Dear El Paso Stockholder:

 

We cordially invite you to attend our 2007 Annual Meeting of Stockholders. The Annual Meeting will be held on May 24, 2007, beginning at 9:00 a.m. (local/Central time) at the Four Seasons Hotel Houston, 1300 Lamar Street, Houston, Texas 77010.

 

At this year’s Annual Meeting, you will be asked to vote on the election of directors, the ratification of Ernst & Young LLP’s appointment as our independent registered public accounting firm and two stockholder proposals.

 

With regard to the election of directors, you should know that your company is well-governed. Thirteen of our 14 nominee directors are independent. We have a separate Chairman and CEO and we do not have a staggered board, so each of our directors stands for election every year. Our By-laws provide for the election of directors by the majority vote of stockholders in uncontested elections. This means the votes cast for a nominee’s election must exceed the votes cast against such nominee’s election in order for him or her to be elected to the Board. In addition, our Corporate Governance Guidelines provide that the Board will nominate for election or appoint to Board vacancies only candidates who irrevocably agree to resign if they fail to receive the required majority vote. In the event a director fails to receive a majority of votes cast and the Board accepts the resignation tendered, then that director would cease to be a director of El Paso. Our Board has adopted certain standards of independence to assist the Board in its assessment of the independence of each director and the materiality of the director’s relationship with El Paso.

 

In addition, we do not have a poison pill plan and all shares of El Paso common stock available for grant to our directors, executive officers and employees have been approved by our stockholders. But as important as any of this, we have an active and engaged Board with the right mix of leadership, industry, finance, academic and legal experience that is built on El Paso’s five core values: stewardship, integrity, safety, accountability and excellence.

 

During 2006, the SEC made significant enhancements to the requirements for director and officer compensation disclosure. We welcome these new rules because we have, for the past two years, provided transparent and fulsome compensation disclosures in our proxy statements. We remain in the forefront of executive compensation disclosure with something we believe is innovative. We have included in the accompanying proxy statement individual executive profiles that summarize the compensation paid in 2006 to our CEO, our CFO and our three other most highly compensated executive officers. These individual executive profiles summarize the compensation disclosures that are provided in more detail in the Compensation Discussion and Analysis and executive compensation tables. We believe these individual executive profiles, which begin on page 22 of the proxy statement, provide a clear and concise summary that is easy for the reader to understand.

 

I urge you to vote for your Board’s nominees. Your vote is important. I hope you will be able to attend the meeting, but if you cannot, please vote your proxy as soon as you can.

 

Sincerely,

 

Douglas L. Foshee
President and Chief Executive Officer

 

Houston, Texas

April 6, 2007

EL PASO CORPORATION
1001 Louisiana Street
Houston, Texas 77002

 

NOTICE OF 2007 ANNUAL MEETING OF STOCKHOLDERS
May 24, 2007

 

On May 24, 2007, El Paso Corporation will hold its 2007 Annual Meeting of Stockholders at the Four Seasons Hotel Houston, 1300 Lamar Street, Houston, Texas 77010. The Annual Meeting will begin at 9:00 a.m. (local/Central time).

 

Only El Paso stockholders who owned shares of our common stock at the close of business on March 26, 2007, are entitled to notice of, and can vote at, this Annual Meeting or any adjournments or postponements that may take place. At the Annual Meeting, you will be asked to consider and take action with respect to the election of 14 directors, each to hold office for a term of one year, and the ratification of Ernst & Young LLP’s appointment as our independent registered public accounting firm.

 

We will also attend to any other business properly presented at the Annual Meeting. In that regard, you may vote on two proposals submitted by stockholders if they are presented at the Annual Meeting. These proposals are described in the attached proxy statement. The Board of Directors is not aware of any other matters to be presented at the Annual Meeting.

 

By Order of the Board of Directors

 

David L. Siddall
Corporate Secretary

 

Houston, Texas

April 6, 2007

ATTENDING THE MEETING

 

If you plan to attend the Annual Meeting in person and are a stockholder of record, bring with you a form of government-issued personal identification to the Annual Meeting. If you own stock through a bank, broker or other nominee, you will need proof of ownership as of the record date to attend the Annual Meeting. If you are an authorized proxy holder, you must present the proper documentation. Please see pages 3 and 4 for more information on what documents you will need for admission to the Annual Meeting. Registration will begin at 8:00 a.m. (local/Central time), and seating will be on a “first come first served” basis. No cameras, recording equipment or other electronic devices will be allowed in the meeting room. If you do not provide photo identification or comply with the other procedures outlined above upon request, you may not be admitted to the Annual Meeting. In addition, please note parking is not provided for the Annual Meeting. There is parking generally available at the Four Seasons Hotel and at other public parking garages around the Four Seasons Hotel.

TABLE OF CONTENTS

 

EL PASO CORPORATION
1001 Louisiana Street
Houston, Texas 77002

 

2007 ANNUAL MEETING OF STOCKHOLDERS — May 24, 2007

 

Our Board of Directors is furnishing you with this proxy statement to solicit proxies on its behalf to be voted at the 2007 Annual Meeting of Stockholders of El Paso Corporation. The Annual Meeting will be held at the Four Seasons Hotel Houston, 1300 Lamar Street, Houston, Texas 77010, on Thursday, May 24, 2007, at 9:00 a.m. (local/Central time). The proxies also may be voted at any adjournments or postponements of the Annual Meeting.

 

This proxy statement, the notice of Annual Meeting and the enclosed proxy card are being mailed to stockholders beginning on or about April 6, 2007. All properly executed written proxies that are delivered pursuant to this solicitation will be voted at the Annual Meeting. Each person who is an El Paso stockholder of record at the close of business on March 26, 2007, the record date, is entitled to vote at the Annual Meeting, or at adjournments or postponements of the Annual Meeting.

 

 

Stockholders holding shares of El Paso’s common stock, par value $3.00 per share, as of the close of business on the record date, March 26, 2007, and present in person or represented by a properly executed proxy are entitled to vote at the Annual Meeting, or any adjournments or postponements of the Annual Meeting. You have one vote for each share of common stock held as of the record date, which may be voted on each proposal presented at the Annual Meeting.

 

 

The record date for the Annual Meeting is March 26, 2007. The record date was established by the Board of Directors as required by our By-laws and Delaware law. Owners of record of El Paso’s common stock at the close of business on the record date are entitled to:

 

A. Receive notice of the Annual Meeting; and

 

B. Vote at the Annual Meeting, and any adjournments or postponements of the Annual Meeting.

 

 

There were 699,827,774 shares of common stock outstanding and entitled to vote at the Annual Meeting at the close of business on the record date. Common stock is the only class of stock entitled to vote.

 

 

You can vote in person at the Annual Meeting or by proxy. For shares that you hold directly as a registered shareholder, you have three ways to vote by proxy:

 

A. Connect to the Internet at www.investorvote.com;

 

B. Call 1-800-652-VOTE (8683); or

 

C. Complete the proxy card and mail it back to us.

 

Complete instructions for voting your shares can be found on your proxy card.

 

If you change your mind on any issue, you may revoke your proxy at any time before the close of voting at the Annual Meeting.

 

There are four ways to revoke your proxy:

 

A. Connect to the Internet at www.investorvote.com;

 

B. Call 1-800-652-VOTE (8683);

 

 

 

 

If your shares of common stock are held in the name of your broker, a bank, or other nominee, only your broker, bank or other nominee may execute a proxy and vote your shares. Please sign, date and promptly return the instruction card you received from your broker, bank or other nominee, in accordance with the instructions on the card. You may vote by the Internet or telephone if your bank or broker makes those methods available, in which case you can follow the instructions on the card. If you wish to vote your “street name” shares directly, you will need to obtain a document known as a “legal proxy” from your broker, bank or other nominee. Please contact your bank, broker or other nominee if you wish to do so.

 

 

You should specify your choice for each proposal on the proxy card. Shares represented by proxies will be voted in accordance with the instructions given by the stockholders. If no instructions are given, proxy cards that are signed and returned will be voted “FOR” the election of all El Paso director nominees, “FOR” the proposal to ratify the appointment of Ernst & Young LLP and “AGAINST” any stockholder proposal.

 

 

The matters described in the notice of Annual Meeting are the only matters we know of which will be voted on at the Annual Meeting. If other matters are properly presented at the Annual Meeting, the proxy holders, Douglas L. Foshee, El Paso’s President and Chief Executive Officer, and Robert W. Baker, El Paso’s Executive Vice President and General Counsel, will vote your shares at their discretion.

 

 

A representative of Computershare Trust Company, N.A., an independent tabulator appointed by the Board of Directors, will count the votes and act as the Inspector of Election. The Inspector of Election shall have the authority to receive, inspect, electronically tally and determine the validity of the proxies received.

 

 

A “quorum” is a majority of the aggregate voting power of the outstanding shares of common stock and is required to hold the Annual Meeting. A quorum is determined by counting shares of common stock present in person at the Annual Meeting or represented by proxy. If you submit a properly executed proxy, you will be considered part of the quorum even if you abstain from voting. Shares that brokers do not have the authority to vote in the absence of timely instructions from the beneficial owners (“broker non-votes”) are treated as present for the purposes of determining a quorum.

