contractual rights with regard to providing collateral or credit.
 o
    
    As part of our determination of available capacity under our credit
agreements, we completed an  assessment of our available lenders under these
facilities, which is a diverse group. Based on our assessment, we have
determined the potential exposure to a loss of available capacity to be
approximately $25 million from El Pasos $1.5 billion revolving credit facility ,
approximately $2 million from EPEPs $1.0 billion revolving credit facility, and
approximately $15 million under the EPB facility. This assessment is based upon the
fact that one of our lenders has failed to fund previous requests under these
facilities and has filed for bankruptcy.o
    
    We have also reviewed the risk of consolidation of lending institutions
on our current revolving credit facility. Since our revolving credit facilities do
not expire until 2012, we believe this consolidation risk will not be a near term
issue and will be an issue that we address over the next several years.o
    
    We conduct similar reviews of the credit risks of our trading
counterparties and our material customers, joint interest owners, suppliers and
vendors. Certain of our contractual arrangements with such parties include
requirements to provide letters of credit, performance bonds or other assurances of
performance to mitigate, in part, against the risk of non-performance by such parties.
However, our natural gas and oil hedges executed at EPEP do not contractually
require the posting of margin.
   26




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##### Table of Contents



Segment Results
    Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)SegmentPipelines
    
    $
    278
    
    
    $
    275
    
    
    $
    954
    
    
    $
    957Exploration and Production
    
    
    532
    
    
    
    232
    
    
    
    1,078
    
    
    
    646Marketing
    
    
    82
    
    
    
    (8
    )
    
    
    (131
    )
    
    
    (138
    )Power
    
    
    (6
    )
    
    
    (67
    )
    
    
    4
    
    
    
    (33
    )Segment EBIT
    
    
    886
    
    
    
    432
    
    
    
    1,905
    
    
    
    1,432Corporate and other
    
    
    (5
    )
    
    
    51
    
    
    
    75
    
    
    
    (263
    )Consolidated EBIT
    
    
    881
    
    
    
    483
    
    
    
    1,980
    
    
    
    1,169Interest and debt expense
    
    
    (221
    )
    
    
    (228
    )
    
    
    (675
    )
    
    
    (742
    )Income taxes
    
    
    (215
    )
    
    
    (100
    )
    
    
    (450
    )
    
    
    (151
    )Income from continuing operations
    
    
    445
    
    
    
    155
    
    
    
    855
    
    
    
    276Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    674Net income
    
    $
    445
    
    
    $
    155
    
    
    $
    855
    
    
    $
    950
 27




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##### Table of Contents



Pipelines Segment
 Overview and Operating Results.
 Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions, except volume amounts)Operating revenues
    
    $
    628
    
    
    $
    586
    
    
    $
    1,994
    
    
    $
    1,844Operating expenses
    
    
    (387
    )
    
    
    (352
    )
    
    
    (1,133
    )
    
    
    (1,010
    )Operating income
    
    
    241
    
    
    
    234
    
    
    
    861
    
    
    
    834Other income
    
    
    44
    
    
    
    41
    
    
    
    117
    
    
    
    123EBIT before minority interest
    
    
    285
    
    
    
    275
    
    
    
    978
    
    
    
    957Minority interest
    
    
    (7
    )
    
    
    
    
    
    
    (24
    )
    
    
    EBIT
    
    $
    278
    
    
    $
    275
    
    
    $
    954
    
    
    $
    957Throughput volumes (BBtu/d)(1)
    
    
    18,905
    
    
    
    18,512
    
    
    
    18,736
    
    
    
    17,909
 
 (1)
    
    Throughput volumes include volumes associated with our proportionate share of
unconsolidated affiliates. Variance Analysis and Discussion
 Quarter Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2008Variance
    
    
    VarianceRevenue
    
    
    Expense
    
    
    Other
    
    
    EBIT
    
    
    Revenue
    
    
    Expense
    
    
    Other
    
    
    EBITImpact
    
    
    Impact
    
    
    Impact
    
    
    Impact
    
    
    Impact
    
    
    Impact
    
    
    Impact
    
    
    ImpactFavorable/(Unfavorable)(In millions)Expansions
    
    $
    14
    
    
    $
    (6
    )
    
    $
    7
    
    
    $
    15
    
    
    $
    58
    
    
    $
    (20
    )
    
    $
    8
    
    
    $
    46Reservation and usage revenues
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    37Gas not used in operations
and revaluations
    
    
    15
    
    
    
    (11
    )
    
    
    
    
    
    
    4
    
    
    
    34
    
    
    
    (23
    )
    
    
    
    
    
    
    11Bankruptcy settlements
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    27
    
    
    
    1
    
    
    
    
    
    
    
    28Hurricanes
    
    
    (7
    )
    
    
    (5
    )
    
    
    
    
    
    
    (12
    )
    
    
    (7
    )
    
    
    (5
    )
    
    
    
    
    
