##### 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 June 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(State or Other Jurisdiction of 
Incorporation or Organization)
    
    76-0568816(I.R.S. Employer
Identification No.)El Paso Building 
1001 Louisiana Street 
Houston, Texas(Address of Principal Executive Offices)
    
    77002(Zip Code)
 Telephone Number: (713) 420-2600
Internet Website: www.elpaso.com
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.




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##### 



EL PASO CORPORATION
TABLE OF CONTENTS
 Caption
    
    PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4. Controls and Procedures
    
    
    48PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    49Item 1A. Risk Factors
    
    
    49Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 3. Defaults Upon Senior Securities
    
    
    51Item 4. Submission of Matters to a Vote of Security Holders
    
    
    51Item 5. Other Information
    
    
    51Item 6. Exhibits
    
    
    51Signatures
    
    
    52Thirteenth Supplemental IndentureRatio of Earnings to Combined Fixed Charges and Preferred Stock DividendsCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
   /d
    
    = per day
    
    Mcfe
    
    = thousand cubic feet of natural gas
equivalentsBbl
    
    = barrels
    
    MMBtu
    
    = million British thermal unitsBBtu
    
    = billion British thermal units
    
    MMcf
    
    = million cubic feetBcf
    
    = billion cubic feet
    
    MMcfe
    
    = million cubic feet of natural gas equivalentsLNG
    
    = liquefied natural gas
    
    NGL
    
    = natural gas liquidsMBbls
    
    = thousand barrels
    
    TBtu
    
    = trillion British thermal unitsMcf
    
    = thousand cubic feet
   2




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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenues
    
    $
    1,153
    
    
    $
    1,198
    
    
    $
    2,422
    
    
    $
    2,220Operating expensesCost of products and services
    
    
    71
    
    
    
    60
    
    
    
    127
    
    
    
    115Operation and maintenance
    
    
    282
    
    
    
    329
    
    
    
    553
    
    
    
    630Depreciation, depletion and amortization
    
    
    298
    
    
    
    286
    
    
    
    611
    
    
    
    557Taxes, other than income taxes
    
    
    81
    
    
    
    72
    
    
    
    160
    
    
    
    132732
    
    
    
    747
    
    
    
    1,451
    
    
    
    1,434Operating income
    
    
    421
    
    
    
    451
    
    
    
    971
    
    
    
    786Earnings from unconsolidated affiliates
    
    
    52
    
    
    
    44
    
    
    
    89
    
    
    
    81Loss on debt extinguishment
    
    
    
    
    
    
    (86
    )
    
    
    
    
    
    
    (287
    )Other income, net
    
    
    33
    
    
    
    60
    
    
    
    55
    
    
    
    106Minority interest
    
    
    (7
    )
    
    
    1
    
    
    
    (16
    )
    
    
    Interest and debt expense
    
    
    (221
    )
    
    
    (231
    )
    
    
    (454
    )
    
    
    (514
    )Income before income taxes from continuing operations
    
    
    278
    
    
    
    239
    
    
    
    645
    
    
    
    172Income taxes
    
    
    87
    
    
    
    70
    
    
    
    235
    
    
    
    51Income from continuing operations
    
    
    191
    
    
    
    169
    
    
    
    410
    
    
    
    121Discontinued operations, net of income taxes
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    674Net income
    
    
    191
    
    
    
    166
    
    
    
    410
    
    
    
    795Preferred stock dividends
    
    
    
    
    
    
    10
    
    
    
    19
    
    
    
    19Net income available to common stockholders
    
    $
    191
    
    
    $
    156
    
    
    $
    391
    
    
    $
    776Basic earnings per common shareIncome from continuing operations
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.56
    
    
    $
    0.15Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.97Net income per common share
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.56
    
    
    $
    1.12Diluted earnings per common shareIncome from continuing operations
    
    $
    0.25
    
    
    $
    0.22
    
    
    $
    0.54
    
    
    $
    0.15Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.96Net income per common share
    
    $
    0.25
    
    
    $
    0.22
    
    
    $
    0.54
    
    
    $
    1.11Dividends declared per common share
    
    $
    
    
    
    $
    0.04
    
    
    $
    0.08
    
    
    $
    0.08
  3




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EL PASO CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except for share amounts)
(Unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assetsCash and cash equivalents
    
    $
    274
    
    
    $
    285Accounts and notes receivableCustomers, net of allowance of $11 in 2008 and $17 in 2007
    
    
    829
    
    
    
    468Affiliates
    
    
    145
    
    
    
    196Other
    
    
    175
    
    
    
    201Inventory
    
    
    143
    
    
    
    131Assets from price risk management activities
    
    
    182
    
    
    
    113Deferred income taxes
    
    
    458
    
    
    
    191Other
    
    
    168
    
    
    
    127Total current assets
    
    
    2,374
    
    
    
    1,712Property, plant and equipment, at costPipelines
    
    
    17,191
    
    
    
    16,750Natural gas and oil properties, at full cost
    
    
    19,011
    
    
    
    19,048Other
    
    
    306
    
    
    
    53036,508
    
    
    
    36,328Less accumulated depreciation, depletion and amortization
    
    
    17,340
    
    
    
    16,974Total property, plant and equipment, net
    
    
    19,168
    
    
    
    19,354Other assetsInvestments in unconsolidated affiliates
    
    
    1,863
    
    
    
    1,614Assets from price risk management activities
    
    
    207
    
    
    
    302Other
    
    
    1,614
    
    
    
    1,5973,684
    
    
    
    3,513Total assets
    
    $
    25,226
    
    
    $
    24,579
  4




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EL PASO CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except for share amounts)
(Unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payableTrade
    
    $
    639
    
    
    $
    460Affiliates
    
    
    9
    
    
    
    5Other
    
    
    477
    
    
    
    502Current maturities of long-term financing obligations
    
    
    1,236
    
    
    
    331Liabilities from price risk management activities
    
    
    785
    
    
    
    267Accrued interest
    
    
    182
    
    
    
    195Other
    
    
    739
    
    
    
    653Total current liabilities
    
    
    4,067
    
    
    
    2,413Long-term financing obligations, less current maturities
    
    
    11,223
    
    
    
    12,483OtherLiabilities from price risk management activities
    
    
    1,064
    
    
    
    931Deferred income taxes
    
    
    1,437
    
    
    
    1,157Other
    
    
    1,566
    
    
    
    1,7504,067
    
    
    
    3,838Commitments and contingencies (Note 8)Minority interest
    
    
    545
    
    
    
    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 711,992,983 shares in
2008 and 709,192,605 shares in 2007
    
    
    2,136
    
    
    
    2,128Additional paid-in capital
    
    
    4,679
    
    
    
    4,699Accumulated deficit
    
    
    (1,420
    )
    
    
    (1,834
    )Accumulated other comprehensive loss
    
    
    (617
    )
    
    
    (272
    )Treasury stock (at cost); 9,378,210 shares in 2008
and 8,656,095 shares in 2007
    
    
    (204
    )
    
    
    (191
    )Total stockholders equity
    
    
    5,324
    
    
    
    5,280Total liabilities and stockholders equity
    
    $
    25,226
    
    
    $
    24,579
  5




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




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




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##### Table of Contents



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
 8




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2. Acquisitions and Divestitures
 Acquisitions
 Gulf LNG.
 Exploration
and Production properties.
 Divestitures
 Accounting for the Impairment or Disposal of Long-Lived Assets
 Continuing operations asset sales.
 Discontinued Operations.
 ANR andRelatedOperations(In millions)Six Months Ended June 30, 2007Revenues
    