 

 

Admission to the Annual Meeting is limited to stockholders of El Paso, persons holding validly executed proxies from stockholders who held El Paso common stock on March 26, 2007, and invited guests of El Paso.

 

If you are a stockholder of El Paso, you must bring certain documents with you in order to be admitted to the Annual Meeting. The purpose of this requirement is to help us verify that you are actually a stockholder of El Paso. Please read the following rules carefully because they specify the documents that you must bring with you to the Annual Meeting in order to be admitted. The items that you must bring with you differ depending upon whether you are a record holder or hold your stock in “street name”.

 

Proof of ownership of El Paso stock must be shown at the door. Failure to provide adequate proof that you were a stockholder on the record date may prevent you from being admitted to the Annual Meeting.

 

If you were a record holder of El Paso common stock on March 26, 2007, then you must bring a valid government-issued personal identification (such as a driver’s license or passport).

 

If a broker, bank or other nominee was the record holder of your shares of El Paso common stock on March 26, 2007, then you must bring:

 

 

Examples of proof of ownership include the following: (1) a letter from your bank or broker stating that you owned El Paso common stock on March 26, 2007; (2) a brokerage account statement indicating that you owned El Paso common stock on March 26, 2007; or (3) the voting instruction card provided by your broker indicating that you owned El Paso common stock on March 26, 2007.

 

If you are a proxy holder for a stockholder of El Paso, then you must bring:

 

 

You may not use cameras, recording equipment or other electronic devices during the Annual Meeting.

 

 

 

 

Votes are counted in accordance with our By-laws and Delaware law. A broker non-vote with respect to the election of directors or any proposal will not be counted in determining the election of directors or whether the proposal is approved. A broker non-vote or abstention will be counted towards a quorum. If a stockholder returns an executed proxy card but does not indicate how his or her shares are to be voted, the shares covered by such proxy card will be included in determining if there is a quorum and will also be counted as votes “FOR” the election of all of El Paso’s director nominees, “FOR” the proposal to ratify the appointment of Ernst & Young LLP and “AGAINST” any stockholder proposal. Shares will not be voted at the Annual Meeting if a properly executed proxy card covering those shares has not been returned and the holder does not cast votes in respect of those shares in person at the Annual Meeting.

 

 

No. However, we strongly urge you to vote. You may abstain from voting or vote “FOR” or “AGAINST” all or some of El Paso’s director nominees. You may abstain from voting or vote “FOR” or “AGAINST” the other proposals.

 

 

A complete list of stockholders entitled to vote at the Annual Meeting will be available to view during the Annual Meeting. You may access this list at El Paso’s offices at 1001 Louisiana Street, Houston, Texas 77002 during ordinary business hours for a period of ten days before the Annual Meeting.

 

 

We do. In addition to sending you these materials, some of our directors and officers as well as management and non-management employees may contact you by telephone, mail, e-mail or in person. You may also be solicited by means of press releases issued by El Paso, postings on our website, www.elpaso.com, and advertisements in periodicals. None of our officers or employees will receive any extra compensation for soliciting you. We have retained Georgeson Shareholder Communications, Inc. to assist us in soliciting your proxy for an estimated fee of $16,500, plus reasonable out-of-pocket expenses. Georgeson will ask brokers and other custodians and nominees whether other persons are beneficial owners of El Paso common stock. If so, we will supply them with additional copies of the proxy materials for distribution to the beneficial owners. We will also reimburse banks, nominees, fiduciaries, brokers and other custodians for their costs of sending the proxy materials to the beneficial owners of El Paso common stock.

 

 

If you want to submit a proposal for possible inclusion in next year’s proxy statement, you must submit it in writing to the Corporate Secretary, El Paso Corporation, P.O. Box 2511, Houston, Texas 77252-2511, telephone (713) 420-6195 and facsimile (713) 420-4099. El Paso must receive your proposal on or before December 8, 2007. El Paso will consider only proposals meeting the requirements of the applicable rules of the Securities and Exchange Commission (“SEC”).

 

Additionally, under our By-law provisions, for a stockholder to bring any matter before the 2008 Annual Meeting that is not included in the 2008 Proxy Statement, the stockholder’s written notice must be received not less than 90 days nor more than 120 days prior to the first anniversary of the 2007 Annual Meeting. Under this criteria, stockholders must provide us with a notice of a matter to be brought before the 2008 Annual Meeting between January 25, 2008 and February 24, 2008.

 

If the 2008 Annual Meeting is held more than 30 days before or 60 days after May 24, 2008, for a stockholder seeking to bring any matter before the 2008 Annual Meeting, the stockholder’s written notice must be received not less than 90 days nor more than 120 days before the date of the 2008 Annual Meeting or by the tenth day after we publicly announce the date of the 2008 Annual Meeting, if that would result in a later deadline.

 

 

If you want to stop receiving paper copies of the proxy materials, you must consent to electronic delivery. You can give consent by going to www.econsent.com/ep and following the instructions. Those of you that hold shares with a broker under a street name can give consent by going to www.ICSDelivery.com/ep and following the instructions.

 

 

A copy of El Paso’s 2006 Annual Report on Form 10-K is being mailed with this proxy statement to each stockholder entitled to vote at the Annual Meeting. If you do not receive a copy of the Annual Report on Form 10-K, you may obtain one free of charge by writing or calling Mr. David L. Siddall, Corporate Secretary, El Paso Corporation, P.O. Box 2511, Houston, Texas 77252-2511, telephone (713) 420-6195 and facsimile (713) 420-4099.

 

We are committed to maintaining the highest standards of corporate governance. We believe that strong corporate governance is critical to achieving our performance goals, and to maintaining the trust and confidence of investors, employees, suppliers, business partners and other stakeholders. A summary of our Corporate Governance Guidelines is set forth below.

 

Corporate Governance Guidelines.  Our Corporate Governance Guidelines, together with the Board committee charters, provide the framework for the effective governance of El Paso. The Board of Directors has adopted our Corporate Governance Guidelines to address matters including qualifications for directors, standards for independence of directors, election of directors, responsibilities of directors, mandatory retirement for directors, limitation on serving on other boards/committees, the composition and responsibility of committees, conduct and minimum frequency of Board and committee meetings, management succession, director access to management and outside advisors, director compensation, stock ownership requirements, director orientation and continuing education, annual self-evaluation of the Board, its committees and directors and our policy on poison pills. The Board of Directors recognizes that effective corporate governance is an on-going process, and the Board, either directly or through the Governance & Nominating Committee, will review and revise as necessary our Corporate Governance Guidelines annually, or more frequently if deemed necessary. Our Corporate Governance Guidelines may be found on our website at www.elpaso.com.

 

Independence of Board Members.  Our Corporate Governance Guidelines require that a majority of our Board of Directors meet the “independence” requirements of the New York Stock Exchange (“NYSE”) listing requirements and at least 75 percent of our Board of Directors must not be from current management. The Board of Directors observes and complies with all criteria for independence established by the NYSE listing requirements and other governing laws and regulations. The Board of Directors makes its determination of the independence of its members based on categorical standards it has adopted to assist the Board in its assessment of the independence of each director. The categorical standards adopted by the Board of Directors are consistent with the NYSE listing requirements and provide that a director must not have a direct or indirect material relationship with us or our management other than as a director. The standards specify the criteria by which the independence of our directors will be determined, including guidelines for directors and their immediate family members with respect to past employment, compensation received from us, affiliations with our internal or external auditors and companies or professional organizations we do business with, interlocking directorate relationships, and service as advisory members or directors of charitable organizations. For purposes of the standards, the Board of Directors has adopted the definition of “immediate family member” as set forth in the NYSE listing requirements, which includes spouses, parents, children, siblings and in-laws of the director and anyone else (other than domestic employees) who shares the director’s home. The Board of Directors, based upon a recommendation of the Governance & Nominating Committee, reviews annually all relationships of our directors to determine whether each director meets the standards of independence adopted by the Board. If any relationship exists that is not covered by the standards adopted by the Board, the Board will determine whether such relationship is material, and whether the director should be determined to be independent. The Board may determine that a director is independent even if the director does not meet each of these standards of independence as long as the Board determines that the director is

independent of management and free from any relationship that, in the judgment of the Board, would interfere with the independent judgment of the director. The standards of independence adopted by the Board are contained in our Corporate Governance Guidelines, which may be found on our website at www.elpaso.com.