    
    (12
    )Operating and general and
administrative expenses
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    (47
    )Gain/loss on long-lived assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    (26
    )Equity earnings from Citrus
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )Other(1)
    
    
    3
    
    
    
    6
    
    
    
    (2
    )
    
    
    7
    
    
    
    1
    
    
    
    (3
    )
    
    
    (1
    )
    
    
    (3
    )Total impact on EBIT
    
    $
    42
    
    
    $
    (35
    )
    
    $
    (4
    )
    
    $
    3
    
    
    $
    150
    
    
    $
    (123
    )
    
    $
    (30
    )
    
    $
    (3
    )
 
 (1)
    
    Consists of individually insignificant items on several of our pipeline
systems. Expansions.
 28




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##### Table of Contents



Significant New Backlog Projects:
 
    
    Ruby Pipeline Project.We obtained sufficient long-term capacity commitments from
customers and committed to move forward with the $3 billion Ruby Pipeline project, which
is anticipated to be placed in-service in March 2011. We plan to file a certificate
application with the FERC in January 2009.
    
    TGP 300 Line Expansion.In August 2008, we announced the expansion of TGPs 300
Line pipeline. The estimated total capital cost for this expansion project is
approximately $750 million with anticipated in-service dates in the fourth quarter of
2010 for Phase I and in the fourth quarter of 2011 for Phase II.
    
    CIG Raton 2010 Expansion.In July 2008, we announced the expansion of the CIG
Raton Basin Pipeline. The estimated capital cost for the Raton Basin Pipeline expansion
project is $146 million with an estimated in-service date in the second quarter of 2010.
The tentative FERC filing date for this project is January 2009.
    
    WIC Expansions.We announced the expansions of the WIC system in July 2008.
Due to increased shipper commitments, WIC recently expanded the scope
of this project to add a second compressor unit on the Kanda Lateral,
which increased its capital cost from $55  million to $71 million.
These expansions consist of two projects with separate in-service dates of
November 2010 and March 2011.
 Significant Backlog Project Updates:
 
    
    High Plains and Totem Gas Storage.We received FERC approval on the High Plains
Pipeline project in March 2008 and the Totem Gas Storage project in April 2008. The
estimated total capital cost for the High Plains Pipeline project is $216 million ($108
million to be paid by us) and the estimated in service date is November 2008. The
estimated total capital cost for the Totem Gas Storage project is $154 million ($77
million to be paid by us) and the estimated in-service date is July 2009.
    
    South System III.The South System III expansion project will be completed in
three phases. During the second quarter of 2008, we changed the scope of this project at
the request of the customer which increased the total estimated cost to $352 million. We
anticipate filing an application with the FERC during the fourth quarter of 2008 for
certificate authorization to construct and operate these facilities. The project has
estimated in-service dates of January 2011 for Phase I, June 2011 for Phase II and June
2012 for Phase III.
    
    Southeast Supply Header.We own an undivided interest in the northern portion of
the Southeast Supply Header project jointly owned by Spectra Energy Corp. (Spectra) and
Centerpoint Energy. The construction of this project is managed by Spectra and our share
of the estimated cost for this project is $241 million. This project is expected to be
completed in two phases. Phase I of the project was placed in service in September 2008.
Phase II is anticipated to be placed in service in June 2011.
    
    Florida Gas Transmission Phase VIII.We have a 50 percent interest in this
project through our equity investment in Citrus. Our proportional share of the estimated
cost of this project has increased to $1.2 billion due to higher than expected
pipe and other costs.
  29




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##### Table of Contents



Reservation and Usage Revenues.
 Gas Not Used in Operations and Revaluations.
 Bankruptcy Settlements.
 Hurricanes.
 Operating and General and Administrative Expenses.
 Gain/Loss on Long-Lived Assets.
 Equity Earnings from Citrus
 Minority Interest.
 30




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##### Table of Contents



Other Regulatory Matters.
   31




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##### Table of Contents



Exploration and Production Segment
 Overview and Strategy
    Significant Operational Factors
 Production.
 Nine Months EndedSeptember 30,2008
    
    
    2007(MMcfe/d)United StatesCentral
    
    
    238
    
    
    
    220Western
    
    
    153
    
    
    
    144Texas Gulf Coast
    
    
    227
    
    
    
    199Gulf of Mexico and south Louisiana
    
    
    134
    
    
    
    196InternationalBrazil
    
    
    11
    
    
    
    15Total Consolidated
    
    
    763
    
    
    
    774Four Star
    
    
    74
    
    
    