    $
    101Costs and expenses
    
    
    (43
    )Other expense
    
    
    (7
    )Interest and debt expense
    
    
    (10
    )Income taxes
    
    
    (15
    )Income from operations
    
    
    26Gain on sale, net of income taxes of $354 million(1)
    
    
    648Net income from discontinued operations
    
    $
    674
 
 (1)
    
    During the second quarter of 2007, we recognized a $3 million loss, net
of income taxes of $2 million, from discontinued operations related
to a reduction of the gain on the sale of ANR primarily to reflect post-closing
adjustments related to the sale. 9




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##### Table of Contents



3. Income Taxes
  Quarters
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions, except for rates)Income taxes
    
    $
    87
    
    
    $
    70
    
    
    $
    235
    
    
    $
    51Effective tax rate
    
    
    31
    %
    
    
    29
    %
    
    
    36
    %
    
    
    30
    %
     10




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##### Table of Contents



4. Earnings Per Share
  2008
    
    
    2007Basic
    
    
    Diluted
    
    
    Basic
    
    
    Diluted(In millions, except per share amounts)Quarters Ended June 30Income from continuing operations
    
    $
    191
    
    
    $
    191
    
    
    $
    169
    
    
    $
    169Convertible preferred stock dividends(1)
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    Income from continuing operations available to common stockholders
    
    
    191
    
    
    
    191
    
    
    
    159
    
    
    
    169Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Net income available to common stockholders
    
    $
    191
    
    
    $
    191
    
    
    $
    156
    
    
    $
    166Weighted average common shares outstanding
    
    
    698
    
    
    
    698
    
    
    
    696
    
    
    
    696Effect of dilutive securities:Options and restricted stock
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    4Convertible preferred stock
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    57Weighted average common shares outstanding and dilutive securities
    
    
    698
    
    
    
    761
    
    
    
    696
    
    
    
    757Earnings per common share:Income from continuing operations
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.22Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.22
 2008
    
    
    2007Basic
    
    
    Diluted
    
    
    Basic
    
    
    Diluted(In millions, except per share amounts)Six Months Ended June 30Income from continuing operations
    
    $
    410
    
    
    $
    410
    
    
    $
    121
    
    
    $
    121Convertible preferred stock dividends
    
    
    (19
    )
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )Income from continuing operations available to common stockholders
    
    
    391
    
    
    
    410
    
    
    
    102
    
    
    
    102Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    674
    
    
    
    674Net income available to common stockholders
    
    $
    391
    
    
    $
    410
    
    
    $
    776
    
    
    $
    776Weighted average common shares outstanding
    
    
    698
    
    
    
    698
    
    
    
    695
    
    
    
    695Effect of dilutive securities:Options and restricted stock
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Convertible preferred stock
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    Weighted average common shares outstanding and dilutive securities
    
    
    698
    
    
    
    760
    
    
    
    695
    
    
    
    699Earnings per common share:Income from continuing operations
    
    $
    0.56
    
    
    $
    0.54
    
    
    $
    0.15
    
    
    $
    0.15Discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    0.97
    
    
    
    0.96Net income
    
    $
    0.56
    
    
    $
    0.54
    
    
    $
    1.12
    
    
    $
    1.11
 
 (1)
    
    Dividends were declared in February and March 2008. No dividends were declared
during the quarter ended June 30, 2008.  11




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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 based on pricing data representative of quoted
prices for similar assets and liabilities in active markets (or identical assets and
liabilities in less active markets). Included in this level are our production-related
natural gas and oil derivatives and certain of our other natural gas derivatives (such as
natural gas supply arrangements) whose fair values are based on commodity pricing data
obtained from an independent pricing source.
    
    Level 3 instruments fair values are partially calculated using pricing data that is
similar to Level 2 above, but their fair value also reflects adjustments for being in less
liquid markets or having longer contractual terms. For these instruments, we use available
pricing data adjusted for liquidity and/or contractual terms to develop an estimate of
forward price curves. The curves are then used to estimate the value of settlements in
future periods based on contractual settlement quantities and dates. Our valuation of these
instruments considers specific contractual terms, statistical and simulation analysis,
present value concepts and other internal assumptions related to (i) contract maturities
that extend beyond the periods in which quoted market prices are available; (ii) the
uniqueness of the contract terms and (iii) the lack of viable market participants. Since a
significant portion of the fair value of our power-related derivatives, foreign currency
swaps and certain of our remaining natural gas derivatives with longer terms or in less
liquid markets than similar Level 2 derivatives, rely on the techniques discussed above, we
classify these instruments as Level 3 instruments.
 12




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Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsMarketable securities invested in non-qualified compensation plans
    
    $
    20
    
    
    $
    
    
    
    $
    
    
    
    $
    20Production-related natural gas and oil derivatives
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Other natural gas derivatives
    
    
    
    
    
    
    44
    
    
    
    46
    
    
    
    90Power-related derivatives
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    164Foreign currency swaps
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    132Total assets
    
    $
    20
    
    
    $
    47
    
    
    $
    342
    
    
    $
    409
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalLiabilitiesProduction-related natural gas and oil derivatives
    
    $
    
    
    
    $
    (714
    )
    
    $
    
    
    
    $
    (714
    )Other natural gas derivatives
    
    
    
    
    
    
    (183
    )
    
    
    (209
    )
    
    
    (392
    )Power-related derivatives
    
    
    
    
    
    
    
    
    
    
    (736
    )
    
    
    (736
    )Interest rate swaps
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Other
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    (67
    )Total liabilities
    
    
    
    
    
    
    (904
    )
    
    
    (1,012
    )
    
    
    (1,916
    )Total
    
    $
    20
    
    
    $
    (857
    )
    
    $
    (670
    )
    
    $
    (1,507
    )
  Quarter Ended June 30, 2008
 Change in fairChange in fair
    
    
    Change in fair
    
    
    value reflected inBalance at
    
    
    value reflected in
    
    
    value reflected in
    
    
    long-termBeginning of
    
    
    operating
    
    
    operating
    
    
    financing
    
    
    Settlements,
    
    
    Balance at End ofPeriod
    
    
    revenues(1)
    
    
    expenses(2)
    
    
    obligations(3)
    
    
    Net
    
    
    PeriodAssets
    
    $
    332
    
    
    $
    58
    
    
    $
    
    
    
    $
    (39
    )
    
    $
    (9
    )
    
    $
    342Liabilities
    
    
    (913
    )
    
    
    (154
    )
    
    
    13
    
    
    
    
    
    
    
    42
    
    
    
    (1,012
    )Total
    
    $
    (581
    )
    
    $
    (96
    )
    
    $
    13
    
    
    $
    (39
    )
    
    $
    33
    
    
    $
    (670
    )Six Months Ended June 30, 2008Assets
    
    $
    250
    
    
    $
    90
    
    
    $
    
    
    
    $
    20
    
    
    $
    (18
    )
    
    $
    342Liabilities
    
    
    (839
    )
    
    
    (224
    )
    
    
    (31
    )
    
    
    
    
    
    
    82
    
    
    
    (1,012
    )Total
    
    $
    (589
    )
    
    $
    (134
    )
    
    $
    (31
    )
    
    $
    20
    
    
    $
    64
    
    
    $
    (670
    )
 
 (1)
    
    Includes approximately $92 million and $133 million of net losses that had not
been realized through settlements for the quarter and six months ended June 30, 2008.(2)
    