 

The Board has affirmatively determined that Juan Carlos Braniff, James L. Dunlap, Robert W. Goldman, Anthony W. Hall, Jr., Thomas R. Hix, William H. Joyce, Ronald L. Kuehn, Jr., Ferrell P. McClean, Steven J. Shapiro, J. Michael Talbert, Robert F. Vagt, John L. Whitmire and Joe B. Wyatt meet the standards of independence adopted by the Board and are “independent”. Among other things, the Board has reviewed all of the payments received by Mr. Kuehn during 2006 (as reflected in the Director Compensation table on page 61 of this proxy statement) and has determined that none of these payments affects his independence on the Board because the payments received by him related to either (i) his service on the Board, (ii) taxable compensation received by Mr. Kuehn in 2006 from the exercise of stock options that were awarded to him and related to his service in 2003 as interim CEO, or (iii) pension and other benefits Mr. Kuehn is entitled to pursuant to his termination and consulting agreement that was entered into as part of the merger with Sonat Inc. in 1999 and which are not dependent upon his continued service on the Board. Thus, 13 of the 14 nominees for the El Paso Board (93 percent) are independent. Further, our Audit, Compensation, Governance & Nominating, Finance and Health, Safety & Environmental Committees are composed entirely of independent directors.

 

Audit Committee Financial Expert.  The Audit Committee plays an important role in promoting effective accounting, financial reporting, risk management and compliance procedures and controls. It is imperative that members of the Audit Committee have requisite financial literacy and expertise. All members of our Audit Committee meet the financial literacy standard required by the NYSE rules and at least one member qualifies as having accounting or related financial management expertise under the NYSE rules. In addition, as required by the Sarbanes-Oxley Act of 2002, the SEC requires that we disclose whether or not our audit committee has an “audit committee financial expert” as a member. An “audit committee financial expert” is defined as a person who, based on his or her experience, satisfies all of the following attributes:

 

 

The Board of Directors has affirmatively determined that Messrs. Hix (chairman of our Audit Committee), Goldman and Shapiro each satisfy the definition of “audit committee financial expert,” and has designated each of them as an “audit committee financial expert.”

 

Non-Executive Chairman.  Mr. Kuehn currently serves as the Chairman of our Board of Directors in a non-executive capacity. As the Chairman of the Board of Directors, Mr. Kuehn has a number of responsibilities, which include setting board meeting agendas in collaboration with the Chief Executive Officer (“CEO”), presiding at Board meetings, executive sessions and the annual stockholders’ meeting, assigning tasks to the appropriate committees, and ensuring that information flows openly between management and the Board. Stockholders may communicate directly with Mr. Kuehn by writing to Chairman of the Board, c/o Corporate Secretary, El Paso Corporation, P.O. Box 2511, Houston, Texas 77252-2511, facsimile (713) 420-4099.

 

Executive Sessions of the Board of Directors.  The Board of Directors holds regular executive sessions in which non-management Board members meet without any members of management present. Currently, Mr. Kuehn presides over the executive sessions of the Board. During 2006, non-management members of the Board met in executive session four times and several Committees of the Board met in executive session without members of

management present. The purpose of these executive sessions is to promote open and candid discussion among the non-management directors.

 

Committees of the Board of Directors.  The Board of Directors has adopted charters for the Audit Committee, the Compensation Committee and the Governance & Nominating Committee that comply with the corporate governance rules adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002 and the NYSE listing standards. The Audit Committee, the Compensation Committee, the Governance & Nominating Committee, the Finance Committee and the Health, Safety & Environmental Committee charters may be found on our website at www.elpaso.com.

 

Board/Committee/Director Evaluations.  Each year the Board of Directors and each Board committee participates in a self-assessment or evaluation of the effectiveness of the Board and its committees. At least once every three years, the Board conducts an evaluation of each individual director. During 2006, each director completed a written self-assessment of the Board and its committees, each director was asked to evaluate each of the other directors and members of senior management were asked to complete a written assessment of the overall effectiveness of the Board. The results of these assessments were compiled and presented to the Board, the respective Committees and each director, as appropriate, for discussion and, if necessary, action.

 

Management Succession.  The Board periodically reviews with the CEO the management succession and development plan which includes the succession of the CEO in the event of an emergency or retirement. The CEO is expected to provide a recommendation for his or her successor to the Board.

 

Director Education.  We encourage and facilitate director participation in seminars and conferences and other opportunities for continuing director education. All of our directors are required to attend, at least once every two years, an educational program designed by a nationally recognized board educational organization. In addition, each of our directors is a member of the National Association of Corporate Directors.

 

Mandatory Retirement.  Our directors are subject to a mandatory retirement age and cannot stand for reelection in the calendar year following their 72nd birthday.

 

Stock Ownership Requirements.  Our Board of Directors is committed to director and senior management stock ownership. Directors are required to own shares of our common stock with a value of five times the annual cash retainer paid to non-employee directors within a five-year time period following initial election to the Board. The Board also requires that our CEO own shares of our common stock with a value of at least five times his or her annual base salary, and that other executive officers own our common stock with a value of at least two times their base salary within a five-year time period following initial election to that position. Each share of common stock owned by a director or executive officer is deemed to have a value equal to the greater of (i) the trading price of our common stock as of the date the applicable share was acquired by the director or executive officer or (ii) the trading price of the share of common stock as of the measurement date. A director’s or executive officer’s shares in our stock based plans, such as shares of restricted stock, deferred shares, shares in our retirement savings plan or other similar plans, are counted as shares of common stock owned by the director or executive officer. Additionally, a director or executive officer is deemed to own shares of common stock with a value equal to the in-the-money value, if any, of any vested or unvested stock option, SAR, or similar equity-linked grant that is held by the director or executive officer on any given measurement date.

 

Voting Standard to Elect Directors.  Our By-laws provide for the election of directors by the majority vote of stockholders in uncontested elections. This means the number of votes cast for a nominee’s election must exceed the number of votes cast against such nominee’s election in order for him or her to be elected to the Board of Directors. Our By-laws provide for the election of directors by the plurality of votes cast in contested elections. This means that in elections where the number of nominees exceeds the number of directors to be elected, the nominees who receive the highest number of votes will be elected to the Board of Directors. In addition, our Corporate Governance Guidelines provide that the Board will nominate for election or appoint to Board vacancies only candidates who irrevocably agree to resign if they fail to receive the required majority vote in uncontested elections. In the event a director fails to receive a majority of votes cast and the Board accepts the resignation tendered, then that director would cease to be a director of El Paso. In accordance with our Corporate Governance Guidelines, our By-laws require as a part of a stockholder’s written notice in connection with the nomination of a director, a statement

whether the nominated individual intends to tender an irrevocable resignation effective upon such person’s failure to receive the required vote for reelection at the next meeting at which such person would face reelection.

 

Policy on Poison Pill Plans.  Our Corporate Governance Guidelines include a policy on poison pills, or stockholder rights plans. We do not currently have in place a stockholders rights plan, and the Board currently has no plans to adopt such a plan. However, if the Board is presented with a set of facts and circumstances which leads it to conclude that adopting a stockholder rights plan would be in the best interests of stockholders, the Board will seek prior stockholder approval unless the Board, in exercising its fiduciary responsibilities under the circumstances, determines by vote of a majority of the independent directors that such submission would not be in the best interests of our stockholders in the circumstances. If the Board were ever to adopt a stockholder rights plan without prior stockholder approval, the Board would present such plan to the stockholders for ratification within one year or cause it to expire within one year, without being renewed or replaced. Further, if the Board adopts a stockholder rights plan and our stockholders do not approve such plan, it will terminate.

 

Code of Ethics.  We have adopted a code of ethics, referred to as our “Code of Business Conduct,” that applies to all of our directors and employees, including our CEO, Chief Financial Officer (“CFO”) and senior financial and accounting officers. Our Code of Business Conduct is a value-based code that is built on our five core values: stewardship, integrity, safety, accountability and excellence. In addition to other matters, our Code of Business Conduct establishes policies to deter wrongdoing and to promote honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest, compliance with applicable laws, rules and regulations, full, fair, accurate, timely and understandable disclosure in public communications and prompt internal reporting of violations of our Code of Business Conduct. We also have an Ethics & Compliance Office and Ethics & Compliance Committee, which is composed of members of senior management that administer our ethics and compliance program and reports to the Audit Committee of our Board of Directors. A copy of our Code of Business Conduct is available on our website at www.elpaso.com. We will post on our internet website all waivers to or amendments of our Code of Business Conduct, which are required to be disclosed by applicable law and the NYSE listing standards. Currently, we do not have nor do we anticipate any waivers of or amendments to our Code of Business Conduct. We believe our Code of Business Conduct exceeds the requirements set forth in the applicable SEC regulations and the corporate governance rules of the NYSE.

 

Transactions with Related Persons.  We recognize that related-person transactions can present potential or actual conflicts of interest and it is our preference that related-person transactions are avoided as a general matter. Nevertheless, we recognize that there are situations, including certain transactions negotiated on an arm’s length basis, where related-person transactions may be in, or may not be inconsistent with, the best interests of us and our stockholders. Therefore, we have procedures for the approval, ratification and review of on-going related-person transactions. The Governance & Nominating Committee of our Board of Directors is charged with the responsibility to review, ratify or approve, as necessary, any related-person transactions prior to the transaction being entered into, or ratify any related person-transactions that have not been previously approved, in which a director, five percent owner, executive officer or immediate family member of any such person has a material interest, and which transaction is in an amount equal to or in excess of $120,000, either individually or in the aggregate of several transactions during any calendar year. Based on our review of on-going related-person transactions, we have not entered into and do not currently propose to enter into any transactions with related persons required to be disclosed under the rules and regulations of the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All related-person transactions that are required to be disclosed in company filings with the SEC will be disclosed in accordance with the Securities Act of 1933 and the Exchange Act.

