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

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

For the transition period from            to

El Paso Corporation

Delaware		76-0568816
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

El Paso Building
1001 Louisiana Street
Houston, Texas		77002
(Address of Principal Executive Offices)		(Zip Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     Common stock, par value $3 per share. Shares outstanding on November 5, 2008: 698,562,656

 

 

EL PASO CORPORATION
TABLE OF CONTENTS

Caption		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			49
Item 4. Controls and Procedures			51
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			52
Item 1A. Risk Factors			52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. Defaults Upon Senior Securities			53
Item 4. Submission of Matters to a Vote of Security Holders			53
Item 5. Other Information			53
Item 6. Exhibits			53
Signatures			54
EX-12
EX-31.A
EX-31.B
EX-32.A
EX-32.B

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

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

     When we refer to natural gas and oil in “equivalents,” we are doing so to compare quantities of oil with quantities of natural gas or to express these different commodities in a common unit. In calculating equivalents, we use a generally recognized standard in which one Bbl of oil is equal to six Mcf of natural gas. Also, when we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.

     When we refer to “us”, “we”, “our”, “ours”, “the company” or “El Paso”, we are describing El Paso Corporation and/or our subsidiaries.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

EL PASO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per common share amounts)
(Unaudited)

		Quarters Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Operating revenues		$	1,598			$	1,166			$	4,020			$	3,386
Operating expenses
Cost of products and services			68				55				195				170
Operation and maintenance			329				348				882				978
Depreciation, depletion and amortization			292				293				903				850
Taxes, other than income taxes			70				53				230				185
			759				749				2,210				2,183
Operating income			839				417				1,810				1,203
Earnings (losses) from unconsolidated affiliates			52				(6	)			141				75
Loss on debt extinguishment			—				—				—				(287	)
Other income, net			(3	)			73				52				179
Minority interest			(7	)			(1	)			(23	)			(1	)
Interest and debt expense			(221	)			(228	)			(675	)			(742	)
Income before income taxes from continuing operations			660				255				1,305				427
Income taxes			215				100				450				151
Income from continuing operations			445				155				855				276
Discontinued operations, net of income taxes			—				—				—				674
Net income			445				155				855				950
Preferred stock dividends			9				9				28				28
Net income available to common stockholders		$	436			$	146			$	827			$	922
Basic earnings per common share
Income from continuing operations		$	0.63			$	0.21			$	1.19			$	0.36
Discontinued operations, net of income taxes			—				—				—				0.97
Net income per common share		$	0.63			$	0.21			$	1.19			$	1.33
Diluted earnings per common share
Income from continuing operations		$	0.58			$	0.20			$	1.12			$	0.35
Discontinued operations, net of income taxes			—				—				—				0.96
Net income per common share		$	0.58			$	0.20			$	1.12			$	1.31
Dividends declared per common share		$	0.05			$	0.04			$	0.13			$	0.12

See accompanying notes.

EL PASO CORPORATION

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

		September 30,				December 31,
		2008				2007
ASSETS
Current assets
Cash and cash equivalents		$	1,160			$	285
Accounts and notes receivable
Customers, net of allowance of $10 in 2008 and $17 in 2007			587				468
Affiliates			164				196
Other			211				201
Inventory			168				131
Assets from price risk management activities			388				113
Deferred income taxes			181				191
Other			140				127
Total current assets			2,999				1,712
Property, plant and equipment, at cost
Pipelines			17,561				16,750
Natural gas and oil properties, at full cost			19,479				19,048
Other			323				530
			37,363				36,328
Less accumulated depreciation, depletion and amortization			17,595				16,974
Total property, plant and equipment, net			19,768				19,354
Other assets
Investments in unconsolidated affiliates			1,830				1,614
Assets from price risk management activities			240				302
Other			1,589				1,597
			3,659				3,513
Total assets		$	26,426			$	24,579

See accompanying notes.

EL PASO CORPORATION

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

		September 30,				December 31,
		2008				2007
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Trade		$	447			$	460
Affiliates			7				5
Other			573				502
Current maturities of long-term financing obligations			1,079				331
Liabilities from price risk management activities			256				267
Accrued interest			232				195
Other			786				653
Total current liabilities			3,380				2,413
Long-term financing obligations, less current maturities			12,258				12,483
Other
Liabilities from price risk management activities			833				931
Deferred income taxes			1,660				1,157
Other			1,621				1,750
			4,114				3,838
Commitments and contingencies (Note 8)
Minority interest			559				565
Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized 50,000,000 shares; issued 750,000 shares of 4.99% convertible perpetual stock; stated at liquidation value			750				750
Common stock, par value $3 per share; authorized 1,500,000,000 shares; issued 712,119,118 shares in 2008 and 709,192,605 shares in 2007			2,136				2,128
Additional paid-in capital			4,649				4,699
Accumulated 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				5,280
Total liabilities and stockholders’ equity		$	26,426			$	24,579

See accompanying notes.