    Includes approximately $12 million of net gains and $26 million of net losses
that had not been realized through settlements for the quarter and six months ended June 30,
2008.(3)
    
    Includes approximately $39 million of net losses and $20 million of net gains
that had not been realized through settlements for the quarter and six months ended June 30,
2008. 13




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##### Table of Contents



6. Price Risk Management Activities
  June 30,
    
    
    December 31,2008
    
    
    2007(In millions)Net assets (liabilities):Derivatives designated as accounting hedges
    
    $
    (581
    )
    
    $
    (23
    )Other commodity-based derivative contracts
    
    
    (1,004
    )
    
    
    (869
    )Total commodity-based derivatives
    
    
    (1,585
    )
    
    
    (892
    )Interest rate and foreign currency derivatives
    
    
    125
    
    
    
    109Net liabilities from price risk management activities(1)
    
    $
    (1,460
    )
    
    $
    (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
 June 30,
    
    
    December 31,2008
    
    
    2007(In millions)Current maturities of long-term financing obligations
    
    $
    1,236
    
    
    $
    331Long-term financing obligations
    
    
    11,223
    
    
    
    12,483Total
    
    $
    12,459
    
    
    $
    12,814
 Long Term Financing Obligations.
 Credit Facilities.
  Letters of Credit.
 14




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##### Table of Contents



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
 Price Reporting Litigation.
 15




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##### Table of Contents



Gas Measurement Cases. In re: Natural Gas Royalties Qui
Tam Litigation,
 Will Price, et
al. v. Gas Pipelines and Their Predecessors, et al.,
 MTBE
 Government Investigations and Inquiries
 Reserve Revisions.
  16




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##### Table of Contents



Rates and Regulatory Matters
 Notice of Inquiry on Pipeline Fuel Retention Policies
 EPNG Rate Case
 Notice of Proposed Rulemaking.
 Greenhouse Gas Emissions
 Other Matter
 Navajo Nation.
 17




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##### Table of Contents



Environmental Matters
   June 30, 2008Sites
    
    Expected
    
    
    High(In millions)Operating
    
    $
    20
    
    
    $
    26Non-operating
    
    
    200
    
    
    
    376Superfund
    
    
    24
    
    
    
    48Total
    
    $
    244
    
    
    $
    450
  Balance as of January 1, 2008
    
    $
    260Additions/adjustments for remediation activities
    
    
    4Payments for remediation activities
    
    
    (20
    )Balance as of June 30, 2008
    
    $
    244
  CERCLA Matters.
 18




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##### Table of Contents



Guarantees
and Other Contractual Commitments
 Guarantees.
  Other Purchase Obligations.
 19




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##### Table of Contents



9. Retirement Benefits
 Net Benefit Cost.
 Quarters Ended June 30,
    
    
    Six Months Ended June 30,Other
    
    
    
    
    
    
    
    
    
    
    OtherPension
    
    
    Postretirement
    
    
    Pension
    
    
    PostretirementBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    Benefits2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Service cost
    
    $
    3
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    7
    
    
    $
    9
    
    
    $
    
    
    
    $
    Interest cost
    
    
    30
    
    
    
    30
    
    
    
    10
    
    
    
    7
    
    
    
    60
    
    
    
    60
    
    
    
    17
    
    
    
    13Expected return on plan assets
    
    
    (46
    )
    
    
    (46
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (93
    )
    
    
    (91
    )
    
    
    (8
    )
    
    
    (8
    )Amortization of net actuarial loss (gain)
    
    
    6
    
    
    
    11
    
    
    
    (1
    )
    
    
    
    
    
    
    12
    
    
    
    21
    
    
    
    (2
    )
    
    
    Amortization of prior service cost(1)
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Net benefit cost (income)
    
    $
    (7
    )
    
    $
    (1
    )
    
    $
    4
    
    
    $
    2
    
    
    $
    (15
    )
    
    $
    (2
    )
    
    $
    6
    
    
    $
    4
 
 (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.
    20




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##### Table of Contents



10. Stockholders Equity
  Common Stock
    
    Convertible Preferred Stock($0.04/Share)
    
    (4.99%/Year)Amount paid through June 30, 2008
    
    $
    56
    
    
    $
    19Amount paid in July 2008
    
    $
    28
    
    
    $
    9Dividends declared subsequent to June 30, 2008Date of declaration
    
    July 25, 2008
    
    July 25, 2008Payable to shareholders on record
    
    September 5, 2008
    
    September 15, 2008Date payable
    
    October 1, 2008
    
    October 1, 2008
   11. Business Segment Information
  Pipelines.
 Exploration and Production.
 Marketing.
 Power.
 21




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##### Table of Contents



Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Segment EBIT
    
    $
    458
    
    
    $
    574
    
    
    $
    1,019
    
    
    $
    1,000Corporate and other
    
    
    41
    
    
    
    (104
    )
    
    
    80
    
    
    
    (314
    )Interest and debt expense
    
    
    (221
    )
    
    
    (231
    )
    
    
    (454
    )
    
    
    (514
    )Income taxes
    
    
    (87
    )
    
    
    (70
    )
    
    
    (235
    )
    
    
    (51
    )Income from continuing operations
    
    $
    191
    
    
    $
    169
    
    
    $
    410
    
    
    $
    121
  SegmentsExplorationand
    
    
    
    
    
    
    
    
    
    CorporatePipelines
    
    Production
    
    Marketing
    
    Power
    
    and Other(1)
    
    Total(In millions)Quarters Ended June 30,
2008Revenue from external customers
    
    $
    632
    
    
    $
    198
    (2)
    
    $
    322
    
    
    $
    
    
    
    $
    1
    
    
    $
    1,153Intersegment revenue
    
    
    14
    
    
    
    457
    (2)
    
    
    (468
    )
    
    
    
    
    
    
    (3
    )
    
    
    Operation and maintenance
    
    
    205
    
    
    
    105
    
    
    
    8
    
    
    
    4
    
    
    
    (40
    )
    
    
    282Depreciation, depletion and
amortization
    
    
    99
    
    
    
    197
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    298Earnings from unconsolidated affiliates
    
    
    25
    
    
    
    16
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    52EBIT
    
    
    295
    
    
    
    304
    
    
    
    (153
    )
    
    
    12
    
    
    
    41
    
    
    
    4992007Revenue from external customers
    
    $
    600
    
    
    $
    268
    (2)
    
    $
    301
    
    
    $
    
    
    
    $
    29
    
    
    $
    1,198Intersegment revenue
    
    
    14
    
    
    
    307
    (2)
    
    
    (317
    )
    
    
    
    
    
    
    (4
    )
    
    
    Operation and maintenance
    
    
    181
    
    
    
    110
    
    
    
    3
    
    
    
    7
    
    
    
    28
    
    
    
    329Depreciation, depletion and
amortization
    
    
    91
    
    
    
    189
    
    
    
    1
    
    
    
    
    
    
    
    5
    
    
    
    286Earnings (losses) from unconsolidated
affiliates
    
    
    29
    
    
    
    3
    
    
    
    
    
    
    
    13
    
    
    
    (1
    )
    
    
    44EBIT
    
    
    318
    
    
    
    235
    
    
    
    5
    
    
    
    16
    
    
    
    (104
    )(3)
    
    
    470
 
 (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 quarters ended June 30, 2008 and 2007, we recorded
an intersegment revenue elimination of $5 million and $4 million in the Corporate and Other
column to remove intersegment transactions.(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)
    
    Debt and treasury management activities, which are part of Corporate and Other,
included debt extinguishment costs of $86 million for the
quarter ended June 30, 2007 primarily
related to refinancing of EPEPs $1.2 billion notes. 22