    67
 32




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##### Table of Contents



2008 Drilling Results
  Central.
 Western.
 Texas Gulf Coast.
 Gulf of Mexico and south Louisiana.
 Brazil.
 
    
    Camamu Basin-In 2008, we retained a 100 percent working interest in two
development areas in the BM-CAL-4 block and relinquished the remainder of the acreage in
the block. The two development areas include the Camarao and Pinauna Fields.In 2007, we
completed the drilling of two successful exploratory wells south of the Pinauna Field
that extended the southern limits of the Pinauna project. We continue to advance the
Pinauna project and are in the process of obtaining all regulatory and environmental
approvals that are required before we can enter the next major phase of development. In
October 2008, IBAMA, the environmental regulatory agency in Brazil, issued to us the
Terms of Reference for the Pinauna project, which represents the first major step in the
environmental permitting process.We own an approximate 18 percent working interest in the BM-CAL-5 and BM-CAL-6 blocks,
operated by Petrobras. In the first half of 2008, we participated in drilling an
exploratory well in the BM-CAL-6 block that was unsuccessful. We continue to evaluate other
opportunities in this block. In the third quarter of 2008, we participated in drilling an
exploratory well in the BM-CAL-5 block and the results are currently being evaluated. We
plan to participate in drilling a second exploratory well in the BM-CAL-5 block which is
scheduled for the first quarter of 2009.
    
    Espirito Santo Basin-In 2007, we completed drilling and testing of two exploratory
wells with Petrobras in the ES-5 block. These wells confirmed the extension of an earlier
discovery by Petrobras on a block to the south. We are currently in negotiations with
Petrobras on a unitization agreement as well as other commercial agreements. The plan of
development for this field, known as Camarupim Field, includes four wells that are
projected by Petrobras to be completed and producing by the end of the first quarter of
2009. The price that we expect to receive for our natural gas production from the
Camarupim Field will be indexed to a basket of international fuel oils. Additionally, in
the third quarter of 2008, Petrobras began drilling an exploratory well on the ES-5 block
in which we own a 35 percent working interest. We expect drilling operations on this
well to be completed by the end of 2008. Petrobras plans to begin drilling a second
exploratory well on this block before the end of the first quarter of 2009.
 Egypt.
 33




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##### Table of Contents



Cash Operating Costs.
 Capital Expenditures.
 Outlook
  
    
    Average daily production volumes for the year to range from approximately 745 MMcfe/d
to 755 MMcfe/d, excluding approximately 70 MMcfe/d from our equity investment in Four Star.
We have decreased our average daily production volume guidance from that previously
disclosed primarily due to production shut in as a result of Hurricanes Ike and Gustav. 
Hurricane Ike caused minor damage to most of our 27 operated-platforms in the Gulf of
Mexico and south Louisiana region while two structures in the Eugene Island area were
heavily damaged.  Prior to damages from Hurricane Ike, the two structures in the Eugene
Island area produced approximately 15 MMcfe/d which remains shut in pending repairs. In
addition, approximately 80 MMcfe/d of production remains shut in pending repairs to the
High Island Offshore and Stingray gathering systems, which are owned and operated by third
parties.  The operators currently estimate these systems will be repaired and back in
service by mid-December 2008. We continue to evaluate the cost of restoring our platforms to
operation with initial estimated costs of $30 million to $35 million, a portion of which
will be capitalized and a portion of which will be expensed.
    
    Capital expenditures, excluding acquisitions, of approximately $1.8 billion which is
approximately $100 million lower than previously disclosed guidance. While approximately
85% of our planned 2008 capital program is allocated to our domestic program, we expect
approximately $275 million in international capital expenditures in 2008, primarily in our
Brazil exploration and development program. This amount includes approximately $100 million
of development capital expenditures related to the Camarupim project, the timing of which
will depend on finalization of commercial agreements with our partner and regulatory
approvals.
    
    Average cash operating costs which include production costs, general and administrative
expenses and other expenses of approximately $1.98/Mcfe to $2.04/Mcfe for the year. Average
cash operating costs have increased during 2008, and could change further, primarily as a
result of severance taxes which are sensitive to commodity prices, the volumetric impact of
hurricanes mentioned above and hurricane repair costs; and
    
    Depreciation, depletion and amortization rate of between $2.92/Mcfe and $2.96/Mcfe.
 34




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##### Table of Contents



Price
Risk Management Activities
    Derivatives designated as accounting hedges
 Fixed PriceSwaps(1)
    
    Floors(1)
    
    Ceilings(1)Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageVolumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    PriceNatural Gas2008
    
    
    6
    
    
    $
    7.47
    
    
    
    28
    
    
    $
    8.00
    
    
    
    28
    
    
    $
    10.872009
    
    
    4
    
    
    $
    3.56
    
    
    
    126
    
    
    $
    8.93
    
    
    
    101
    
    
    $
    14.582010
    
    
    5
    
    
    $
    3.70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2011-2012
    
    
    6
    
    
    $
    3.88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Oil2008
    
    
    430
    
    
    $
    88.57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009
    
    
    1,934
    
    
    $
    109.32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Volumes presented are TBtu for natural gas and MBbl for oil. Prices presented
are per MMBtu of natural gas and per Bbl of oil. Derivatives not designated as accounting hedges
 Fixed PriceSwaps(1)
    
    Floors(1)
    
    Ceilings(1)
    