EL PASO CORPORATION

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

		Nine Months Ended
		September 30,
		2008				2007
Cash flows from operating activities
Net income		$	855			$	950
Less income from discontinued operations, net of income taxes			—				674
Income from continuing operations			855				276
Adjustments to reconcile net income to net cash from operating activities
Depreciation, depletion and amortization			903				850
Deferred income taxes			470				127
Earnings from unconsolidated affiliates, adjusted for cash distributions			(12	)			81
Loss on debt extinguishment			—				287
Other non-cash income items			47				(52	)
Asset and liability changes			(212	)			(76	)
Cash provided by continuing activities			2,051				1,493
Cash used in discontinued activities			—				(31	)
Net cash provided by operating activities			2,051				1,462
Cash flows from investing activities
Capital expenditures			(1,905	)			(1,796	)
Cash paid for acquisitions			(362	)			(1,182	)
Net proceeds from the sale of assets and investments			671				82
Net change in restricted cash			35				33
Other			44				17
Cash used in continuing activities			(1,517	)			(2,846	)
Cash provided by discontinued activities			—				3,660
Net cash provided by (used in) investing activities			(1,517	)			814
Cash flows from financing activities
Net proceeds from issuance of long-term debt			4,083				5,253
Payments 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			—				3,346
Other			9				4
Cash provided by continuing activities			341				1,205
Cash 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 equivalents
Beginning of period			285				537
End of period		$	1,160			$	389

See accompanying notes.

EL PASO CORPORATION

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

										Nine Months
		Quarters Ended								Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net income		$	445			$	155			$	855			$	950
Pension and postretirement obligations:
Unrealized actuarial losses arising during period (net of income taxes of $1 in 2008)			—				—				(2	)			—
Reclassification adjustments (net of income taxes of $2 and $7 in 2008 and $3 and $10 in 2007)			3				5				13				18
Cash 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				6
Reclassification 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)			—				—				—				3
Realized 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

See accompanying notes.

EL PASO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

     We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the United States Securities and Exchange Commission (SEC). Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by U.S. generally accepted accounting principles. You should read this Quarterly Report on Form 10-Q along with our 2007 Annual Report on Form 10-K, which contains a summary of our significant accounting policies and other disclosures. The financial statements as of September 30, 2008, and for the quarters and nine months ended September 30, 2008 and 2007, are unaudited. We derived the condensed consolidated balance sheet as of December 31, 2007, from the audited balance sheet filed in our 2007 Annual Report on Form 10-K. In our opinion, we have made all adjustments which are of a normal, recurring nature to fairly present our interim period results. Due to the seasonal nature of our businesses, information for interim periods may not be indicative of our operating results for the entire year. Our financial statements for prior periods include reclassifications that were made to conform to the current period presentation. Those reclassifications did not impact our reported net income or stockholders’ equity.

Significant Accounting Policies

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

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

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

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

2. Acquisitions and Divestitures

Acquisitions

     Gulf LNG. In February 2008, we paid $295 million to complete the acquisition of a 50 percent interest in the Gulf LNG Clean Energy Project, an LNG terminal which is currently under construction in Pascagoula, Mississippi. The terminal is expected to be placed in service in late 2011 at an estimated total cost of $1.1 billion. In addition, we have a commitment to loan Gulf LNG up to $150 million under which we advanced approximately $14 million as of September 30, 2008. Our partner in this project has a commitment to loan up to $64 million. We account for our investment in Gulf LNG using the equity method.

     Exploration and Production properties. During the nine months ended September 30, 2008, we acquired additional interests in onshore domestic natural gas and oil properties for approximately $61 million. During 2007, we acquired operated natural gas and oil producing properties and undeveloped acreage in south Texas for approximately $254 million and also acquired Peoples Energy Production Company (Peoples) for $879 million. Peoples was an exploration and production company with natural gas and oil properties located primarily in the ArkLaTex, Texas Gulf Coast and Mississippi areas and in the San Juan and Arkoma Basins.

Divestitures

     During the nine months ended September 30, 2008, we sold natural gas and oil properties primarily in the Gulf of Mexico and Texas Gulf Coast regions for net cash proceeds of approximately $649 million. We also sold two power investments located in Central America and Asia for net cash proceeds of approximately $16 million. During the nine months ended September 30, 2007, we received approximately $82 million of proceeds from the sales of assets and investments, primarily related to the sale of a pipeline lateral and our investment in the New York Mercantile Exchange (NYMEX).