 

Web Access.  We provide access through our website to current information relating to corporate governance, including a copy of each of the Board’s standing committee charters, our Corporate Governance Guidelines, our Code of Business Conduct, our Restated Certificate of Incorporation and By-laws, biographical information concerning each director, and other matters regarding our corporate governance principles. We also provide access through our website to all filings submitted by El Paso to the SEC. Our website is www.elpaso.com, and access to this information is free of any charge to the user (except for any internet provider or telephone charges). Copies will also be provided to any stockholder upon request. Information contained on our website is not part of this proxy statement.

 

Process for Shareholder Communication with the Board.  Our Board has established a process for interested parties to communicate with the Board. Such communications should be in writing, addressed to the Board or an individual director, c/o Mr. David L. Siddall, Corporate Secretary, El Paso Corporation, P.O. Box 2511, Houston, Texas 77252-2511. The Corporate Secretary will forward all communications to the addressee.

 

Director Attendance at Annual Meeting.  The Board encourages all director nominees standing for election to attend the Annual Meeting in accordance with our Corporate Governance Guidelines. All incumbent directors who were elected at our 2006 Annual Meeting attended our 2006 Annual Meeting of Stockholders, with the exception of Mr. Braniff. Mr. Braniff was not able to attend due to a family emergency.

 

The Board of Directors held 11 meetings during 2006.  Each director who served on the El Paso Board of Directors during 2006 attended at least 75 percent of the meetings of the Board of Directors and of each committee on which he or she served. The Board of Directors has established five standing committees to assist the Board in carrying out its duties: the Audit Committee, the Compensation Committee, the Governance & Nominating Committee, the Finance Committee and the Health, Safety & Environmental Committee. The current members of the five standing committees are as follows:

 

 

Audit Committee

 

The Audit Committee held 13 meetings during 2006. The Audit Committee currently consists of five non-employee directors, each of whom the Board has determined is “independent” as such term is defined in Section 10A of the Exchange Act, the SEC rules thereunder, the NYSE listing standards and our Corporate Governance Guidelines. The Board of Directors has determined that each member of the Audit Committee possesses the necessary level of financial literacy required to enable him or her to serve effectively as an Audit Committee member. No Audit Committee member serves on more than three audit committees of public companies, including our Audit Committee. We maintain an Internal Audit Department to provide management and the Audit Committee with ongoing assessments of our risk management processes and system of internal controls. In addition, during 2006, we formed a Financial Controls Group to manage our internal control over financial reporting compliance activities. Prior to 2006, these activities were managed by the Internal Audit Department.

 

The Audit Committee’s primary duties include:

 

 

 

 

 

Our independent auditor reports directly to the Audit Committee. In addition, the Audit Committee provides an open avenue of communication between the internal auditors, the independent auditor and the Board. Interested parties may contact the Audit Committee members by following the process outlined in the Corporate Governance section of this proxy statement.

 

The Audit Committee Charter can be found on our website at www.elpaso.com.

 

Policy for Approval of Audit and Non-Audit Fees

 

During 2006, the Audit Committee approved all the types of audit and permitted non-audit services which our independent auditor was to perform during the year and the cap on fees for each of these categories, as required under applicable law. The Audit Committee’s current practice is to consider for pre-approval annually all categories of audit and permitted non-audit services proposed to be provided by our independent auditor for a fiscal year. Pre-approval of tax services requires that the independent auditor provide the Audit Committee with written documentation of the scope and fee structure of the proposed tax services and discuss with the Audit Committee the potential effects, if any, of providing such services on the independent auditor’s independence. The Audit Committee will also consider for pre-approval annually the maximum amount of fees and the manner in which the fees are determined for each type of pre-approved audit and non-audit services proposed to be provided by our independent auditor for the fiscal year. The Audit Committee must separately pre-approve any service that is not included in the approved list of services or any proposed services exceeding pre-approved cost levels. The Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee for services that need to be addressed between Audit Committee meetings. The Audit Committee is then informed of these pre-approval decisions, if any, at the next meeting of the Audit Committee. See “Principal Accountant Fees and Services” beginning on page 68 of this proxy statement for the aggregate fees paid to Ernst & Young LLP for the year ended December 31, 2006, and PricewaterhouseCoopers LLP for the year ended December 31, 2005.

 

Compensation Committee

 

The Compensation Committee held seven meetings during 2006. The Compensation Committee currently consists of six non-employee directors, each of whom the Board has determined is “independent” as such term is defined in (a) the NYSE listing standards, (b) the non-employee director standards of Rule 16b-3 of the Exchange Act, (c) the outside director requirements of Section 162(m) of the Internal Revenue Code (the “Code”) and (d) our Corporate Governance Guidelines. The Compensation Committee’s charter reflects the Committee’s various responsibilities, and the Compensation Committee periodically reviews the charter and makes any necessary revisions to the charter.

 

The Compensation Committee’s primary functions are to:

 

 

See the Compensation Discussion and Analysis beginning on page 28 of this proxy statement for a discussion of (i) the Compensation Committee’s annual process for determining total compensation for executive officers, (ii) the Compensation Committee’s engagement of an independent executive compensation consultant and (iii) the

role of executive management in determining executive compensation. The Compensation Committee Charter can be found on our website at www.elpaso.com.

 

Compensation Committee Interlocks and Insider Participation

 

During 2006, the following independent directors served on the Compensation Committee: Messrs. Dunlap, Joyce, Shapiro, Talbert and Wyatt and Ms. McClean. Ms. McClean has served as a member of the Compensation Committee since May 2006 and Mr. Shapiro has served as a member since December 2006. The Compensation Committee has neither interlocks nor insider participation.

 

Governance & Nominating Committee

 

The Governance & Nominating Committee met five times during 2006. The Governance & Nominating Committee currently consists of four non-employee directors, each of whom the Board has determined is “independent” as such term is defined in the NYSE listing standards and our Corporate Governance Guidelines. The Board has delegated to the Governance & Nominating Committee its oversight responsibilities relating to corporate governance and the establishment of criteria for Board selection (including an initial determination regarding director independence).

 

The Governance & Nominating Committee’s primary responsibilities are to:

 

 

The Governance & Nominating Committee Charter can be found on our website at www.elpaso.com.

 

Director Nomination Process

 

The Governance & Nominating Committee will review any nominations from stockholders, other Board members, third party search firms, executives and other such persons. The minimum qualifications we believe our

directors must meet are the education, experience and skills necessary to assist and provide oversight to our management in the operation of our businesses. Among other matters, the Board considers education; business, governmental and civic experience; leadership; diversity; communication, interpersonal and other required skills; independence; and other matters relevant to the Board’s objectives. We have a comprehensive process in place to identify and evaluate candidates to be nominated for director. The Governance & Nominating Committee identifies the needs of the Board by asking each director to identify particular skills that will strengthen the Board, and that are in conformity with the goals identified in our Corporate Governance Guidelines. A third party search firm is then retained to help identify, assess qualifications and screen specific candidates. The Governance & Nominating Committee reviews the qualifications of the candidates presented and interviews the most qualified. The Governance & Nominating Committee recommends potential nominees to the full Board, which interviews the candidates and then makes nominations for election at the Annual Meeting. All of the nominees for director other than Mr. Shapiro were elected by our stockholders last year. Mr. Shapiro was reviewed as a potential director nominee by our third party search firm, recommended for appointment by the Governance & Nominating Committee and appointed by the Board during 2006. Each director nominee who appears on the ballot has been recommended by the Governance & Nominating Committee to the full Board.

 

Stockholders seeking to nominate persons for election as directors at the 2008 Annual Meeting must submit in writing a timely notice complying with our By-laws to Mr. David L. Siddall, Corporate Secretary, El Paso Corporation, P.O. Box 2511, Houston, Texas 77252-2511, telephone (713) 420-6195 and facsimile (713) 420-4099. To be timely for a stockholder seeking to bring any matter before the 2008 Annual Meeting, the stockholder’s written notice must be received not less than 90 days nor more than 120 days prior to the first anniversary of the 2007 Annual Meeting. Under these criteria, stockholders must provide us with notice of nominations sought to be made at the 2008 Annual Meeting between January 25, 2008 and February 24, 2008.

 

If the 2008 Annual Meeting is held more than 30 days before or 60 days after May 24, 2008, for a stockholder seeking to bring any matter before the 2008 Annual Meeting, the stockholder’s written notice must be received not less than 90 days nor more than 120 days before the date of the 2008 Annual Meeting or by the tenth day after we publicly announce the date of the 2008 Annual Meeting, if that would result in a later deadline.

 

Finance Committee

 

The Finance Committee met eight times during 2006. The Finance Committee currently consists of five non-employee directors, each of whom the Board has determined is “independent” as such term is defined in the NYSE listing standards and in accordance with our Corporate Governance Guidelines. The Finance Committee assists the Board in fulfilling its oversight responsibilities by reviewing and recommending appropriate action with respect to our capital structure, source of funds, payment of dividends, liquidity and financial position.