    Basis Swaps(1)(2)Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    Texas Gulf Coast
    
    Western-Raton
    
    RockiesVolumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Avg. Price
    
    Volumes
    
    Avg. Price
    
    Volumes
    
    Avg. PriceNatural Gas2008
    
    
    2
    
    
    $
    8.24
    
    
    
    6
    
    
    $
    8.00
    
    
    
    6
    
    
    $
    10.32
    
    
    
    15
    
    
    $
    (0.33
    )
    
    
    6
    
    
    $
    (1.14
    )
    
    
    3
    
    
    $
    (1.37
    )2009
    
    
    4
    
    
    $
    12.06
    
    
    
    42
    
    
    $
    9.61
    
    
    
    42
    
    
    $
    17.40
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    $
    (1.00
    )
    
    
    
    
    
    
    Oil2008(3)
    
    
    200
    
    
    $
    88.282009
    
    
    1,497
    
    
    $
    110.71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Volumes presented are TBtu for natural gas and MBbl for oil. Prices presented
are per MMBtu of natural gas and per Bbl of oil.(2)
    
    Our basis swaps effectively limit our exposure to differences between the NYMEX
gas price and the price at the location where we sell our gas. The average prices listed above
are the amounts we will pay per MMBtu relative to the NYMEX price to lock-in these
locational price differences.(3)
    
    During the third quarter of 2008, we were required to remove the hedging
designation on fixed price swaps associated with 200 MBbls of our 2008 crude oil production
due to the impact of Hurricane Ike on our forecasted 2008 crude oil production volumes. 35




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##### Table of Contents



Operating Results and Variance Analysis
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Operating Revenues:Natural gas
    
    $
    505
    
    
    $
    431
    
    
    $
    1,547
    
    
    $
    1,298Oil, condensate and NGL
    
    
    139
    
    
    
    129
    
    
    
    435
    
    
    
    328Changes in fair value of derivative
contracts not designated as accounting
hedges
    
    
    214
    
    
    
    6
    
    
    
    104
    
    
    
    4Other
    
    
    23
    
    
    
    9
    
    
    
    53
    
    
    
    25Total operating revenues
    
    
    881
    
    
    
    575
    
    
    
    2,139
    
    
    
    1,655Operating Expenses:Cost of products
    
    
    (13
    )
    
    
    (6
    )
    
    
    (28
    )
    
    
    (15
    )Transportation costs
    
    
    (23
    )
    
    
    (19
    )
    
    
    (63
    )
    
    
    (53
    )Production costs
    
    
    (96
    )
    
    
    (79
    )
    
    
    (280
    )
    
    
    (249
    )Depreciation, depletion and amortization
    
    
    (191
    )
    
    
    (194
    )
    
    
    (600
    )
    
    
    (553
    )General and administrative expenses
    
    
    (26
    )
    
    
    (46
    )
    
    
    (116
    )
    
    
    (141
    )Other
    
    
    (4
    )
    
    
    (3
    )
    
    
    (17
    )
    
    
    (10
    )Total operating expenses
    
    
    (353
    )
    
    
    (347
    )
    
    
    (1,104
    )
    
    
    (1,021
    )Operating income
    
    
    528
    
    
    
    228
    
    
    
    1,035
    
    
    
    634Other income(1)
    
    
    4
    
    
    
    4
    
    
    
    43
    
    
    
    12EBIT
    
    $
    532
    
    
    $
    232
    
    
    $
    1,078
    
    
    $
    646
 
 (1)
    
    Other income includes equity earnings from our investment in Four Star. 36




---



##### Table of Contents



Quarters Ended September 30,
    
    
    Nine Months Ended September 30,Percent
    
    
    
    
    
    
    
    
    
    
    Percent2008
    
    
    2007
    
    
    Variance
    
    
    2008
    
    
    2007
    
    
    VarianceConsolidated volumes, prices and costs per
unit:Natural gasVolumes (MMcf)
    
    
    56,609
    
    
    
    60,705
    
    
    
    (7
    )%
    
    
    178,688
    
    
    
    177,222
    
    
    
    1
    %Average realized prices including hedges ($/Mcf)
    
    $
    8.92
    
    
    $
    7.12
    
    
    
    25
    %
    
    $
    8.66
    
    
    $
    7.33
    
    
    
    18
    %Average realized prices excluding hedges ($/Mcf)
    
    $
    9.58
    
    
    $
    5.92
    
    
    
    62
    %
    
    $
    9.23
    
    
    $
    6.52
    
    
    
    42
    %Average transportation costs ($/Mcf)
    
    $
    0.37
    
    
    $
    0.29
    
    
    
    28
    %
    
    $
    0.32
    
    
    $
    0.28
    
    
    
    14
    %Oil, condensate and NGLVolumes (MBbls)
    
    
    1,571
    
    
    
    1,948
    
    
    
    (19
    )%
    
    
    5,079
    
    
    
    5,684
    
    
    