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

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

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

3. Income Taxes

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

		Quarters								Nine Months
		Ended								Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In millions, except for rates)
Income taxes		$	215			$	100			$	450			$	151
Effective tax rate			33	%			39	%			34	%			35	%

     We compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss, except for significant unusual or infrequently occurring items. Significant tax items are recorded in the period that the item occurs. Our effective tax rate may be affected by items such as dividend exclusions on earnings from unconsolidated affiliates where we anticipate receiving dividends, the effect of state income taxes (net of federal income tax effects), and the effect of foreign income which can be taxed at different rates.

     During the nine months ended September 30, 2008 and 2007, our effective tax rate on continuing operations was relatively consistent with the statutory rate and the customary relationship between our pretax accounting income and income tax expense. However, our effective tax rate for the quarter ended September 30, 2008, was lower than the statutory rate due primarily to the foreign tax impact of fluctuations in exchange rates while our effective tax rate for the quarter ended September 30, 2007, was higher than the statutory rate due primarily to impairments on foreign investments for which there were no corresponding income tax benefits.

     We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. For years in which our returns are still subject to review, our unrecognized tax benefits (liabilities for uncertain tax matters) could increase or decrease our income tax expense and, in turn, effective income tax rates as these open years are closed, although we are unable to estimate the range of potential impacts the resolution of any contested matters could have on our financial statements. In June 2008, the Internal Revenue Service’s examination of El Paso’s U.S. income tax returns for 2003 and 2004 was settled at the appellate level with approval by the Joint Committee on Taxation. The settlement of issues raised in this examination did not materially impact our results of operations, financial condition or liquidity.

     As of January 1, 2008 and September 30, 2008, we had unrecognized tax benefits of $157 million and $126 million. The reduction in these amounts was primarily associated with the settlement of the 2003 and 2004 Internal Revenue Service audits and was recorded as an adjustment to additional paid in capital. Approximately $132 million as of January 1, 2008 and $122 million as of September 30, 2008 (net of federal tax benefits) would favorably affect our income tax expense and our effective income tax rate if recognized in future periods. While the amount of our unrecognized tax benefits could change in the next twelve months, we do not expect this change to have a significant impact on our results of operations or financial position.

4. Earnings Per Share

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

		2008								2007
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Quarters Ended September 30
Income from continuing operations		$	445			$	445			$	155			$	155
Convertible preferred stock dividends			(9	)			—				(9	)			—
Interest on trust preferred securities			—				3				—				—
Income from continuing operations available to common stockholders			436				448				146				155
Discontinued operations, net of income taxes			—				—				—				—
Net income available to common stockholders.		$	436			$	448			$	146			$	155
Weighted average common shares outstanding			696				696				696				696
Effect of dilutive securities:
Options and restricted stock			—				4				—				5
Trust preferred securities			—				8				—				—
Convertible preferred stock			—				58				—				58
Weighted average common shares outstanding and dilutive securities			696				766				696				759
Earnings per common share:
Income from continuing operations		$	0.63			$	0.58			$	0.21			$	0.20
Discontinued operations, net of income taxes			—				—				—				—
Net income		$	0.63			$	0.58			$	0.21			$	0.20

		2008								2007
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Nine Months Ended September 30
Income from continuing operations		$	855			$	855			$	276			$	276
Convertible preferred stock dividends			(28	)			—				(28	)			(28	)
Interest on trust preferred securities			—				8				—				—
Income from continuing operations available to common stockholders			827				863				248				248
Discontinued operations, net of income taxes			—				—				674				674
Net income available to common stockholders.		$	827			$	863			$	922			$	922
Weighted average common shares outstanding			697				697				695				695
Effect of dilutive securities:
Options and restricted stock			—				4				—				4
Trust preferred securities			—				8				—				—
Convertible preferred stock			—				58				—				—
Weighted average common shares outstanding and dilutive securities			697				767				695				699
Earnings per common share:
Income from continuing operations		$	1.19			$	1.12			$	0.36			$	0.35
Discontinued operations, net of income taxes			—				—				0.97				0.96
Net income		$	1.19			$	1.12			$	1.33			$	1.31

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

5. Fair Value Measurements

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

     We use various methods to determine the fair values of our financial instruments and other derivatives which depend on a number of factors, including the availability of observable market data over the contractual term of the underlying instrument. For some of our instruments, the fair value is calculated based on directly observable market data or data available for similar instruments in similar markets. For other instruments, the fair value may be calculated based on these inputs as well as other assumptions related to estimates of future settlements of these instruments. We separate our financial instruments and other derivatives into three levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine the fair value of our instruments. Our assessment of an instrument can change over time based on the maturity or liquidity of the instrument, which could result in a change in the classification of the instruments between levels. Each of these levels and our corresponding instruments classified by level are further described below:

	•		Level 1 instruments’ fair values are based on quoted prices in actively traded markets. Included in this level are our marketable securities invested in non-qualified compensation plans whose fair value is determined using quoted prices of these instruments.
	•		Level 2 instruments’ fair values are 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.