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##### Table of Contents



SegmentsExplorationand
    
    
    
    
    
    
    
    
    
    CorporatePipelines
    
    Production
    
    Marketing
    
    Power
    
    and Other(1)
    
    Total(In millions)Six Months Ended June 30,
2008Revenue from external customers
    
    $
    1,339
    
    
    $
    328
    (2)
    
    $
    744
    
    
    $
    
    
    
    $
    11
    
    
    $
    2,422Intersegment revenue
    
    
    27
    
    
    
    930
    (2)
    
    
    (947
    )
    
    
    
    
    
    
    (10
    )
    
    
    Operation and maintenance
    
    
    400
    
    
    
    213
    
    
    
    10
    
    
    
    9
    
    
    
    (79
    )
    
    
    553Depreciation, depletion and
amortization
    
    
    198
    
    
    
    409
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    611Earnings from unconsolidated affiliates
    
    
    46
    
    
    
    26
    
    
    
    
    
    
    
    16
    
    
    
    1
    
    
    
    89EBIT
    
    
    676
    
    
    
    546
    
    
    
    (213
    )
    
    
    10
    
    
    
    80
    
    
    
    1,0992007Revenue from external customers
    
    $
    1,231
    
    
    $
    488
    (2)
    
    $
    460
    
    
    $
    
    
    
    $
    41
    
    
    $
    2,220Intersegment revenue
    
    
    27
    
    
    
    592
    (2)
    
    
    (611
    )
    
    
    
    
    
    
    (8
    )
    
    
    Operation and maintenance
    
    
    342
    
    
    
    220
    
    
    
    3
    
    
    
    11
    
    
    
    54
    
    
    
    630Depreciation, depletion and
amortization
    
    
    185
    
    
    
    359
    
    
    
    2
    
    
    
    
    
    
    
    11
    
    
    
    557Earnings from unconsolidated
affiliates
    
    
    55
    
    
    
    2
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    81EBIT
    
    
    682
    
    
    
    414
    
    
    
    (130
    )
    
    
    34
    
    
    
    (314
    )(3)
    
    
    686
 
 (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 six months ended June 30, 2008 and 2007, we
recorded an intersegment revenue elimination of $10 million and $9 million in the Corporate
and Other column to remove intersegment transactions.(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)
    
    Debt and treasury management activities, which are part of Corporate and Other,
included debt extinguishment costs of $287 million for the six months ended June 30, 2007, $86
million of which is related to refinancing of EPEPs $1.2 billion notes.  June 30,
    
    
    December 31,2008
    
    
    2007(In millions)Pipelines
    
    $
    14,537
    
    
    $
    13,939Exploration and Production
    
    
    7,663
    
    
    
    8,029Marketing
    
    
    675
    
    
    
    537Power
    
    
    498
    
    
    
    531Total segment assets
    
    
    23,373
    
    
    
    23,036Corporate and Other
    
    
    1,853
    
    
    
    1,543Total consolidated assets
    
    $
    25,226
    
    
    $
    24,579
 23




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##### Table of Contents



12. Investments in, Earnings from and Transactions with Unconsolidated Affiliates
  Earnings (Losses) fromUnconsolidated AffiliatesQuarters
    
    
    Six MonthsInvestment
    
    
    Ended
    
    
    EndedJune 30,
    
    
    December 31,
    
    
    June 30,
    
    
    June 30,Net Investment and Earnings (Losses)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)
    
    
    (In millions)Four Star (1)
    
    $
    688
    
    
    $
    698
    
    
    $
    16
    
    
    $
    3
    
    
    $
    26
    
    
    $
    2Citrus
    
    
    568
    
    
    
    576
    
    
    
    19
    
    
    
    22
    
    
    
    32
    
    
    
    44Gulf LNG(2)
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bolivia to Brazil Pipeline
    
    
    110
    
    
    
    105
    
    
    
    3
    
    
    
    2
    
    
    
    6
    
    
    
    5Gasoductos de Chihuahua
    
    
    159
    
    
    
    146
    
    
    
    6
    
    
    
    6
    
    
    
    13
    
    
    
    10Manaus/Rio Negro(3)
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    9Porto Velho(4)
    
    
    (62
    )
    
    
    (60
    )
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    7Asian and Central American Investments(4)(5)
    
    
    17
    
    
    
    26
    
    
    
    6
    
    
    
    (1
    )
    
    
    6
    
    
    
    (1
    )Argentina to Chile Pipeline
    
    
    24
    
    
    
    21
    
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    3Other
    
    
    64
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    2Total
    
    $
    1,863
    
    
    $
    1,614
    
    
    $
    52
    
    
    $
    44
    
    
    $
    89
    
    
    $
    81
 
 (1)
    
    Amortization of our purchase cost in excess of the underlying net assets of
Four Star was $13 million for the quarters ended June 30, 2008 and 2007 and $27 million for
the six months ended June 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)
    
    As of June 30, 2008 and December 31, 2007, we had outstanding advances and
receivables of $298 million and $350 million related to our foreign investments of which $292
million and $335 million related to our investment in Porto Velho.(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. Six MonthsQuarters Ended
    
    EndedJune 30,
    
    June 30,Summarized Financial Information
    
    2008
    
    2007
    
    2008
    
    2007(In millions)Operating results data:Operating revenues
    
    $
    194
    
    
    $
    227
    
    
    $
    380
    
    
    
    
    
    
    $
    416Operating expenses
    
    
    84
    
    
    
    132
    
    
    
    177
    
    
    
    
    
    
    
    243Income from continuing operations
    
    
    66
    
    
    
    62
    
    
    
    122
    
    
    
    
    
    
    
    113Net income(1)
    
    
    66
    
    
    
    62
    
    
    
    122
    
    
    
    
    
    
    
    113
 
 (1)
    
    Includes net income of less than $1 million and $4 million for the quarters
ended June 30, 2008 and 2007, and $1 million and $9 million for the six months ended June 30,
2008 and 2007, related to our proportionate share of affiliates in which we hold a greater
than 50 percent interest. 24




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##### Table of Contents



Matters that Could Impact Our Investments
 Porto Velho.
    25




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##### Table of Contents



Manaus /Rio Negro.
 Asian power investments.
 Investment in Bolivia.
 Investment in Argentina.
 26




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 Financial and Operational Update.
 Outlook.
    27




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##### Table of Contents



Segment Results
    Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)SegmentPipelines
    
    $
    295
    
    
    $
    318
    
    
    $
    676
    
    
    $
    682Exploration and Production
    
    
    304
    
    
    
    235
    
    
    
    546
    
    
    
    414Marketing
    
    
    (153
    )
    
    
    5
    
    
    
    (213
    )
    
    
    (130
    )Power
    
    
    12
    
    
    
    16
    
    
    
    10
    
    
    
    34Segment EBIT
    
    
    458
    
    
    
    574
    
    
    
    1,019
    
    
    
    1,000Corporate and other
    
    
    41
    
    
    
    (104
    )
    
    
    80
    
    
    
    (314
    )Consolidated EBIT
    
    
    499
    
    
    
    470
    
    
    
    1,099
    
    
    
    686Interest and debt expense
    
    
    (221
    )
    
    
    (231
    )
    
    
    (454
    )
    
    
    (514
    )Income taxes
    
    
    (87
    )
    
    
    (70
    )
    
    
    (235
    )
    
    
    (51
    )Income from continuing operations
    
    
    191
    
    
    
    169
    
    
    