    (11
    )%Average
realized prices including hedges ($/Bbl)
    
    $
    88.17
    
    
    $
    66.26
    
    
    
    33
    %
    
    $
    85.60
    
    
    $
    57.71
    
    
    
    48
    %Average
realized prices excluding hedges ($/Bbl)
    
    $
    99.77
    
    
    $
    66.82
    
    
    
    49
    %
    
    $
    94.81
    
    
    $
    58.36
    
    
    
    62
    %Average transportation costs ($/Bbl)
    
    $
    1.18
    
    
    $
    0.84
    
    
    
    40
    %
    
    $
    0.97
    
    
    $
    0.76
    
    
    
    28
    %Total equivalent volumesMMcfe
    
    
    66,033
    
    
    
    72,392
    
    
    
    (9
    )%
    
    
    209,161
    
    
    
    211,327
    
    
    
    (1
    )%MMcfe/d
    
    
    718
    
    
    
    787
    
    
    
    (9
    )%
    
    
    763
    
    
    
    774
    
    
    
    (1
    )%Production costs and other cash operating
costs ($/Mcfe)Average lease operating expenses
    
    $
    0.96
    
    
    $
    0.83
    
    
    
    16
    %
    
    $
    0.85
    
    
    $
    0.87
    
    
    
    (2
    )%Average production taxes(1)
    
    
    0.50
    
    
    
    0.26
    
    
    
    92
    %
    
    
    0.49
    
    
    
    0.31
    
    
    
    58
    %Total production costs
    
    
    1.46
    
    
    
    1.09
    
    
    
    34
    %
    
    
    1.34
    
    
    
    1.18
    
    
    
    14
    %Average general and administrative
expenses
    
    
    0.38
    
    
    
    0.64
    
    
    
    (41
    )%
    
    
    0.56
    
    
    
    0.67
    
    
    
    (16
    )%Average taxes, other than production
and income taxes
    
    
    0.05
    
    
    
    0.04
    
    
    
    25
    %
    
    
    0.04
    
    
    
    0.04
    
    
    
    
    %Total cash operating costs
    
    $
    1.89
    
    
    $
    1.77
    
    
    
    7
    %
    
    $
    1.94
    
    
    $
    1.89
    
    
    
    3
    %Depreciation, depletion and amortization
($/Mcfe)
    
    $
    2.89
    
    
    $
    2.69
    
    
    
    7
    %
    
    $
    2.87
    
    
    $
    2.62
    
    
    
    10
    %Unconsolidated affiliate volumes (Four Star)Natural gas (MMcf)
    
    
    5,351
    
    
    
    4,107
    
    
    
    
    
    
    
    15,399
    
    
    
    13,854Oil, condensate and NGL (MBbls)
    
    
    263
    
    
    
    254
    
    
    
    
    
    
    
    797
    
    
    
    756Total equivalent volumesMMcfe
    
    
    6,929
    
    
    
    5,634
    
    
    
    
    
    
    
    20,180
    
    
    
    18,389MMcfe/d
    
    
    75
    
    
    
    61
    
    
    
    
    
    
    
    74
    
    
    
    67
 
 (1)
    
    Production taxes include ad valorem and severance taxes. 37




---



##### Table of Contents



Quarter and Nine Months Ended September 30, 2008 Compared to Quarter and Nine Months Ended
September 30, 2007
  Quarter Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2008Variances
    
    
    VariancesOperating
    
    
    Operating
    
    
    
    
    
    
    
    
    
    
    Operating
    
    
    OperatingRevenue
    
    
    Expense
    
    
    Other
    
    
    EBIT
    
    
    Revenue
    
    
    Expense
    
    
    Other
    
    
    EBITFavorable/(Unfavorable)(In millions)Natural Gas RevenueHigher realized prices in 2008
    
    $
    207
    
    
    $
    
    
    
    $
    
    
    
    $
    207
    
    
    $
    485
    
    
    $
    
    
    
    $
    
    
    
    $
    485Impact of hedges
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    (110
    )
    
    
    (246
    )
    
    
    
    
    
    
    
    
    
    
    (246
    )Higher (lower) volumes in 2008
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Oil, Condensate and NGL RevenuesHigher realized prices in 2008
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    185Impact of hedges
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    (43
    )Lower volumes in 2008
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )Other RevenueChanges in fair value of derivatives
not designated as accounting hedges
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    208
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100Other
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Depreciation, Depletion and
Amortization ExpenseHigher depletion rate in 2008
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    (52
    )Lower production volumes in 2008
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Production CostsLower (higher) lease operating
expenses in 2008
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Higher production taxes in 2008
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )General and Administrative Expenses
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25OtherEarnings from investment in Four Star
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    32Other
    
    
    
    
    
    
    (12
    )
    
    
    (8
    )
    
    
    (20
    )
    
    
    
    
    
    
    (30
    )
    
    
    (1
    )
    