 

The Finance Committee’s primary functions are to:

 

 

The Finance Committee Charter can be found on our website at www.elpaso.com.

 

Health, Safety & Environmental Committee

 

The Health, Safety & Environmental Committee met four times during 2006. The Health, Safety & Environmental Committee currently consists of four non-employee directors, each of whom the Board has

determined is “independent” as such term is defined in the NYSE listing standards and our Corporate Governance Guidelines. The Health, Safety & Environmental Committee assists the Board in fulfilling its oversight responsibilities with respect to the Board’s and our continuing commitment to improving the environment, ensuring the safety of our employees and ensuring that our businesses and facilities are operated and maintained in a safe and environmentally sound manner.

 

The Health, Safety & Environmental Committee’s primary functions are to:

 

 

The Health, Safety & Environmental Committee Charter can be found on our website at www.elpaso.com.

 

The Board.  You will have the opportunity to elect our entire Board of Directors, consisting of 14 members, at the Annual Meeting. All of our incumbent directors are standing for reelection. Mr. Shapiro has been appointed to the Board since the last Annual Meeting and election of directors. All directors are elected annually and serve a one-year term or until his or her successor has been duly elected and shall qualify.

 

Nominations.  At the Annual Meeting, we will nominate the 14 persons named in this proxy statement as directors.

 

Our By-laws provide for the election of directors by the majority vote of stockholders in uncontested elections. This means the number of votes cast for a nominee’s election must exceed the number of votes cast against such nominee’s election in order for him or her to be elected to the Board of Directors. In addition, our Corporate Governance Guidelines provide that the Board will nominate for election or appoint to Board vacancies only candidates who irrevocably agree to resign if they fail to receive the required majority vote. In the event a director fails to receive a majority of votes cast and the Board accepts the resignation tendered, then that director would cease to be a director of El Paso. Each of the nominees named below has submitted an irrevocable letter of resignation that becomes effective in the event he or she does not receive a majority of votes cast for his or her election.

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES NAMED BELOW.

 

General Information about the Nominees for Election, as of March 26, 2007.  Each of the following nominees has agreed to be named in this proxy statement and to serve as a director if elected.

 

 

Mr. Braniff has served as the Managing Partner of Capital I Ltd. Partners and a Partner in Alpha Patrimonial S.A. de C.V. since August 2005. He was a business consultant from January 2004 to August 2005. Mr. Braniff served Grupo Financíero BBVA Bancomer as Vice Chairman from October 1999 to January 2004, as Deputy Chief Executive Officer of Retail Banking from September 1994 to October 1999 and as Executive Vice President of Capital Investments, Mortgage Banking and Tourism from December 1991 to September 1994.

 

 

Mr. Dunlap’s primary occupation has been as a business consultant since 1999. He served as Vice Chairman, President and Chief Operating Officer of Ocean Energy/United Meridian Corporation from 1996 to 1999, where he was responsible for exploration and production and the development of the international exploration business. For 33 years prior to that date, Mr. Dunlap served Texaco, Inc. in various positions, including Senior Vice President, President of Texaco USA, President and Chief Executive Officer of Texaco Canada Inc. and Vice Chairman of Texaco Ltd., London. Mr. Dunlap is currently a member of the board of directors of Massachusetts Mutual Life Insurance Company, a member of the Advisory Council of the Nantucket Conservation Foundation, a trustee of the Culver Educational Foundation, a member of the Corporation of the Woods Hole Oceanographic Institution and a member of the Council of Overseers for the Jesse H. Jones Graduate School of Management at Rice University.

 

Mr. Foshee has been President, Chief Executive Officer and a director of El Paso since September 2003. He became Executive Vice President and Chief Operating Officer of Halliburton Company in 2003, having joined that company in 2001 as Executive Vice President and Chief Financial Officer. Several subsidiaries of Halliburton, including DII Industries and Kellogg Brown & Root, commenced prepackaged Chapter 11 proceedings to discharge current and future asbestos and silica personal injury claims in December 2003 and an order confirming a plan of reorganization became final effective December 31, 2004. Under the plan of reorganization, all current and future asbestos and silica personal injury claims were channeled into trusts established for the benefit of asbestos and silica claimants. Prior to assuming his position at Halliburton, Mr. Foshee was President, Chief Executive Officer and Chairman of the Board of Nuevo Energy Company from 1997 to 2001. From 1993 to 1997, Mr. Foshee served Torch Energy Advisors Inc. in various capacities, including Chief Executive Officer and Chief Operating Officer. Mr. Foshee serves on the Federal Reserve Bank of Dallas, Houston Branch, as a director. Mr. Foshee serves on the Board of Trustees of Rice University, where he chairs the Building and Grounds Committee and serves as a member of the Council of Overseers for the Jesse H. Jones Graduate School of Management at Rice University. He is a member of the Greater Houston Partnership Board and Executive Committee and serves as Chair of the Environment Advisory Committee. In addition, Mr. Foshee serves on the boards of Central Houston, Inc., Children’s Museum of Houston, Goodwill Industries, Small Steps Nurturing Center and the Texas Business Hall of Fame Foundation.

 

 

Mr. Goldman’s primary occupation has been as a financial consultant since October 2002. He served as Senior Vice President, Finance and Chief Financial Officer of Conoco, Inc. from 1998 to 2002 and Vice President, Finance from 1991 to 1998. For more than five years prior to that date, he held various executive positions with Conoco, Inc. and E.I. Du Pont de Nemours & Co., Inc. Mr. Goldman is the elected Vice President, Finance of the World Petroleum Council, and a member of the Financial Executives Institute and the Outside Advisory Council of Global Infrastructure Partners. He serves on the board of directors of McDermott International, Inc., Parker Drilling Company and Tesoro Corporation, as well as the board of directors of the Alley Theatre in Houston, Texas.

 

 

Mr. Hall has been Chief Administrative Officer of the City of Houston since January 2004. He served as the City Attorney for the City of Houston from March 1998 to January 2004. He served as a director of The Coastal Corporation from August 1999 to January 2001. Prior to March 1998, Mr. Hall was a partner in the Houston law firm of Jackson Walker, LLP. He is a director of Houston Endowment Inc. and Chairman of the Boulé Foundation.

 

Mr. Hix has been a business consultant since January 2003. He served as Senior Vice President of Finance and Chief Financial Officer of Cooper Cameron Corporation from January 1995 to January 2003. From September 1993 to April 1995, Mr. Hix served as Senior Vice President of Finance, Treasurer and Chief Financial Officer of The Western Company of North America. Mr. Hix is a member of the board of directors of The Offshore Drilling Company (TODCO).

 

 

Dr. Joyce has been Chairman of the Board and Chief Executive Officer of Nalco Company since November 2003. From May 2001 to October 2003, he served as Chairman and Chief Executive Officer of Hercules Inc. From February 2001 to May 2001, Dr. Joyce served as Vice Chairman of the Board of Dow Chemical Corporation following its merger with Union Carbide Corporation. Dr. Joyce was named Chief Executive Officer of Union Carbide Corporation in 1995 and Chairman of the Board in 1996. Prior to 1995, Dr. Joyce served in various positions with Union Carbide. Dr. Joyce is a director of CVS Corporation.

 

 

Mr. Kuehn is currently the Chairman of the El Paso Board of Directors. Mr. Kuehn was Chairman of the Board and Interim Chief Executive Officer of El Paso from March 2003 to September 2003. From September 2002 to March 2003, Mr. Kuehn was the Lead Director of El Paso. From January 2001 to March 2003, he was a business consultant. Mr. Kuehn served as non-executive Chairman of the Board of El Paso from October 25, 1999 to December 31, 2000. Mr. Kuehn served as President and Chief Executive Officer of Sonat from June 1984 until his retirement on October 25, 1999. He was Chairman of the Board of Sonat Inc. from April 1986 until his retirement. He is a director of Regions Financial Corporation, Praxair, Inc. and The Dun & Bradstreet Corporation. Regions Financial Corporation has publicly announced that Mr. Kuehn reached the mandatory retirement age as in effect at Regions Financial Corporation and AmSouth Bancorporation prior to the merger of Regions Financial Corporation with AmSouth Bancorporation and he will not stand for reelection to the board of directors of Regions Financial Corporation at its 2007 annual meeting of stockholders to be held in April.

 

Ms. McClean has been a business consultant since 2002. Ms. McClean served as Managing Director and Senior Advisor of J.P. Morgan Chase & Co.’s energy/power investment banking group from 2000 to 2002. From 1991 until 2000, Ms. McClean served as Managing Director and headed the investment banking and global energy group at J.P. Morgan & Co. Prior to 1991, Ms. McClean held various positions with J.P. Morgan & Co. Ms. McClean served as a member of the board of directors of Unocal Corporation and is currently on the board of directors of GrafTech International Ltd. (formerly UCAR International, Inc.).