    410
    
    
    
    121Discontinued operations, net of income taxes
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    674Net income
    
    $
    191
    
    
    $
    166
    
    
    $
    410
    
    
    $
    795
 28




---



##### Table of Contents



Pipelines Segment
 Operating Results.
 Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions, except volume amounts)Operating revenues
    
    $
    646
    
    
    $
    614
    
    
    $
    1,366
    
    
    $
    1,258Operating expenses
    
    
    (383
    )
    
    
    (338
    )
    
    
    (746
    )
    
    
    (658
    )Operating income
    
    
    263
    
    
    
    276
    
    
    
    620
    
    
    
    600Other income
    
    
    40
    
    
    
    42
    
    
    
    73
    
    
    
    82EBIT before minority interest
    
    
    303
    
    
    
    318
    
    
    
    693
    
    
    
    682Minority interest
    
    
    (8
    )
    
    
    
    
    
    
    (17
    )
    
    
    EBIT
    
    $
    295
    
    
    $
    318
    
    
    $
    676
    
    
    $
    682Throughput volumes (BBtu/d)(1)
    
    
    17,981
    
    
    
    17,161
    
    
    
    18,652
    
    
    
    17,597
 
 (1)
    
    Throughput volumes include volumes associated with our proportionate share of
unconsolidated affiliates. Quarter Ended June 30, 2008
    
    
    Six Months Ended June 30, 2008Variance
    
    
    VarianceRevenue
    
    
    Expense
    
    
    Other
    
    
    EBIT
    
    
    Revenue
    
    
    Expense
    
    
    Other
    
    
    EBITImpact
    
    
    Impact
    
    
    Impact
    
    
    Impact
    
    
    Impact
    
    
    Impact
    
    
    Impact
    
    
    ImpactFavorable/(Unfavorable)(In millions)Expansions
    
    $
    20
    
    
    $
    (5
    )
    
    $
    2
    
    
    $
    17
    
    
    $
    45
    
    
    $
    (12
    )
    
    $
    1
    
    
    $
    34Reservation and usage revenues
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    15Gas not used in operations
and revaluations
    
    
    11
    
    
    
    (16
    )
    
    
    
    
    
    
    (5
    )
    
    
    19
    
    
    
    (12
    )
    
    
    
    
    
    
    7Bankruptcy settlements
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    30
    
    
    
    1
    
    
    
    
    
    
    
    31Operating and general and
administrative expenses
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )Gain/loss on long-lived assets
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    (26
    )Equity earnings from Citrus
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )Other(1)
    
    
    (4
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    (8
    )
    
    
    (1
    )
    
    
    (9
    )
    
    
    2
    
    
    
    (8
    )Total impact on EBIT
    
    $
    32
    
    
    $
    (45
    )
    
    $
    (10
    )
    
    $
    (23
    )
    
    $
    108
    
    
    $
    (88
    )
    
    $
    (26
    )
    
    $
    (6
    )
 
 (1)
    
    Consists of individually insignificant items on several of our pipeline
systems. Expansions.
 29




---



##### 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 Line 300 expansion. In August 2008, we announced the expansion of TGPs Line 300 pipeline.  The
estimated total capital cost for this expansion project is approximately $750 million with anticipated in-service dates  in  2010 for Phase I and 2011 for Phase II.
    
    CIG Raton Basin 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 and we expect
to place this project in service in the second quarter of 2010.
    
    WIC expansions. We announced the expansions of the WIC system in July 2008.  This project has an estimated total
capital cost of $55 million and will 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 December
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. The FERC issued an order approving the first phase in
September 2007. The estimated in-service dates are September 2008 for Phase I and June 2011 for Phase II.
    
    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.
   Reservation and Usage Revenues.
 Gas Not Used in Operations and Revaluations.
 30




---



##### Table of Contents



Bankruptcy Settlements.
 Operating and General and Administrative Expenses.
 Gain/Loss on Long-Lived Assets.
 Equity Earnings from Citrus
 Minority Interest.
 Other Regulatory Matters.
  31




---



##### Table of Contents



Exploration and Production Segment
 Overview and Strategy
    Significant Operational Factors Affecting the Periods Ended June 30, 2008
 Production.
 Six Months EndedJune 30,2008
    
    
    2007(MMcfe/d)United StatesOnshore Central
    
    
    239
    
    
    
    218Onshore Western
    
    
    151
    
    
    
    147Texas Gulf Coast
    
    
    230
    
    
    
    196Gulf of Mexico and south Louisiana
    
    
    154
    
    
    
    192InternationalBrazil
    
    
    12
    
    
    
    15Total Consolidated
    
    
    786
    
    
    
    768Four Star
    
    
    73
    
    
    
    70
 32




---



##### Table of Contents



2008 Drilling Results
 Onshore Central.
 Onshore 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.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. We also plan to participate in drilling up to two
exploratory wells in the BM-CAL-5 block during the second half of 2008.
    
    Espirito Santo Basin-In 2007, we completed drilling and testing 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. The plan of development for this area
includes four wells that are projected to be completed and producing during the first
quarter of 2009. It is expected that the gas price we will receive will
be indexed to a basket of international fuel oils. During the second half of 2008, we plan to participate with Petrobras
in the drilling of two more exploratory wells in this block in which we have a 35
percent working interest.
 Egypt.
 Cash Operating Costs.
 33




---



##### Table of Contents



Capital Expenditures.
 Outlook
  
    
    Average daily production volumes for the year at the low end
of our previously disclosed guidance range of  approximately 795 MMcfe/d to 850
MMcfe/d,  excluding approximately 65 MMcfe/d to 70 MMcfe/d from our equity investment
in Four Star.
    
    Capital expenditures, excluding acquisitions, of approximately $1.9 billion. While
approximately 80% of our planned 2008 capital program is allocated to our domestic program,
we plan to spend approximately $350 million to $385 million in international capital in
2008, primarily in our Brazil exploration and development program. As part of our domestic
capital program, we will allocate a greater percentage of our capital to our Onshore
Central, Onshore Western and Texas Gulf Coast regions, as compared to our 2007 capital
program.
    
    Average cash operating costs which include production costs, general and administrative
expenses and other expenses of approximately $1.95/Mcfe to $2.05/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; and
    
    Depreciation, depletion and amortization rate of between $2.90/Mcfe and $3.10/Mcfe.
 Price Risk Management Activities
   34




---



##### Table of Contents



Derivatives designated as accounting hedges
 Fixed PriceSwaps(1)
    
    Floors(1)
    
    Ceilings(1)Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageVolumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    PriceNatural Gas2008
    
    
    13
    
    
    $
    7.50
    
    
    
    63
    
    
    $
    8.00
    
    
    
    63
    
    
    $
    10.842009
    
    
    5
    
    
    $
    3.56
    
    
    
    126
    
    
    $
    8.93
    
    
    
    101
    
    
    $
    14.582010
    
    
    5
    
    
    $
    3.70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2011-2012
    
    
    6
    
    
    $
    3.88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Oil2008
    
    
    1,260
    
    
    $
    87.80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    Onshore-Raton
    
    RockiesVolumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Avg. Price
    
    Volumes
    
    Avg. Price
    
    Volumes
    
    Avg. PriceNatural Gas2008
    
    
    4
    
    
    $
    8.24
    
    
    
    18
    
    
    $
    8.00
    
    
    
    18
    
    
    $
    10.45
    
    
    
    30
    
    
    $
    (0.33
    )
    
    
    13
    
    
    $
    (1.14
    )
    