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

		Level 1				Level 2				Level 3				Total
Assets
Marketable securities invested in non-qualified compensation plans		$	21			$	—			$	—			$	21
Production-related natural gas and oil derivatives			—				324				—				324
Other natural gas derivatives			—				89				31				120
Power-related derivatives			—				—				99				99
Foreign currency swaps			—				—				85				85
Total assets		$	21			$	413			$	215			$	649

		Level 1				Level 2				Level 3				Total
Liabilities
Production-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	)

     On certain derivative contracts recorded as assets we are exposed to the risk that our counterparties may not be able to perform or post the required collateral, if any, with us. We have assessed this counterparty risk in light of the collateral our counterparties have posted with us and the recent instability in the credit markets. Based on this assessment, we have determined that our exposure is primarily related to our production-related derivatives and foreign currency swaps and is limited to seven financial institutions, each of which has a current Standard & Poor’s credit rating of A or better.

     The following table presents the changes in our financial assets and liabilities included in Level 3 for the quarter and nine months ended September 30, 2008 (in millions):

						Change in fair				Change in fair				Change in fair
						value reflected				value reflected				value reflected in
		Balance at				in				in				long-term
		Beginning of				operating				operating				financing				Settlements,				Balance at End of
		Period				revenues(1)				expenses(2)				obligations(3)				Net				Period
Quarter Ended September 30, 2008
Assets		$	342			$	(63	)		$	—			$	(46	)		$	(18	)		$	215
Liabilities			(1,012	)			116				(8	)			—				53				(851	)
Total		$	(670	)		$	53			$	(8	)		$	(46	)		$	35			$	(636	)
Nine Months Ended September 30, 2008
Assets		$	250			$	25			$	—			$	(24	)		$	(36	)		$	215
Liabilities			(839	)			(108	)			(39	)			—				135				(851	)
Total		$	(589	)		$	(83	)		$	(39	)		$	(24	)		$	99			$	(636	)

6. Price Risk Management Activities

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

		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				109
Net liabilities from price risk management activities(1)		$	(461	)		$	(783	)

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			$	331
Long-term financing obligations			12,258				12,483
Total		$	13,337			$	12,814

     Long Term Financing Obligations. On September 30, 2008, El Paso Pipeline Partners, L.P. (EPB), our master limited partnership (MLP), issued $175 million of private placement debt as part of the MLP’s purchase of incremental interests in Colorado Interstate Gas (CIG) and Southern Natural Gas (SNG). The EPB borrowings are due 2011 through 2013, are non-recourse to El Paso and have an average annual rate of 7.8 percent. During the second quarter of 2008, we repurchased $289 million of subsidiary debt obligations and issued $600 million of 7.25% unsecured senior notes that mature in June 2018.

     Credit Facilities. As of September 30, 2008, we had available capacity under various credit agreements (excluding that under EPB’s $750 million revolving credit facility) of approximately $0.7 billion as follows:

Facility		Credit Facility				Available Capacity
El Paso revolving credit agreement		$1.5 billion				$0.6 billion
El Paso Exploration and Production (EPEP) revolving credit facility		$1.0 billion				$0.1 billion
Unsecured credit facilities		$1.0 billion					____

     As of September 30, 2008, the total amount outstanding under EPB’s $750 million revolving credit facility was approximately $586 million. The EPB borrowings are not recourse to El Paso and the facility is solely available for use by EPB and its subsidiaries.

     As part of our determination of available capacity under our credit agreements, we completed an assessment of the available lenders under our credit facilities. Based on our assessment as of September 30, 2008, our available capacity noted above was reduced to reflect the potential exposure to a loss of available capacity of approximately $25 million on El Paso’s $1.5 billion revolving credit facility, approximately $2 million on EPEP’s 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.

     Restrictive Covenants. Under our credit agreements, our most restrictive debt covenants (see our 2007 Annual Report on Form 10-K) relate to maintaining certain financial coverage ratios. As of September 30, 2008 we are in compliance with these coverage ratios which include among other ratios, a ratio of Debt to Consolidated EBITDA, each as defined in our $1.5 billion credit agreement. For the last 12 months through September 30, 2008, our ratio of Debt to Consolidated EBITDA was approximately 3.4 to 1 compared with the requirement that our ratio of Debt to Consolidated EBITDA shall not exceed 5.25 to 1 until maturity.