 

 

Mr. Shapiro has been a business consultant since 2006. From October 2000 to April 2006, he served as executive vice president and chief financial officer of Burlington Resources Inc. During his five-year tenure at Burlington Resources, Mr. Shapiro served as a member of the board of directors and the office of the chairman. Before that, he served as senior vice president, chief financial officer and director at Vastar Resources, Inc. and spent 16 years in various roles of increasing responsibility with Atlantic Richfield Company (ARCO). Mr. Shapiro recently served as chairman of the executive committee of the American Petroleum Institute’s general committee on finance and is a trustee of the Houston Museum of Natural Science. He is a member of the board of directors of Barrick Gold Corporation.

 

 

Mr. Talbert has been non-executive Chairman of the Board of Transocean Inc. since October 2002. He served as Chief Executive Officer of Transocean Inc. and its predecessor companies from August 1994 until October 2002, Chairman of the Board from August 1994 until September 1999, and as President from December 1999 until December 2001. Mr. Talbert served as Chairman of the Board of The Offshore Drilling Company (TODCO) from February 2004 to October 2005. He served as President and Chief Executive Officer of Lone Star Gas Company from 1990 to 1994. He served as President of Texas Oil & Gas Company from 1987 to 1990, and served in various positions at Shell Oil Company from 1970 to 1982. Mr. Talbert is a past Chairman of the National Ocean Industries Association and a member of the University of Akron’s College of Engineering Advancement Council.

 

 

 

Mr. Vagt has been President of Davidson College since 1997. He served as President and Chief Operating Officer of Seagull Energy Corporation from 1996 to 1997. From 1992 to 1996, Mr. Vagt served as President, Chairman and Chief Executive Officer of Global Natural Resources. He served as President and Chief Operating Officer of Adobe Resources Corporation from 1989 to 1992. Prior to 1989, Mr. Vagt served in various positions with Adobe Resources Corporation and its predecessor entities.

 

 

Mr. Whitmire has been Chairman of CONSOL Energy, Inc. since 1999. He served as Chairman and Chief Executive Officer of Union Texas Petroleum Holdings, Inc. from 1996 to 1998, and spent over 30 years serving Phillips Petroleum Company in various positions including Executive Vice President of Worldwide Exploration and Production from 1992 to 1996 and Vice President of North American Exploration and Production from 1988 to 1992. He also served as a member of the Phillips Petroleum Company Board of Directors from 1994 to 1996. Mr. Whitmire is a member of the board of directors of GlobalSantaFe Corporation.

 

 

Mr. Wyatt has been Chancellor Emeritus of Vanderbilt University since August 2000. For eighteen years prior to that date, he served as Chancellor, Chief Executive Officer and Trustee of Vanderbilt University. Prior to joining Vanderbilt University, Mr. Wyatt was a member of the faculty and Vice President Administration of Harvard University. From 1984 until October 1999, Mr. Wyatt was a director of Sonat Inc. Mr. Wyatt is a principal of the Washington Advisory Group and Chairman of the Universities Research Association. He is a director of Ingram Micro, Inc. and Hercules, Inc

 

The following table sets forth information as of March 19, 2007 regarding beneficial ownership of our common stock by each director, our CEO, our CFO and the other three most highly compensated executive officers in the last fiscal year, our directors and executive officers as a group and each person or entity known by us to own beneficially more than 5 percent of our outstanding shares of common stock. No family relationship exists between any of our directors or executive officers.

 

 

 

 

The following are individual executive profiles that summarize the compensation earned or paid in 2006 to our CEO, our CFO and our three other most highly compensated executive officers, whom we refer to as our “named executive officers.” The individual executive profiles provide biographical information and summarize the compensation disclosures that are provided in the Compensation Discussion and Analysis and executive compensation tables in this proxy statement. The compensation information presented in the following executive profiles is calculated in accordance with the SEC regulations and is derived from the more detailed compensation tables that begin on page 43 of this proxy statement. Please consult those tables and the accompanying footnotes for an explanation of how the compensation information is calculated.

Douglas L. Foshee: Individual Executive Profile

23

D. Mark Leland: Individual Executive Profile

24

Robert W. Baker: Individual Executive Profile

25

James C. Yardley: Individual Executive Profile

26

Brent J. Smolik: Individual Executive Profile

27

 

Objectives of our Executive Compensation Program

 

The objectives of the Compensation Committee are to ensure our executives’ compensation is competitive so that we can attract and retain executive personnel and performance-based so that the interests of our executive officers are aligned with both the short-term and long-term interests of our stockholders. The Compensation Committee accomplishes these objectives through the structure of the elements of our executive compensation program.

 

Compensation Committee’s Annual Process for Determining Total Compensation

 

On an annual basis the Compensation Committee is responsible for determining and approving the total compensation level of our CEO and other executive officers based on its evaluation of company performance and the executive officer’s individual performance relative to pre-established performance goals and objectives. At the beginning of each calendar year, the Committee approves financial and non-financial goals for El Paso and its business units. The Compensation Committee also establishes the annual base salaries and minimum, target, and maximum annual cash incentive bonus levels for each of the executive officers. After the financial and non-financial results are available for the year, the Compensation Committee determines the appropriate funding of the annual cash incentive pool for payment of annual incentive bonuses and the equity pool for grants of long-term incentive awards. Then the Compensation Committee takes into account the executives’ individual performances to determine the amount of each individual annual cash incentive bonus and the value of individual long-term incentive awards. The Compensation Committee also considers recommendations from our CEO regarding total compensation levels for those executives reporting directly to him. At the end of the calendar year, the Compensation Committee makes determinations with respect to any adjustments for the following year to individual base salaries and target levels for annual cash incentive bonuses.

 

Independent Executive Compensation Consultant

 

The Compensation Committee engages an independent executive compensation consulting firm to assist it in its review of our executive and director compensation programs to ensure they are competitive and consistent with the Compensation Committee’s stated objectives. The executive compensation consultant is retained by and is directly accountable to the Compensation Committee. Generally, the Compensation Committee approves all fees paid to its executive compensation consultant. Our Compensation and Benefits Groups in our Human Resources Department support the Compensation Committee in its work and in some cases act pursuant to delegated authority to fulfill various functions in administering our compensation and benefits plans. Members of management (including our CEO and Senior Vice President of Human Resources and Administration) act, as requested, as a liaison between the Compensation Committee and its executive compensation consultant.

 

In late 2005, the Compensation Committee engaged Mercer Human Resource Consulting (“Mercer”), a subsidiary of the Marsh & McLennan Companies (“Marsh”), as its executive compensation consultant to (i) develop materials on the general competitive landscape and trends in compensation, (ii) assess the market for outside board compensation and prepare an analysis of the components of our director compensation program, (iii) review our internal executive pay analysis, (iv) assist with ideas regarding our officer annual incentive bonus pool and equity programs, and (v) conduct an analysis regarding El Paso’s current peer group as well as identify new potential peer companies. Historically, Mercer has also been engaged by El Paso to provide benefits plan design and actuarial services and Mercer Investment Consulting, Inc. has been engaged by El Paso to provide investment consulting and performance analysis for our benefits plans. Mercer Human Resource Services has been engaged by El Paso to provide recordkeeping and benefits administration for our pension and health and group plans. Marsh has been engaged by El Paso to provide risk and insurance services. The Compensation Committee and El Paso determined that each of these relationships was separate and independent and would not impair Mercer’s ability to provide independent advice to the Compensation Committee.

 

In December 2006, Mercer informed the Compensation Committee that a key individual assigned to El Paso was leaving Mercer and would not be able to continue as the Compensation Committee’s executive compensation consultant. While the Compensation Committee was satisfied with the services that had been provided by Mercer, the Compensation Committee decided to retain its former executive compensation consultant, Deloitte Consulting (“Deloitte”). The Compensation Committee had previously replaced Deloitte because Deloitte was affiliated with one of the four largest independent registered public accounting firms responding to a request for proposal (“RFP”) process that our Audit Committee had conducted. See the Audit Committee Report on page 63 of this proxy statement for additional information about the RFP process. In January 2007, Deloitte was engaged by the Compensation Committee to provide advice on an ongoing basis with regard to the general competitive landscape and trends in compensation and executive and director compensation matters, including (i) competitive benchmarking, (ii) incentive plan design, (iii) performance metrics testing, (iv) peer group selection, (v) updates on trends in executive and director compensation, (vi) review of the Compensation Discussion and Analysis and related tables included in our proxy statements, and (vii) handling other matters requested by the Compensation Committee. Certain Deloitte affiliates are also engaged by El Paso to provide the following services: tax and tax-related services, process optimization consulting and technology consulting. The Compensation Committee and El Paso believe that each of these relationships is separate and independent and will not impair Deloitte’s ability to provide independent advice to the Compensation Committee.