    
    6
    
    
    $
    (1.37
    )2009
    
    
    
    
    
    
    
    
    
    
    42
    
    
    $
    9.61
    
    
    
    42
    
    
    $
    17.40
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    $
    (1.00
    )
    
    
    
    
    
    
    Oil2009
    
    
    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.   35




---



##### Table of Contents



Operating Results and Variance Analysis
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Operating Revenues:Natural gas
    
    $
    574
    
    
    $
    459
    
    
    $
    1,042
    
    
    $
    867Oil, condensate and NGL
    
    
    137
    
    
    
    111
    
    
    
    296
    
    
    
    199Changes in fair value of derivative contracts not designated
as accounting hedges
    
    
    (75
    )
    
    
    (5
    )
    
    
    (110
    )
    
    
    (2
    )Other
    
    
    19
    
    
    
    10
    
    
    
    30
    
    
    
    16Total operating revenues
    
    
    655
    
    
    
    575
    
    
    
    1,258
    
    
    
    1,080Operating Expenses:Depreciation, depletion and amortization
    
    
    (197
    )
    
    
    (189
    )
    
    
    (409
    )
    
    
    (359
    )Production costs
    
    
    (93
    )
    
    
    (84
    )
    
    
    (184
    )
    
    
    (170
    )Transportation costs
    
    
    (21
    )
    
    
    (15
    )
    
    
    (40
    )
    
    
    (34
    )Cost of products
    
    
    (10
    )
    
    
    (4
    )
    
    
    (15
    )
    
    
    (9
    )General and administrative expenses
    
    
    (43
    )
    
    
    (49
    )
    
    
    (90
    )
    
    
    (95
    )Other
    
    
    (10
    )
    
    
    (5
    )
    
    
    (13
    )
    
    
    (7
    )Total operating expenses
    
    
    (374
    )
    
    
    (346
    )
    
    
    (751
    )
    
    
    (674
    )Operating income
    
    
    281
    
    
    
    229
    
    
    
    507
    
    
    
    406Other income(1)
    
    
    23
    
    
    
    6
    
    
    
    39
    
    
    
    8EBIT
    
    $
    304
    
    
    $
    235
    
    
    $
    546
    
    
    $
    414
 
 (1)
    
    Other income includes equity earnings from our investment in Four Star. Quarters Ended June 30,
    
    
    Six Months Ended June 30,Percent
    
    
    
    
    
    
    
    
    
    
    Percent2008
    
    
    2007
    
    
    Variance
    
    
    2008
    
    
    2007
    
    
    VarianceConsolidated volumes, prices and costs per unit:Natural gasVolumes (MMcf)
    
    
    60,270
    
    
    
    59,804
    
    
    
    1
    %
    
    
    122,079
    
    
    
    116,517
    
    
    
    5
    %Average realized prices including hedges ($/Mcf)
    
    $
    9.53
    
    
    $
    7.67
    
    
    
    24
    %
    
    $
    8.54
    
    
    $
    7.44
    
    
    
    15
    %Average realized prices excluding hedges ($/Mcf)
    
    $
    10.46
    
    
    $
    7.17
    
    
    
    46
    %
    
    $
    9.07
    
    
    $
    6.83
    
    
    
    33
    %Average transportation costs ($/Mcf)
    
    $
    0.32
    
    
    $
    0.24
    
    
    
    33
    %
    
    $
    0.30
    
    
    $
    0.27
    
    
    
    11
    %Oil, condensate and NGLVolumes (MBbls)
    
    
    1,516
    
    
    
    1,948
    
    
    
    (22
    )%
    
    
    3,508
    
    
    
    3,736
    
    
    
    (6
    )%Average realized prices including hedges ($/Bbl)
    
    $
    90.64
    
    
    $
    56.87
    
    
    
    59
    %
    
    $
    84.45
    
    
    $
    53.25
    
    
    
    59
    %Average realized prices excluding hedges ($/Bbl)
    
    $
    105.12
    
    
    $
    57.50
    
    
    
    83
    %
    
    $
    92.59
    
    
    $
    53.94
    
    
    
    72
    %Average transportation costs ($/Bbl)
    
    $
    1.07
    
    
    $
    0.68
    
    
    
    57
    %
    
    $
    0.87
    
    
    $
    0.72
    
    
    
    21
    %Total equivalent volumesMMcfe
    
    
    69,366
    
    
    
    71,493
    
    
    
    (3
    )%
    
    
    143,128
    
    
    
    138,935
    
    
    
    3
    %MMcfe/d
    
    
    762
    
    
    
    786
    
    
    
    (3
    )%
    
    
    786
    
    
    
    768
    
    
    
    2
    %Production costs and other cash operating costs
($/Mcfe)Average lease operating expenses
    
    $
    0.79
    
    
    $
    0.85
    
    
    
    (7
    )%
    
    $
    0.80
    
    
    $
    0.89
    
    
    
    (10
    )%Average production taxes(1)
    
    
    0.54
    
    
    
    0.33
    
    
    
    64
    %
    
    
    0.48
    
    
    
    0.33
    
    
    
    45
    %Total production costs
    
    
    1.33
    
    
    
    1.18
    
    
    
    13
    %
    
    
    1.28
    
    
    
    1.22
    
    
    
    5
    %Average general and administrative expenses
    
    
    0.63
    
    
    
    0.68
    
    
    
    (7
    )%
    
    
    0.64
    
    
    
    0.69
    
    
    
    (7
    )%Average taxes, other than production and income
taxes
    
    
    0.05
    
    
    
    0.06
    
    
    
    (17
    )%
    
    
    0.04
    
    
    
    0.05
    
    
    
    (20
    )%Total cash operating costs
    
    $
    2.01
    
    
    $
    1.92
    
    
    
    5
    %
    
    $
    1.96
    
    
    $
    1.96
    
    
    
    
    %Depreciation, depletion and amortization ($/Mcfe)
    
    $
    2.84
    
    
    $
    2.64
    
    
    
    8
    %
    
    $
    2.85
    
    
    $
    2.58
    
    
    
    10
    %Unconsolidated affiliate volumes (Four Star)Natural gas (MMcf)
    
    
    4,926
    
    
    
    4,806
    
    
    
    
    
    
    
    10,047
    
    
    
    9,747Oil, condensate and NGL (MBbls)
    
    
    249
    
    
    
    268
    
    
    
    
    
    
    
    534
    
    
    
    501Total equivalent volumesMMcfe
    
    
    6,419
    
    
    
    6,417
    
    
    
    
    
    
    
    13,251
    
    
    
    12,755MMcfe/d
    
    
    71
    
    
    
    71
    
    
    
    
    
    
    
    73
    
    
    
    70
 
 (1)
    
    Production taxes include ad valorem and severance taxes. 36




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##### Table of Contents



Quarter and Six Months Ended June 30, 2008 Compared to Quarter and Six Months Ended June 30, 2007
  Quarter Ended June 30, 2008
    
    
    Six Months Ended June 30, 2008Variances
    
    
    VariancesOperating
    
    
    Operating
    
    
    
    
    
    
    
    
    
    
    Operating
    
    
    OperatingRevenue
    
    
    Expense
    
    
    Other
    
    
    EBIT
    
    
    Revenue
    
    
    Expense
    
    
    Other
    
    
    EBITFavorable/(Unfavorable)(In millions)Natural Gas RevenueHigher realized prices in 2008
    
    $
    198
    
    
    $
    
    
    
    $
    
    
    
    $
    198
    
    
    $
    274
    
    
    $
    
    
    
    $
    
    
    