     Letters of Credit. We enter into letters of credit in the ordinary course of our operating activities as well as periodically in conjunction with the sales of assets or businesses. In the third quarter, we closed a new letter of credit facility with a bank to support our purchase commitments for pipe related to the Ruby Pipeline project. Through September 30, 2008 we issued two letters of credit under this facility that total approximately $450 million. Of our outstanding letters of credit under this facility, we pay 0.85% annually on approximately $180 million maturing in one year and 1.00% annually on approximately $270 million maturing in two years. As of September 30, 2008, we had total outstanding letters of credit issued under all facilities of approximately $1.8 billion, of which approximately $1.0 billion secure our recorded obligations related to price risk management activities.

8. Commitments and Contingencies

Legal Proceedings

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

     Cash Balance Plan Lawsuit. In December 2004, a purported class action lawsuit entitled Tomlinson, et al. v. El Paso Corporation and El Paso Corporation Pension Plan was filed in U.S. District Court for Denver, Colorado. The lawsuit alleges various violations of ERISA and the Age Discrimination in Employment Act as a result of our change from a final average earnings formula pension plan to a cash balance pension plan. The claims that our cash balance plan violated ERISA’s age discrimination, backloading and notice provisions were dismissed by the trial court. Our costs and legal exposure related to this lawsuit are not currently determinable.

     Retiree Medical Benefits Matter. In 2002, a lawsuit entitled Yolton et al. v. El Paso Tennessee Pipeline Co. and Case Corporation was filed in a federal court in Detroit, Michigan. The lawsuit was filed on behalf of a group of retirees of Case Corporation (Case) that alleged they are entitled to retiree medical benefits under a medical benefits plan that we serve as plan administrator pursuant to a merger agreement with Tenneco Inc. Although we had asserted that our obligations under the plan were subject to a cap pursuant to an agreement with the union for Case employees, in the first quarter of 2008, the trial court granted summary judgment and ruled that the benefits were vested and not subject to the cap. As a result, we were obligated to pay the amounts above the cap and we adjusted our existing indemnification accrual using current actuarial assumptions and reclassified our liability as a postretirement benefit obligation. See Note 9 for a discussion of the impact of this matter. We intend to pursue appellate options following the determination by the trial court of any damages incurred by the plaintiffs during the period when premium payments above the cap were paid by the retirees. We believe our accruals established for this matter are adequate.

     Price Reporting Litigation. Beginning in 2003, several lawsuits were filed against El Paso Marketing L.P. (EPM) alleging that El Paso, EPM and other energy companies conspired to manipulate the price of natural gas by providing false price information to industry trade publications that published gas indices. The first set of cases, involving similar allegations on behalf of commercial and residential customers, was transferred to a multi-district litigation proceeding (MDL) in the U.S. District Court for Nevada and styled In re: Western States Wholesale Natural Gas Antitrust Litigation. These cases were dismissed. The U.S. Court of Appeals for the Ninth Circuit, however, reversed the dismissal and ordered that these cases be remanded to the trial court. The second set of cases also involve similar allegations on behalf of certain purchasers of natural gas. These include Farmland Industries v. Oneok Inc., et al. (filed in state court in Wyandotte County, Kansas in July 2005) and Missouri Public Service Commission v. El Paso Corporation, et al. (filed in the circuit court of Jackson County, Missouri at Kansas City in October 2006), and the purported class action lawsuits styled: Leggett, et al. v. Duke Energy Corporation, et al. (filed in Chancery Court of Tennessee in January 2005); Ever-Bloom Inc., et al. v. AEP Energy Services Inc., et al. (filed in federal court for the Eastern District of California in September 2005); Learjet, Inc., et al. v. Oneok Inc., et al. (filed in state court in Wyandotte County, Kansas in September 2005); Breckenridge, et al. v. Oneok Inc., et al. (filed in state court in Denver County, Colorado in May 2006); Arandell, et al. v. Xcel Energy, et al. (filed in the circuit court of Dane County, Wisconsin in December 2006); and Heartland, et al. v. Oneok Inc., et al. (filed in the circuit court of Buchanan County, Missouri in March 2007). The Leggett case was dismissed by the Tennessee state court, but in October 2008, the Tennessee Court of Appeals reversed the dismissal, remanding the matter to trial court. The Missouri Public Service case was transferred to the MDL, but remanded back to state court, where a motion to dismiss has been filed. The remaining cases have all been transferred to the MDL proceeding. The Breckenridge Case has been dismissed, but a motion for reconsideration was filed. Motions for summary judgment in Learjet and Farmland were denied, but a motion for reconsideration has been filed. Discovery is proceeding in the MDL cases. We reached an agreement in principle to settle the Western States and Ever-Bloom cases and have established accruals for those cases which we believe are adequate. Settlement documents are being drafted. Our costs and legal exposure related to the remaining lawsuits and claims are not currently determinable.