 

Role of Executive Management in Determining Executive Compensation

 

As a management team, we engage in an interactive process with the Compensation Committee to determine executive compensation. Our role as management in determining executive compensation is to provide recommendations to the Compensation Committee. At the Compensation Committee’s request, we recommend appropriate financial and non-financial performance goals for El Paso and its business units and work with the executive compensation consultant to analyze competitive market data and to recommend levels for base salary, annual incentive awards and long-term incentive awards for all officers and employees. We also work with the Compensation Committee to establish the agenda and prepare meeting information for each Compensation Committee meeting. Our CEO participates in Compensation Committee meetings at the Compensation Committee’s request to provide his evaluation of the performance of and recommendations for the compensation levels of the senior executive officers that report directly to him. The Compensation Committee also has a process for soliciting from the CEO a candid and critical self-assessment of his own performance and compensation levels.

 

Elements of Executive Compensation

 

Total Compensation.  Our named executive officers’ total annual compensation includes three principal elements: base salary, annual cash incentive awards, and long-term incentive awards in the form of restricted stock and stock options. Based on the competitive practices in our industry, the Compensation Committee believes the elements of each named executive officer’s compensation are well-balanced between short-term cash and long-term equity compensation. A significant amount of the compensation paid to our executive officers is short-term cash compensation so that we remain competitive to attract and retain executive personnel and a significant amount is long-term equity compensation that is designed to be “at risk” to align our executive officers’ interests with those of our stockholders and to drive company performance.

 

 

 

During 2006, the Compensation Committee asked Mercer to evaluate the appropriateness of its current philosophy with respect to the types of long-term incentive awards in light of the current market practices for our industry. Based on the Compensation Committee’s review of this analysis, the Compensation Committee determined that for 2006 performance long-term incentive awards in the form of restricted stock and stock options continued to be appropriate to meet the primary objectives of our executive compensation program.

 

Stock Ownership Requirements.  El Paso is committed to stock ownership and the Compensation Committee believes awards of restricted stock and stock options remain an important long-term incentive for rewarding individual performance as well as closely aligning our executive officer’s interests with the interests of our stockholders. Our Corporate Governance Guidelines impose stock ownership requirements on our executive officers. These stock ownership requirements are designed to emphasize stock ownership by our executive officers

and to further link their interests with the interests of our stockholders. Our CEO is required to own shares of our common stock with a value of at least five times his annual base salary and the other named executive officers are required to own shares of our common stock with a value of at least two times their annual base salary within a five-year time period following initial election to that position. Each of the named executive officers’ ownership in our common stock exceeds the required ownership thresholds. See page 8 of this proxy statement for further information regarding the stock ownership requirements for our executive officers.

 

Retirement Benefits.  Each named executive officer participates in the following retirement benefit plans: a company-funded pension plan, a company-sponsored retirement savings plan and a non-qualified supplemental benefits plan. Our named executive officers participate in our Pension Plan and Retirement Savings Plan, which are provided to all eligible employees. The Retirement Savings Plan is a defined contribution plan which provides for immediate vesting of benefits for both participant and company contributions. The Pension Plan provides pension benefits under a cash balance formula that defines participant benefits in terms of a notational account balance based on quarterly interest credits and pay credits (determined by age and years of service). Participants are fully vested in their pension benefits upon the earliest of the completion of five years of service or attainment of age 65. The Internal Revenue Code places limitations on the amount of compensation that can be considered when calculating benefits under the Pension Plan and making contributions to the Retirement Savings Plan. These excess benefits are payable under a supplemental benefits plan in which our named executive officers participate. The Supplemental Benefits Plan and 2005 Supplemental Benefits Plan are described in more detail on pages 52 and 53 of this proxy statement. See page 51 of this proxy statement for the Pension Benefits table and further discussion regarding the actuarial present value of the named executive officers’ accumulated pension benefits under the Pension Plan and supplemental benefits plans.

 

Health and Welfare Benefits.  El Paso offers subsidized health and group benefits to all eligible employees. Each named executive officer may elect to receive the health and group benefits that are generally available to all employees subject to the payment of required premium payments. El Paso offers comprehensive cafeteria-style health and group benefits, which include medical, dental, vision, disability and life insurance coverage as well as dependent day-care and healthcare flexible spending accounts. Our Senior Executive Survivor Benefits Plan provides our named executive officers with survivor benefit coverage in lieu of coverage generally provided under our group life insurance plan. The amount of the executive officer’s survivor benefit, on an after-tax-basis, is two and one-half times the executive officer’s annual salary. See page 56 of this proxy statement for a description of our Senior Executive Survivor Benefits Plan.

 

Perquisites and Personal Benefits.  El Paso seeks to maintain equal standards of treatment between its officers and other El Paso employees. While El Paso does not provide personal perquisite and benefit allowances to officers, it does provide certain benefits which it considers to be business expenses that could be characterized as having a personal benefit. El Paso provides a separate parking space (with no incremental cost to El Paso) for Mr. Foshee. Our named executive officers may use season tickets purchased by El Paso to attend sporting events when the tickets are not otherwise being used for business reasons (with no incremental cost to El Paso). El Paso makes available for business use to its executive officers private aircraft that it has entered into lease agreements to use and there are limited instances when the named executive officers are permitted to use leased aircraft for personal travel or to bring personal guests as passengers on business-related flights. When the executive officer’s use of leased aircraft or a guest’s travel does not meet the Internal Revenue Service’s (“IRS”) standard for business use, the cost of that travel is imputed as income to the officer and a gross-up payment for taxes is provided. El Paso also pays for the costs of annual physicals for all of its executive officers, including the named executive officers. El Paso does not have any outstanding loans to executive officers, and there have not been loans of any kind made to executive officers since federal law prohibited this practice in 2002.

 

Factors Considered When Determining Total Compensation

 

Competitive Benchmark Survey Data.  In order to determine appropriate levels of total compensation for each of our executive officers, the Compensation Committee conducts an evaluation of competitive compensation trends with the help of its independent executive compensation consultant and the Compensation Group of our Human Resources Department. Our Compensation Group reviews and makes recommendations for the level of total compensation for each of our executive officers, including base salaries, annual cash incentive bonuses and

long-term incentive awards based on competitive benchmark data derived from widely recognized executive compensation surveys. The survey data represents the market of companies in which El Paso competes for executive talent and includes a representative sample of companies in El Paso’s peer group (as discussed below). The survey data is used primarily to ensure that the executive compensation program as a whole is competitive and generally within the median range of comparative compensation when El Paso and its business units achieve targeted performance levels. The Compensation Committee asks its executive compensation consultant to review the market data to verify its accuracy and reasonableness. The Compensation Committee may make adjustments to individual base salaries and target bonus opportunities based on external market conditions and factors for an individual executive position. The total compensation for an individual position may exceed the median range of comparative compensation when El Paso and/or its business units exceed target performance levels, El Paso performs well against its peer group of companies or individual performance is high. For example, for 2006, the total compensation of certain named executive officers was above the median range of comparative compensation mainly as a result of El Paso’s high total shareholder return relative to its peer group of companies for 2006 and individual performance factors.

 

El Paso’s Peer Group.  The Compensation Committee selects an appropriate peer group of companies to review executive officer compensation practices and to compare total shareholder return relative to the performance of El Paso. In February 2006, the Compensation Committee asked Mercer for a recommendation regarding the appropriate peer group for El Paso. Based on this analysis, the Compensation Committee determined that the peer group should be adjusted to better fit El Paso’s business mix. For 2006, the Compensation Committee selected a new peer group of companies consisting of eleven diversified energy companies and seven non-diversified energy companies. The current peer group of companies was selected by identifying U.S. publicly traded companies competing in the energy industry that had revenues and business characteristics similar to El Paso. The 2006 peer group of companies includes a proportional weighting of pipeline companies and exploration and production companies and a balanced range of revenues within the peer group. The peer group for 2006 included the following companies: Anadarko Petroleum Corp., Apache Corp., CenterPoint Energy Inc., Devon Energy Corp., Dominion Resources, Inc., Enbridge, Inc., Equitable Resources, Inc., Kinder Morgan, Inc., NiSource, Inc., ONEOK, Inc., PG&E Corp., PPL Corp., Questar Corp., Sempra Energy, Southern Union Co., Transcanada Corp., Western Gas Resources, Inc. and Williams Companies, Inc. On February 13, 2007, the Compensation Committee approved changes to the peer group of companies for 2007. Western Gas Resources, Inc. was removed from the peer group of companies because it was acquired by Anadarko Petroleum Corp. during 2006. Kinder Morgan, Inc was removed from the peer group of companies because the acquisition of Kinder Morgan, Inc. by investors who plan to take the company private is expected to close in the first quarter of 2007. The Compensation Committee approved the addition to the peer group of companies of Spectra Energy Corp., the former natural gas business of Duke Energy, which became a stand-alone, publicly traded company in January 2007. Spectra Energy Corp. has approximately $21 billion in assets and operates 17,500 miles of transmission pipeline in the U.S. and Canada.

 

External Market Conditions and Individual Factors.  The Compensation Committee is aware that it cannot establish total executive compensation levels solely on the basis of the median range of competitive benchmark survey data without additional analysis. Accordingly, the Compensation Committee also takes into account external market conditions and individual factors when establishing the total compensation of each named executive officer. Some of these factors include the executive’s level of experience, the executive’s tenure and responsibilities within El Paso, the position within El Paso and the appropriate competitive pressures for that position within the industry. In addition, the Compensation Committee asks its executive compensation consultant to provide it with an objective opinion regarding total executive compensation levels relative to each individual executive’s responsibilities.