    
    (31
    )Total Variances
    
    $
    306
    
    
    $
    (6
    )
    
    $
    
    
    
    $
    300
    
    
    $
    484
    
    
    $
    (83
    )
    
    $
    31
    
    
    $
    432
 Natural gas, oil, condensate and NGL revenues.
 Other revenue.
 Depreciation, depletion and amortization expense.
 38




---



##### Table of Contents



Production costs.
 General and administrative expenses.
 Other.
 Other Matter
  39




---



##### Table of Contents



Marketing Segment
 Overview.
 Operating Results.
   Quarters
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Production-Related Natural Gas and Oil Derivative Contracts:Changes in fair value of options and swaps
    
    $
    14
    
    
    $
    15
    
    
    $
    (59
    )
    
    $
    (63
    )Contracts Related to Legacy Trading Operations:Natural gas transportation-related contracts:Demand charges
    
    
    (8
    )
    
    
    (27
    )
    
    
    (27
    )
    
    
    (82
    )Settlements, net of termination payments
    
    
    13
    
    
    
    18
    
    
    
    37
    
    
    
    54Changes in fair value of other natural gas derivative contracts(1)
    
    
    7
    
    
    
    (4
    )
    
    
    18
    
    
    
    (26
    )Changes in fair value of power contracts(2)
    
    
    63
    
    
    
    (11
    )
    
    
    (83
    )
    
    
    (43
    )Total revenues
    
    
    89
    
    
    
    (9
    )
    
    
    (114
    )
    
    
    (160
    )Operating expenses
    
    
    (7
    )
    
    
    (4
    )
    
    
    (18
    )
    
    
    (9
    )Operating loss
    
    
    82
    
    
    
    (13
    )
    
    
    (132
    )
    
    
    (169
    )Other
income, net(3)
    
    
    
    
    
    
    5
    
    
    
    1
    
    
    
    31EBIT
    
    $
    82
    
    
    $
    (8
    )
    
    $
    (131
    )
    
    $
    (138
    )
 
 (1)
    
    Includes $17 million and $19 million of revenue for the quarter and nine months
ended September 30, 2008 related to bankruptcy settlements.(2)
    
    Includes $2 million and $23 million of revenue for the quarter and nine months
ended September 30, 2007, related to the settlement of outstanding California power price
disputes.(3)
    
    Includes a $23 million gain on the sale of our investment in the NYMEX in the
first quarter of 2007 and $5 million of interest income in the third quarter of 2007 related
to the settlement of outstanding California power price disputes. 40




---



##### Table of Contents



Production-related Natural Gas and Oil Derivative Contracts
   Contracts Related to Legacy Trading Operations
 Natural gas transportation-related contracts.
 Other natural gas derivative contracts.
 Power contracts.
  41




---



##### Table of Contents



Power Segment
  South AmericaPorto Velho
    
    $
    211Manaus & Rio Negro
    
    
    52Pipeline projects
    
    
    149Asia
    
    
    25Total investment, guarantees and letters of credit
    
    $
    437
 Operating Results.
 Corporate and Other Expenses, Net
  Quarter Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Loss on extinguishment of debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (287
    )Change in litigation, insurance and other reserves
    
    
    (7
    )
    
    
    56
    
    
    
    50
    
    
    
    21Foreign currency fluctuations on Euro-denominated debt
    
    
    5
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    (7
    )Gain on disposition of a portion of our telecommunications business
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    Other
    
    
    (3
    )
    
    
    (1
    )
    
    
    8
    
    
    
    10Total EBIT
    
    $
    (5
    )
    
    $
    51
    
    
    $
    75
    
    
    $
    (263
    )
 Extinguishment of Debt.
 42




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##### Table of Contents



Litigation, Insurance, and Other Reserves.
   Interest and Debt Expense
  Income Taxes
 Quarters
    
    Nine MonthsEnding
    
    EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007(In millions, except for rates)Income taxes
    
    $
    215
    
    
    $
    100
    
    
    $
    450
    
    
    $
    151Effective tax rate
    
    
    33
    %
    
    
    39
    %
    
    
    34
    %
    
    
    35
    %
  Discontinued Operations
  Commitments and Contingencies
  43




---



##### Table of Contents



Liquidity and Capital Resources
    Available Liquidity.
 Overview Liquidity/Cash Flow Outlook
 2008 Cash Flow Activities.
 44




---



##### Table of Contents



2008(In billions)Cash Flow from OperationsContinuing operating activitiesIncome from continuing operations
    
    $
    0.9Other income adjustments
    
    
    1.4Changes in assets and liabilities
    
    
    (0.2
    )Total cash flow from operations
    
    $
    2.1Other Cash InflowsContinuing investing activitiesNet proceeds from the sale of assets and investments
    
    $
    0.7Other
    
    
    0.1Continuing financing activitiesNet proceeds from the issuance of long-term debt(1)
    