    $
    274Impact of hedges
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    (136
    )
    
    
    
    
    
    
    
    
    
    
    (136
    )Higher volumes in 2008
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    37Oil, Condensate and NGL RevenuesHigher realized prices in 2008
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    135Impact of hedges
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    (26
    )Lower volumes in 2008
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )Other RevenueChanges in fair value of derivatives
not designated as accounting hedges
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    (70
    )
    
    
    (108
    )
    
    
    
    
    
    
    
    
    
    
    (108
    )Other
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Depreciation, Depletion and Amortization
ExpenseHigher depletion rate in 2008
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Lower (higher) production volumes in
2008
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )Production CostsLower lease operating expenses in
2008
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Higher production taxes in 2008
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    (23
    )OtherEarnings from investment in Four Star
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    24Other
    
    
    
    
    
    
    (9
    )
    
    
    4
    
    
    
    (5
    )
    
    
    
    
    
    
    (13
    )
    
    
    7
    
    
    
    (6
    )Total Variances
    
    $
    80
    
    
    $
    (28
    )
    
    $
    17
    
    
    $
    69
    
    
    $
    178
    
    
    $
    (77
    )
    
    $
    31
    
    
    $
    132
 Natural gas, oil, condensate and NGL revenues.
 Other revenue.
 Depreciation, depletion and amortization expense.
 37




---



##### Table of Contents



Production costs.
 Other.
 38




---



##### Table of Contents



Marketing Segment
 Overview.
 Operating Results.
   Quarters
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Production-Related Natural Gas and Oil Derivative Contracts:Changes in fair value of options and swaps
    
    $
    (52
    )
    
    $
    9
    
    
    $
    (73
    )
    
    $
    (78
    )Contracts Related to Legacy Trading Operations:Natural gas transportation-related contracts:Demand charges
    
    
    (10
    )
    
    
    (28
    )
    
    
    (19
    )
    
    
    (55
    )Settlements, net of termination payments
    
    
    10
    
    
    
    16
    
    
    
    24
    
    
    
    36Changes in fair value of other natural gas derivative contracts
    
    
    11
    
    
    
    2
    
    
    
    11
    
    
    
    (22
    )Changes in fair value of power contracts(1)
    
    
    (105
    )
    
    
    (15
    )
    
    
    (146
    )
    
    
    (32
    )Total revenues
    
    
    (146
    )
    
    
    (16
    )
    
    
    (203
    )
    
    
    (151
    )Operating expenses
    
    
    (8
    )
    
    
    (4
    )
    
    
    (11
    )
    
    
    (5
    )Operating loss
    
    
    (154
    )
    
    
    (20
    )
    
    
    (214
    )
    
    
    (156
    )Other income, net(2)
    
    
    1
    
    
    
    25
    
    
    
    1
    
    
    
    26EBIT
    
    $
    (153
    )
    
    $
    5
    
    
    $
    (213
    )
    
    $
    (130
    )
 
 (1)
    
    Includes $21 million of revenue recognized in the second quarter of 2007 on the
settlement of outstanding California power price disputes.(2)
    
    Includes a $23 million gain in the second quarter of 2007 on the sale of our
investment in the NYMEX. 39




---



##### 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.
  40




---



##### Table of Contents



Power Segment
  South AmericaPorto Velho
    
    $
    230Manaus & Rio Negro
    
    
    63Pipeline projects
    
    
    146Asia
    
    
    26Total investment, guarantees and letters of credit
    
    $
    465
 Operating Results.
 Corporate and Other Expenses, Net
  Quarter Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Loss on extinguishment of debt
    
    $
    
    
    
    $
    (86
    )
    
    $
    
    
    
    $
    (287
    )Change in litigation, insurance and other reserves
    
    
    46
    
    
    
    (9
    )
    
    
    57
    
    
    
    (35
    )Foreign currency fluctuations on Euro-denominated debt
    
    
    
    
    
    
    (1
    )
    
    
    (6
    )
    
    
    (3
    )Gain on disposition of a portion of our telecommunications business
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    Other
    
    
    (5
    )
    
    
    (8
    )
    
    
    11
    
    
    
    11Total EBIT
    
    $
    41
    
    
    $
    (104
    )
    
    $
    80
    
    
    $
    (314
    )
 Extinguishment of Debt.
 Litigation, Insurance, and Other Reserves.
 41




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##### Table of Contents



Interest and Debt Expense
  Income Taxes
 Quarters
    
    Six MonthsEnding
    
    EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007(In millions, except for rates)Income taxes
    
    $
    87
    
    
    $
    70
    
    
    $
    235
    
    
    $
    51Effective tax rate
    
    
    31
    %
    
    
    29
    %
    
    
    36
    %
    
    
    30
    %
  Discontinued Operations
  Commitments and Contingencies
  42




---



##### Table of Contents



Liquidity and Capital Resources
 Overview.
 2008 Cash Flow Activities.
 2008(In billions)Cash Flow from OperationsContinuing operating activitiesIncome from continuing operations
    
    $
    0.4Other income adjustments
    
    
    0.9Total cash flow from operations
    
    $
    1.3Other Cash InflowsContinuing investing activitiesNet proceeds from the sale of assets and investments
    
    $
    0.7Continuing financing activitiesNet proceeds from the issuance of long-term debt(1)
    
    
    2.7Total other cash inflows
    
    $
    3.4Cash OutflowsContinuing investing activitiesCapital expenditures
    
    $
    1.2Cash paid for acquisitions
    
    
    0.31.5Continuing financing activitiesPayments to retire long-term debt and other financing obligations(1)
    
    
    3.1Dividends and other
    
    
    0.13.2Total cash outflows
    
    $
    4.7Net change in cash
    
    $
    
 
 (1)
    
    Relates primarily to the net activity under our revolving credit
facilities. 43




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##### Table of Contents



Liquidity/Cash Flow Outlook. Overview
  Six Months Ended
    
    
    2008June 30, 2008
    
    
    Remaining
    
    
    Total(In billions)PipelinesMaintenance
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.4Growth
    
    
    0.6
    
    
    
    0.8
    
    
    
    1.4Exploration and Production
    
    
    0.7
    
    
    
    1.2
    
    
    
    1.9Corporate and other(1)
    
    
    
    
    
    
    0.1
    
    
    
    0.1$
    1.5
    
    
    $
    2.3
    
    
    $
    3.8
 
 (1)
 Factors That Could Impact Our Future Liquidity.
 Price Risk Management Activities and Margining Requirements.
 BasisFixed Price
    
    
    
    


    
    Swaps(1)(2)Swaps(1)
    
    Floors(1)
    
    Ceilings(1)
    
    Texas Gulf Coast
    
    Onshore-Raton
    
    RockiesAverage
    
    
    
    Average
    
    
    
    Average
    
    
    
    Avg.
    
    
    
    Avg.
    