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

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

     MTBE. Certain of our subsidiaries used, produced, sold or distributed methyl tertiary-butyl ether (MTBE) as a gasoline additive. Various lawsuits were filed throughout the U.S. regarding the potential impact of MTBE on water supplies. The lawsuits have been brought by different parties, including state attorney generals, water districts and individual water companies. They have sought different remedies, including remediation of the groundwater, future remedial activities, damages, punitive damages and attorneys’ fees and costs. These cases were initially consolidated for pre-trial purposes in multi-district litigation in the U.S. District Court for the Southern District of New York. Several cases were later remanded. We recently settled 59 of these lawsuits, with our payments being made in October 2008. These settlements are covered by insurance and substantially all of the settlement amounts will be funded by our insurers. Following such settlements, there are 24 lawsuits that remain. While the damages claimed in the remaining actions are substantial, there remains significant legal uncertainty regarding the validity of the causes of action asserted and the availability of the relief sought. Other than 3 recently filed actions, we have tendered these remaining cases to our insurers. Our costs and legal exposure related to these remaining lawsuits are not currently determinable.

Government Investigations and Inquiries

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

     In addition to the above proceedings, we and our subsidiaries and affiliates are named defendants in numerous lawsuits and governmental proceedings that arise in the ordinary course of our business. There are also other regulatory rules and orders in various stages of adoption, review and/or implementation. For each of these matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If we determine that an unfavorable outcome is probable and can be estimated, we establish the necessary accruals. While the outcome of these matters, including those discussed above, cannot be predicted with certainty, and there are still uncertainties related to the costs we may incur, based upon our evaluation and experience to date, we believe we have established appropriate reserves for these matters. It is possible, however, that new information or future developments could require us to reassess our potential exposure related to these matters and adjust our accruals accordingly, and these adjustments could be material. As of September 30, 2008, we had approximately $111 million accrued, which has not been reduced by $33 million of related insurance receivables, for outstanding legal and governmental proceedings.

Rates and Regulatory Matters

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

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

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

     Greenhouse Gas Emissions.  Currently, various legislative and regulatory measures to address greenhouse gas (GHG) emissions are in various phases of discussion or implementation. Various federal legislative proposals have been made over the last several years. The Environmental Protection Agency (EPA) is considering a

rulemaking regarding potential regulation of GHG emissions from stationary and mobile sources under the Clean Air Act. Legislation and regulation are also in various stages of proposal, enactment, and implementation in many states throughout the United States. If enacted as proposed, the federal and state legislative and regulatory proposals would impact our operations and financial results. However, until enacted, it is not possible to determine the exact impact that these future measures might have on our operations and financial results. Additionally, various governmental entities and environmental groups have filed lawsuits seeking to force the federal government to regulate GHG emissions and individual companies to reduce GHG emissions from their operations. These and other suits may result in decisions by state courts, federal agencies, and other governing bodies that could impact our operations and ability to obtain certifications and permits to construct future projects.

Other Matter

     Navajo Nation. Approximately 900 looped pipeline miles of the north mainline of our EPNG pipeline system are located on lands held in trust by the United States for the benefit of the Navajo Nation. Our rights-of-way on lands crossing the Navajo Nation are the subject of a pending renewal application filed in 2005 with the Department of the Interior’s Bureau of Indian Affairs. In June 2008, EPNG reached an agreement in principle on the fundamental economic terms of a tribal consent extension through October 2025. Negotiations on the remaining terms and conditions are continuing. Based on the preliminary agreement, EPNG made payments to the Navajo Nation covering the period from January 2007 through October 2008. EPNG made a second payment to the Navajo Nation in October 2008 covering a twelve-month period through October 2009. We have filed with the FERC for recovery of these amounts in our recent rate case, but are uncertain as to whether such recovery will be allowed.

Environmental Matters

     We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remedy the effect on the environment of the disposal or release of specified substances at current and former operating sites. As of September 30, 2008, we had accrued approximately $224 million for environmental matters, which has not been reduced by $24 million for amounts to be paid directly under government sponsored programs. Our accrual includes approximately $217 million for expected remediation costs and associated onsite, offsite and groundwater technical studies and approximately $7 million for related environmental legal costs. Of the $224 million accrual, $19 million was reserved for facilities we currently operate and $205 million was reserved for non-operating sites (facilities that are shut down or have been sold) and Superfund sites.