    
    4.1Total other cash inflows
    
    $
    4.9Cash OutflowsContinuing investing activitiesCapital expenditures
    
    $
    1.9Cash paid for acquisitions
    
    
    0.42.3Continuing financing activitiesPayments to retire long-term debt and other financing obligations(1)
    
    
    3.6Dividends and other
    
    
    0.23.8Total cash outflows
    
    $
    6.1Net change in cash
    
    $
    0.9
 
 (1)
    
    Relates primarily to the net activity under our revolving credit facilities. Liquidity/Cash Flow Outlook. Available Liquidity
  Nine Months Ended
    
    
    2008September 30, 2008
    
    
    Remaining
    
    
    Total(In billions)PipelinesMaintenance
    
    $
    0.3
    
    
    $
    0.2
    
    
    $
    0.5Growth
    
    
    0.8
    
    
    
    0.4
    
    
    
    1.2Exploration and Production
    
    
    1.2
    
    
    
    0.6
    
    
    
    1.8$
    2.3
    
    
    $
    1.2
    
    
    $
    3.5
 
 45




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##### Table of Contents



Additional Factors That Could Impact Our Future Liquidity.
 Price Risk Management Activities and Margining Requirements.
 Fixed Price
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basis Swaps(1)(2)Swaps(1)
    
    Floors(1)
    
    Ceilings(1)
    
    Texas Gulf Coast
    
    Raton
    
    RockiesAverage
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Avg.
    
    
    
    
    
    Avg.
    
    
    
    
    
    Avg.Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    PriceNatural Gas2008
    
    
    8
    
    
    $
    7.66
    
    
    
    34
    
    
    $
    8.00
    
    
    
    34
    
    
    $
    10.77
    
    
    
    15
    
    
    $
    (0.33
    )
    
    
    6
    
    
    $
    (1.14
    )
    
    
    3
    
    
    $
    (1.37
    )2009
    
    
    8
    
    
    $
    7.33
    
    
    
    168
    
    
    $
    9.10
    
    
    
    143
    
    
    $
    15.41
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    $
    (1.00
    )
    
    
    
    
    
    
    2010
    
    
    5
    
    
    $
    3.70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2011-2012
    
    
    6
    
    
    $
    3.88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Oil2008
    
    
    630
    
    
    $
    88.48
    
    
    
    223
    
    
    $
    55.00
    
    
    
    223
    
    
    $
    56.10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009
    
    
    3,431
    
    
    $
    109.93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Volumes presented are TBtu for natural gas and MBbl for oil. Prices presented
are per MMBtu of natural gas and per Bbl of oil.(2)
    
    Our basis swaps effectively limit our exposure to differences between the NYMEX
gas price and the price at the location where we sell our gas. The average prices listed above
are the amounts we will pay per MMBtu relative to the NYMEX price to lock-in these
locational price differences.   Hurricanes.
 46




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##### Table of Contents



Contractual Obligations
  Commodity-Based Derivative Contracts.
 Maturity
    
    
    Maturity
    
    
    Maturity
    
    
    Maturity
    
    
    TotalLess Than
    
    
    1 to 3
    
    
    4 to 5
    
    
    6 to 10
    
    
    Fair1 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Value(In millions)Derivatives designated as accounting hedgesAssets
    
    $
    159
    
    
    $
    39
    
    
    $
    
    
    
    $
    
    
    
    $
    198Liabilities
    
    
    (20
    )
    
    
    (39
    )
    
    
    (13
    )
    
    
    
    
    
    
    (72
    )Total derivatives designated as hedges(1)
    
    
    139
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    126Other commodity-based derivativesAssets
    
    
    144
    
    
    
    150
    
    
    
    36
    
    
    
    15
    
    
    
    345Liabilities
    
    
    (235
    )
    
    
    (412
    )
    
    
    (228
    )
    
    
    (133
    )
    
    
    (1,008
    )Total other commodity-based
derivatives(1)(2)
    
    
    (91
    )
    
    
    (262
    )
    
    
    (192
    )
    
    
    (118
    )
    
    
    (663
    )Total commodity-based derivatives
    
    $
    48
    
    
    $
    (262
    )
    
    $
    (205
    )
    
    $
    (118
    )
    
    $
    (537
    )
 
 (1)
    
    Includes positions whose fair value is primarily based on commodity prices
quoted on exchanges such as the NYMEX.(2)
    
    Includes positions whose fair values are derived from third party pricing data
and valuation techniques that consider specific contractual terms, statistical and simulation
analysis, present value concepts, and other internal assumptions.  Derivatives
    
    
    Other
    
    
    TotalDesignated as
    
    
    Commodity-
    
    
    Commodity-Accounting
    
    
    Based
    
    
    BasedHedges
    
    
    Derivatives
    
    
    Derivatives(In millions)Fair value of contracts outstanding at January 1, 2008
    
    $
    (23
    )
    
    $
    (869
    )
    
    $
    (892
    )Fair value of contract settlements during the period
    
    
    117
    
    
    
    248
    
    
    