    
    
    Avg.Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    Price
    
    Volumes
    
    PriceNatural Gas2008
    
    
    17
    
    
    $
    7.66
    
    
    
    81
    
    
    $
    8.00
    
    
    
    81
    
    
    $
    10.75
    
    
    
    30
    
    
    $
    (0.33
    )
    
    
    13
    
    
    $
    (1.14
    )
    
    
    6
    
    
    $
    (1.37
    )2009
    
    
    5
    
    
    $
    3.56
    
    
    
    168
    
    
    $
    9.10
    
    
    
    143
    
    
    $
    15.41
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    $
    (1.00
    )
    
    
    
    
    
    
    2010
    
    
    5
    
    
    $
    3.70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2011-2012
    
    
    6
    
    
    $
    3.88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Oil2008
    
    
    1,260
    
    
    $
    87.80
    
    
    
    453
    
    
    $
    55.00
    
    
    
    453
    
    
    $
    56.40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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.  44




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##### Table of Contents



Contractual Obligations
  Commodity-Based Derivative Contracts.
 Maturity
    
    
    Maturity
    
    
    Maturity
    
    
    Maturity
    
    
    Maturity
    
    
    TotalLess Than
    
    
    1 to 3
    
    
    4 to 5
    
    
    6 to 10
    
    
    Beyond
    
    
    Fair1 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    10 Years
    
    
    Value(In millions)Derivatives designated as accounting hedgesLiabilities(1)
    
    $
    (433
    )
    
    $
    (122
    )
    
    $
    (26
    )
    
    $
    
    
    
    $
    
    
    
    $
    (581
    )Other commodity-based derivativesAssets
    
    
    47
    
    
    
    126
    
    
    
    63
    
    
    
    19
    
    
    
    2
    
    
    
    257Liabilities
    
    
    (350
    )
    
    
    (460
    )
    
    
    (287
    )
    
    
    (164
    )
    
    
    
    
    
    
    (1,261
    )Total other commodity-based
derivatives(1)(2)
    
    
    (303
    )
    
    
    (334
    )
    
    
    (224
    )
    
    
    (145
    )
    
    
    2
    
    
    
    (1,004
    )Total commodity-based derivatives
    
    $
    (736
    )
    
    $
    (456
    )
    
    $
    (250
    )
    
    $
    (145
    )
    
    $
    2
    
    
    $
    (1,585
    )
 
 (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
    
    
    51
    
    
    
    189
    
    
    
    240Changes in fair value of contracts
    
    
    (630
    )
    
    
    (319
    )
    
    
    (949
    )Option premiums (received) paid
    
    
    21
    
    
    
    (5
    )
    
    
    16Net changes in contracts outstanding during the period
    
    
    (558
    )
    
    
    (135
    )
    
    
    (693
    )Fair value of contracts outstanding at June 30, 2008
    
    $
    (581
    )
    
    $
    (1,004
    )
    
    $
    (1,585
    )
 Other Purchase Obligations.
 45




---



##### Table of Contents



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 derivative net liabilitiesJune 30, 2008
    
    $
    (711
    )
    
    $
    (994
    )
    
    $
    (283
    )
    
    $
    (438
    )
    
    $
    273December 31, 2007
    
    $
    (64
    )
    
    $
    (181
    )
    
    $
    (117
    )
    
    $
    58
    
    
    $
    122Other commodity-based derivative net liabilitiesJune 30, 2008
    
    $
    (874
    )
    
    $
    (900
    )
    
    $
    (26
    )
    
    $
    (848
    )
    
    $
    26December 31, 2007
    
    $
    (828
    )
    
    $
    (846
    )
    
    $
    (18
    )
    
    $
    (810
    )
    
    $
    18
 46




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##### Table of Contents



Interest Rate Risk
 Commodity-based Derivatives.
 Change in Discount Rate1 Percent Increase
    
    1 Percent DecreaseFair Value
    
    Fair Value
    
    Change
    
    Fair Value
    
    Change(In millions)Production-related derivative net liabilitiesJune 30, 2008
    
    $
    (711
    )
    
    $
    (706
    )
    
    $
    5
    
    
    $
    (716
    )
    
    $
    (5
    )December 31, 2007
    
    $
    (64
    )
    
    $
    (62
    )
    
    $
    2
    
    
    $
    (66
    )
    
    $
    (2
    )Other commodity-based derivative net liabilitiesJune 30, 2008
    
    $
    (874
    )
    
    $
    (850
    )
    
    $
    24
    
    
    $
    (900
    )
    
    $
    (26
    )December 31, 2007
    
    $
    (828
    )
    
    $
    (805
    )
    
    $
    23
    
    
    $
    (853
    )
    
    $
    (25
    )
 47




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  48




---



##### Table of Contents



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.
  49




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number ofTotal Number
    
    Average Price
    
    Shares Purchased as
    
    Approximate Dollar Valueof Shares
    
    Paid per
    
    Part of Publicly
    
    that May Yet Be PurchasedPeriod
    
    Purchased
    
    Share
    
    Announced Program
    

Under
the Program(1)June 1, 2008 to
June 30, 2008
    
    
    203,700
    
    
    $
    20.93
    
    
    
    203,700
    
    
    $
    295,736,559Total
    
    
    203,700
    
    
    $
    20.93
    
    
    
    203,700
    
    
    $
    295,736,559July 1, 2008 to
July 31, 2008
    
    
    1,465,253
    
    
    $
    18.40
    
    
    
    1,465,253
    
    
    $
    268,775,904
 
 (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. 50




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Nominee
    
    For
    
    Against
    
    AbstainJuan Carlos Braniff
    
    
    569,327,575
    
    
    
    6,459,771
    
    
    
    5,522,500James L. Dunlap
    
    
    571,030,509
    
    
    
    4,775,190
    
    
    
    5,504,148Douglas L. Foshee
    
    
    568,359,565
    
    
    
    7,463,357
    
    
    
    5,486,924Robert W. Goldman
    
    
    562,387,948
    
    
    
    13,373,915
    
    
    
    5,547,984Anthony W. Hall Jr.
    
    
    570,993,058
    
    
    
    4,745,643
    
    
    
    5,571,145Thomas R. Hix
    
    
    571,820,265
    
    
    
    4,006,496
    
    
    
    5,483,085William H. Joyce
    
    
    558,624,609
    
    
    
    17,095,130
    
    
    
    5,590,107Ronald L. Kuehn, Jr.
    
    
    567,886,937
    
    
    
    7,764,735
    
    
    
    5,658,175Ferrell P. McClean
    
    
    571,506,700
    
    
    
    4,198,528
    
    
    
    5,604,618Steven J. Shapiro
    
    
    571,310,840
    
    
    
    4,536,677
    
    
    
    5,462,330J. Michael Talbert
    
    
    571,695,008
    
    
    
    4,158,367
    
    
    
    5,456,471Robert F. Vagt
    
    
    571,650,369
    
    
    
    4,150,622
    
    
    
    5,508,855John L. Whitmire
    
    
    571,677,980
    
    
    
    4,106,308
    
    
    
    5,525,559Joe B. Wyatt
    
    
    569,404,827
    
    
    
    6,440,371
    
    
    
    5,464,648
  For
    
    Against
    
    AbstainProposal to ratify
the appointment of
Ernst & Young LLP
as our independent
registered public
accounting firm
    
    
    573,288,277
    
    
    
    2,686,997
    
    
    
    5,334,572
 
 Item 5. Other Information
  
 Item 6. Exhibits
  51




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##### Table of Contents



SIGNATURES
  EL PASO CORPORATIONDate: August 8, 2008
    /s/ D. Mark LelandD. Mark LelandExecutive Vice President and
Chief Financial Officer
(Principal Financial Officer)Date: August 8, 2008
    /s/ John R. SultJohn R. SultSenior Vice President and Controller
(Principal Accounting Officer) 52




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##### Table of Contents



EL PASO CORPORATION
EXHIBIT INDEX
  ExhibitNumber
    
    Description4
    
    Thirteenth Supplemental Indenture dated as of May 30, 2008 between El Paso Corporation and HSBC
Bank USA, National Association, as trustee, to Indenture dated as of May 10, 1999.12
    
    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.
 53