     Our estimates of potential liability range from approximately $224 million to approximately $417 million. Our accrual represents a combination of two estimation methodologies. First, where the most likely outcome can be reasonably estimated, that cost has been accrued ($14 million). Second, where the most likely outcome cannot be estimated, a range of costs is established ($210 million to $403 million) and if no one amount in that range is more likely than any other, the lower end of the expected range has been accrued. Our environmental remediation projects are in various stages of completion. Our recorded liabilities reflect our current estimates of amounts we will expend to remediate these sites. However, depending on the stage of completion or assessment, the ultimate extent of contamination or remediation required may not be known. As additional assessments occur or remediation efforts continue, we may incur additional liabilities. By type of site, our reserves are based on the following estimates of reasonably possible outcomes:

		September 30, 2008
Sites		Expected				High
		(In millions)
Operating		$	19			$	26
Non-operating			183				346
Superfund			22				45
Total		$	224			$	417

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

Balance as of January 1, 2008		$	260
Additions/adjustments for remediation activities			(6	)
Payments for remediation activities			(30	)
Balance as of September 30, 2008		$	224

     For the remainder of 2008, we estimate that our total remediation expenditures will be approximately $21 million, most of which will be expended under government directed clean-up plans. In addition, we expect to make capital expenditures for environmental matters of approximately $13 million in the aggregate for the years 2008 through 2012. These expenditures primarily relate to compliance with clean air regulations.

     CERCLA Matters. As part of our environmental remediation projects, we have received notice that we could be designated, or have been asked for information to determine whether we could be designated, as a Potentially Responsible Party (PRP) with respect to 33 active sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or state equivalents. We have sought to resolve our liability as a PRP at these sites through indemnification by third parties and settlements, which provide for payment of our allocable share of remediation costs. Because the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required, and in some cases we have asserted a defense to any liability, our estimates could change. Moreover, liability under the federal CERCLA statute is joint and several, meaning that we could be required to pay in excess of our pro rata share of remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in estimating our liabilities. Accruals for these matters are included in the previously indicated estimates for Superfund sites.

     It is possible that new information or future developments could require us to reassess our potential exposure related to environmental matters. We may incur significant costs and liabilities in order to comply with existing environmental laws and regulations. It is also possible that other developments, such as increasingly strict environmental laws, regulations and orders of regulatory agencies, as well as claims for damages to property and the environment or injuries to employees and other persons resulting from our current or past operations, could result in substantial costs and liabilities in the future. As this information becomes available, or other relevant developments occur, we will adjust our accrual amounts accordingly. While there are still uncertainties related to the ultimate costs we may incur, based upon our evaluation and experience to date, we believe our reserves are adequate.

Guarantees and Other Commitments

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

     Our potential exposure under guarantee and indemnification agreements can range from a specified amount to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. For those arrangements with a specified dollar amount, we have a maximum stated value of approximately $820 million, which primarily relates to indemnification arrangements associated with the sale of ANR, our Macae power facility in Brazil, and other legacy assets. These amounts exclude guarantees for which we have issued related letters of credit discussed in Note 7. As of September 30, 2008, we have recorded obligations of $79 million related to our indemnification arrangements. This liability consists primarily of an indemnification that one of our subsidiaries provided related to its sale of an ammonia facility that is reflected in our financial statements at its fair value. We have provided a partial parental guarantee of our subsidiary’s obligations under this indemnification. We are unable to estimate a maximum exposure for our guarantee and indemnification agreements that do not provide for limits on the amount of future payments due to the uncertainty of these exposures.

     Purchase Obligations. During 2008, we entered into contracts to purchase pipe primarily associated with the Ruby Pipeline project and TGP’s 300 Line expansion which are anticipated to be placed in service between 2010 and 2011. Our estimated obligations under these agreements are approximately $80 million for the remainder of 2008, $660 million in 2009 and $143 million in 2010.

     Asset Retirement Obligations. Our asset retirement liabilities as of September 30, 2008 reflect a reduction of approximately $109 million related to the sale of a portion of our natural gas and oil properties in the Gulf of Mexico and Texas Gulf Coast regions and an increase of approximately $52 million resulting from the third quarter of 2008 impacts of Hurricanes Ike and Gustav on our exploration and production and pipeline assets.

9. Retirement Benefits

     Net Benefit Cost. The components of net benefit cost for our pension and postretirement benefit plans for the periods ended September 30 are as follows:

		Quarters Ended September 30,																Nine Months Ended September 30,
										Other																Other
		Pension								Postretirement								Pension								Postretirement
		Benefits								Benefits								Benefits								Benefits
		2008				2007				2008				2007				2008				2007				2008				2007
		(In millions)
Service cost		$	4			$	4			$	—			$	—			$	11			$	13			$	—			$	—
Interest cost			30				30				10				6				90				90				27				19
Expected 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

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

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

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

     During the fourth quarter of 2008, we expect to contribute an additional $21 million to our other postretirement benefit plans.