    365Changes in fair value of contracts
    
    
    9
    
    
    
    (35
    )
    
    
    (26
    )Reclassification of derivatives that no longer qualify as hedges
    
    
    2
    
    
    
    (2
    )
    
    
    Option premiums (received) paid
    
    
    21
    
    
    
    (5
    )
    
    
    16Net changes in contracts outstanding during the period
    
    
    149
    
    
    
    206
    
    
    
    355Fair value of contracts outstanding at September 30, 2008
    
    $
    126
    
    
    $
    (663
    )
    
    $
    (537
    )
 Other Purchase Obligations.
 47




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Critical Accounting Estimates
  Price Risk Management Activities.
  48




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Commodity Price Risk
 Production-Related Derivatives
 Other Commodity-Based Derivatives.
 Sensitivity Analysis.
 Change in Market Price10 Percent Increase
    
    10 Percent DecreaseFair Value
    
    Fair Value
    
    Change
    
    Fair Value
    
    Change(In millions)Production-related derivatives 
net assets (liabilities)September 30, 2008
    
    $
    240
    
    
    $
    95
    
    
    $
    (145
    )
    
    $
    400
    
    
    $
    160December 31, 2007
    
    $
    (64
    )
    
    $
    (181
    )
    
    $
    (117
    )
    
    $
    58
    
    
    $
    122Other commodity-based derivatives 
net liabilitiesSeptember 30, 2008
    
    $
    (777
    )
    
    $
    (795
    )
    
    $
    (18
    )
    
    $
    (759
    )
    
    $
    18December 31, 2007
    
    $
    (828
    )
    
    $
    (846
    )
    
    $
    (18
    )
    
    $
    (810
    )
    
    $
    18
 49




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Interest Rate Risk
  Change in Discount Rate1 Percent Increase
    
    1 Percent DecreaseFair Value
    
    Fair Value
    
    Change
    
    Fair Value
    
    Change(In millions)Production-related derivatives 
net assets (liabilities)September 30, 2008
    
    $
    240
    
    
    $
    239
    
    
    $
    (1
    )
    
    $
    241
    
    
    $
    1December 31, 2007
    
    $
    (64
    )
    
    $
    (62
    )
    
    $
    2
    
    
    $
    (66
    )
    
    $
    (2
    )Other commodity-based derivatives 
net liabilitiesSeptember 30, 2008
    
    $
    (777
    )
    
    $
    (756
    )
    
    $
    21
    
    
    $
    (798
    )
    
    $
    (21
    )December 31, 2007
    
    $
    (828
    )
    
    $
    (805
    )
    
    $
    23
    
    
    $
    (853
    )
    
    $
    (25
    )
 50




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  51




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Natural Buttes.
 
 Item 1A. Risk Factors
 CAUTIONARY STATEMENTS
  
    
    earnings per share;
    
    capital and other expenditures;
    
    dividends;
    
    financing plans;
    
    capital structure;
    
    liquidity and cash flow;
    
    pending legal proceedings, claims and governmental proceedings, including environmental
matters;
    
    future economic and operating performance;
    
    operating income;
    
    managements plans; and
    
    goals and objectives for future operations.
  52




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Approximate DollarTotal Number of
    
    ValueTotal Number
    
    Average Price
    
    Shares Purchased as
    
    that May Yet Beof Shares
    
    Paid per
    
    Part of Publicly
    
    PurchasedPeriod
    
    Purchased
    
    Share
    
    Announced Program
    
    Under the Program(1)July 1, 2008 to July 31, 2008
    
    
    1,465,253
    
    
    $
    18.40
    
    
    
    1,465,253
    
    
    $
    268,773,153August 1, 2008 to August 31, 2008
    
    
    1,494,100
    
    
    $
    16.73
    
    
    
    1,494,100
    
    
    $
    243,774,407September 1, 2008 to
September 30, 2008
    
    
    1,500,000
    
    
    $
    14.18
    
    
    
    1,500,000
    
    
    $
    222,511,157Quarter Ended September 30, 2008
Total
    
    
    4,459,353
    
    
    $
    16.42
    
    
    
    4,459,353
    
    
    $
    222,511,157
 
 (1)
    
    On May 14, 2008, the Board approved a $300 million stock repurchase program to
be consummated to the extent that we generate cash in excess of that originally planned. The
share repurchase program was publicly announced on May 15, 2008 and has no stated expiration
date. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  53




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SIGNATURES
  EL PASO CORPORATIONDate: November 7, 2008
    /s/ D. Mark LelandD. Mark LelandExecutive Vice President and
Chief Financial Officer
(Principal Financial Officer)Date: November 7, 2008
    /s/ John R. SultJohn R. SultSenior Vice President and
Controller
(Principal Accounting Officer) 54




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EL PASO CORPORATION
 
 EXHIBIT INDEX
  ExhibitNumber
    
    Description12
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.31.A
    
    Certification of Chief 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 Chief 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.
 55