     As a result of the general decline in the markets for debt and equity securities, the funded status of our pension and other postretirement benefit plans declined significantly during the third quarter of 2008. Although we do not currently anticipate having to make any significant contributions to our pension plans in 2009 as a result of the decrease in funded status, if the fair value of

the investments in our pension plans continues to be negatively impacted, this decline could result in a significant decrease in our postretirement benefit asset and in other comprehensive income in the fourth quarter of 2008 when the plans’ assets and obligations are remeasured.

10. Stockholders’ Equity

     Share Repurchase Program. During 2008, the Board approved a $300 million share repurchase program and we repurchased approximately $77 million in common stock under the program through September 30, 2008.

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

		Common Stock				Convertible Preferred Stock
Amount paid through September 30, 2008		$	85			$	28
Amount paid in October 2008		$	34			$	9
Dividends declared subsequent to September 30, 2008
Date of declaration		October 23, 2008				October 23, 2008
Payable to shareholders on record		December 5, 2008				December 15, 2008
Date payable		January 2, 2009				January 2, 2009

     Dividends on our common stock and preferred stock are treated as a reduction of additional paid-in-capital since we currently have an accumulated deficit. For the fourth quarter of 2008, we expect dividends paid on our common and preferred stock will be taxable to our stockholders because we anticipate they will be paid out of current or accumulated earnings and profits for tax purposes. Through October 2008, our Board of Directors declared dividends for our common shareholders of $0.04 per share in February and March and $0.05 per share in July and October.

     The terms of our 750,000 outstanding shares of 4.99% convertible preferred stock provide for the conversion ratio on our preferred stock to increase when we pay quarterly dividends to our common stockholders in excess of $0.04 per share, as we did in October 2008 and will do in January 2009. The terms of these preferred shares also prohibit the payment of dividends on our common stock unless we have paid or set aside for payment all accumulated and unpaid dividends on such preferred stock for all preceding dividend periods. In addition, although our credit facilities do not contain any direct restriction on the payment of dividends, dividends are included as a fixed charge in the calculation of our fixed charge coverage ratio under our credit facilities. If we are unable to comply with our fixed charge coverage ratio, our ability to pay additional dividends would be restricted.

11. Business Segment Information

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

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

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

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

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

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

		Quarters Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In millions)
Segment EBIT		$	886			$	432			$	1,905			$	1,432
Corporate 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

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

		Segments
						Exploration
						and												Corporate
		Pipelines				Production				Marketing				Power				and Other(1)				Total
		(In millions)
Quarters Ended September 30, 2008
Revenue from external customers		$	615			$	528	(2)		$	450			$	—			$	5			$	1,598
Intersegment revenue			13				353	(2)			(361	)			—				(5	)			—
Operation and maintenance			223				90				7				4				5				329
Depreciation, depletion and amortization			97				191				—				—				4				292
Earnings from unconsolidated affiliates			28				10				—				12				2				52
EBIT			278				532				82				(6	)			(5	)			881
2007
Revenue from external customers		$	572			$	290	(2)		$	284			$	—			$	20			$	1,166
Intersegment revenue			14				285	(2)			(293	)			—				(6	)			—
Operation and maintenance			199				106				4				5				34				348
Depreciation, depletion and amortization			94				194				—				1				4				293
Earnings (losses) from unconsolidated affiliates			28				2				—				(36	)(3)			—				(6	)
EBIT			275				232				(8	)			(67	)(3)			51	(4)			483

		Segments
						Exploration
						and												Corporate
		Pipelines				Production				Marketing				Power				and Other(1)				Total
		(In millions)
Nine Months Ended September 30, 2008
Revenue from external customers		$	1,954			$	856	(2)		$	1,194			$	—			$	16			$	4,020
Intersegment revenue			40				1,283	(2)			(1,308	)			—				(15	)			—
Operation and maintenance			623				303				17				13				(74	)			882
Depreciation, depletion and amortization			295				600				—				—				8				903
Earnings from unconsolidated affiliates			74				36				—				28				3				141
EBIT			954				1,078				(131	)			4				75				1,980
2007
Revenue from external customers		$	1,803			$	778	(2)		$	744			$	—			$	61			$	3,386
Intersegment revenue			41				877	(2)			(904	)			—				(14	)			—
Operation and maintenance			541				326				7				16				88				978
Depreciation, depletion and amortization			279				553				2				1				15				850
Earnings (losses) from unconsolidated affiliates			83				4				—				(12	)(3)			—				75
EBIT			957				646				(138	)			(33	)(3)			(263	)(4)			1,169