 

Internal Pay Equity.  The Compensation Committee monitors the relationship between the compensation of our named executive officers and the compensation of our non-managerial employees. In 2006, the Compensation Committee reviewed a comparison of CEO pay and senior management pay to non-management employee pay. This analysis included a three-year period from 2003 through 2005 and showed a flat trend in total compensation and a slight increasing trend in base pay of our CEO and senior management in comparison to non-managerial employees. The slight increasing trend in base pay is the result of a voluntary reduction by our CEO of his base salary during 2004. The Compensation Committee also monitors the relationship between the compensation of

executive officers in comparison to other senior officers. The Compensation Committee periodically conducts these analyses to monitor and avoid any unjustified widening of compensation differentials.

 

Wealth Accumulation.  The Compensation Committee reviews annually all of the elements of total compensation paid to each named executive officer during the prior five-year period, including base salaries, annual cash incentive bonuses, the value of long-term incentive awards and any special payments made to an individual named executive officer. Tally sheets quantifying the elements of each named executive officer’s total compensation are presented to and reviewed by the Compensation Committee.

 

Payments upon Termination or Change in Control.  The Compensation Committee reviews the compensation and benefits each named executive officer could receive upon various termination events. These termination events include voluntary termination, involuntary termination without cause, termination with cause, retirement, death, disability and termination within two years following a change in control of El Paso. The total remuneration includes all aspects of each named executive officer’s compensation and benefits under our plans. Our Severance Pay Plan is a broad-based plan that provides benefits to the named executive officers following an involuntary termination without cause. Our Senior Executive Survivor Benefits Plan provides our named executive officers with survivor benefit coverage in lieu of the coverage provided generally to employees under our group life insurance plan in the event of a named executive officer’s death. All of our named executive officers participate in the 2004 Key Executive Severance Protection Plan, which provides for payment of severance benefits in the event of a termination of employment within two years following a change in control of El Paso. The 2004 Key Executive Severance Protection Plan provides that payment of severance benefits will occur upon a double triggering event, meaning both a change in control of El Paso and a termination of employment must occur. See the section entitled Potential Payments upon Termination or Change in Control beginning on page 54 of this proxy statement for the total amount of compensation and benefits each named executive officer could receive as a result of the various termination events and a description of our Severance Pay Plan, Senior Executive Survivor Benefits Plan and 2004 Key Executive Severance Protection Plan.

 

Employment Agreements

 

El Paso generally does not enter into employment agreements with its executive officers. As described below, Messrs. Foshee and Smolik received letter agreements in connection with their employment that outline the basic terms of their compensation. No other named executive officer has an employment agreement with El Paso. All of our named executive officers receive annual base salaries subject to adjustment by the Compensation Committee and their benefits are determined in accordance with the policies described under our plans in effect from time to time.

 

Mr. Foshee entered into a letter agreement with El Paso effective September 1, 2003. Under this agreement, Mr. Foshee serves as President, CEO and a director of El Paso and receives compensation subject to adjustment by the Compensation Committee. On the start date of his employment, Mr. Foshee was granted 1,000,000 options to purchase our common stock and 200,000 shares of restricted stock. The options time vest in five equal annual installments beginning one year from the date of grant. The shares of restricted stock have both time and performance vesting provisions. Based on El Paso’s performance relative to its peer group of companies during the first year of his employment, 100,000 of the 200,000 shares of restricted stock vested and the remaining 100,000 shares were forfeited. The 100,000 shares that vested based on performance also time vest in five equal annual installments beginning one year from the date of grant. In addition, on his start date, Mr. Foshee received common stock with a value of $875,000 and an additional cash payment of $875,000. Mr. Foshee was prohibited from pledging or selling the common stock received as part of the sign-on bonus for a period of two years from the grant date.

 

Mr. Smolik entered into a letter agreement with El Paso effective November 1, 2006. Under this agreement, Mr. Smolik serves as Executive Vice President of El Paso and President of our Exploration and Production Group. Mr. Smolik received a starting annual base salary payable at a rate of $550,008, a sign-on bonus of $500,000 and a target annual cash incentive bonus opportunity at a rate of 90 percent of his annual base salary. Mr. Smolik is required to repay the sign-on bonus in the event he terminates his employment within the first year. Mr. Smolik was also granted 146,092 shares of restricted stock on the start date of his employment. Mr. Smolik’s sign-on bonus and

restricted stock grant were designed to offset the value of unvested equity Mr. Smolik was forfeiting from his previous employer. The restricted shares will time vest in two equal annual installments beginning one year from the date of grant. El Paso pays or incurs certain of Mr. Smolik’s expatriate, relocation and travel costs related to his transition from Calgary, Canada to Houston, Texas and his benefits are determined in accordance with the policies described under our plans in effect from time to time.

 

Director and Officer Indemnification Agreements

 

El Paso has entered into indemnification agreements with each member of the Board of Directors and certain officers, including each of the named executive officers. These agreements reiterate the rights to indemnification that are provided to our Board of Directors and certain officers under our By-laws, clarify procedures related to those rights, and provide that such rights are also available to fiduciaries under certain of our employee benefit plans. As is the case under the By-laws, the agreements provide for indemnification to the full extent permitted by Delaware law, including the right to be paid the reasonable expenses (including attorneys’ fees) incurred in defending a proceeding related to service as a director, officer or fiduciary in advance of that proceeding’s final disposition. El Paso may maintain insurance, enter into contracts, create a trust fund or use other means available to provide for indemnity payments and advances. In the event of a change in control of El Paso (as defined in the indemnification agreements), El Paso is obligated to pay the costs of independent legal counsel who will provide advice concerning the rights of each director and officer to indemnity payments and advances. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons pursuant to the foregoing provisions, El Paso has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Determination of 2006 Annual Base Salary Adjustments and 2006 Target Bonus Opportunities

 

At the beginning of 2006, the Compensation Committee considered whether adjustments would be made to the annual base salaries and target bonus opportunities of the named executive officers. On March 10, 2006, the Compensation Committee approved appropriate adjustments (if any) to the annual base salaries and 2006 target annual cash incentive bonus opportunities for each of the named executive officers. The base salary adjustments were effective April 1, 2006. On August 11, 2006, in connection with Mr. Yardley’s appointment as Executive Vice President of El Paso and Chairman of our Pipeline Group, the Compensation Committee approved a new annual base salary for Mr. Yardley in the amount of $500,004 effective as of August 16, 2006 and a new target annual cash incentive bonus opportunity for 2006 at a rate of 75% of Mr. Yardley’s base salary. On November 1, 2006, Mr. Smolik began his employment with El Paso. The Compensation Committee approved a starting annual base salary for Mr. Smolik in the amount of $550,008 and a target annual cash incentive bonus opportunity at a rate of 90 percent of Mr. Smolik’s annual base salary.

 

2006 Annual Base Salary Adjustments and
2006 Target Bonus Opportunities

 

 

Determination of Annual Cash Incentive Awards for 2006 Performance

 

On February 13, 2007, the Compensation Committee approved the amount of the named executive officers’ annual cash incentive awards for 2006 performance. The following discussion sets forth the process the Compensation Committee followed in determining the amount of each named executive officer’s annual cash

incentive award for 2006 performance. The annual cash incentive bonuses for 2006 performance are scheduled to be paid in April 2007.

 

Performance Goals.  At the beginning of 2006, the Compensation Committee established a minimum, target and maximum annual cash incentive bonus level for each of the named executive officers (see the ranges of cash incentive bonuses as a percentage of base salary below). In addition, the Compensation Committee established the financial and non-financial goals for El Paso and its business units. At least one of the overall corporate financial goals must have been achieved at the minimum level in order for the 2006 annual incentive bonus program to be funded.

 

The 2006 target financial goals for El Paso were as follows:

 

 

For the regulated pipeline business, the 2006 financial goals included total earnings before deducting interest expenses and income taxes (“EBIT”) and cash value created in excess of the cost of invested capital (excluding purchase accounting, goodwill and off FAS 71 items). For the non-regulated business, the 2006 financial goals included EBIT, free cash flow, average daily production rates measured in million cubic feet of natural gas equivalent per day (MMcfe/d), and the cost of operating, maintenance and general administration.

 

The financial goals for El Paso and its business units are set in alignment with El Paso’s and the business unit’s strategic plan and objectives for the year at a minimum and target level. In making the annual determination of the minimum and target levels, the Compensation Committee considers the specific circumstances expected to be faced by El Paso and its business units in the coming year. Generally, the minimum and target levels are set such that the relative difficulty of achieving the target level is consistent from year to year. Corporate performance was determined to be above the target level for 2005 performance and at target level for 2004 performance. For 2005 and 2004 performance, the regulated pipeline business achieved performance above the target level that was set for each of those years and the non-regulated business achieved performance below the target level that was set for each of those years.

 

The 2006 non-financial goals for El Paso and El Paso’s business units were as follows:

 

 

Funding of the Annual Incentive Bonus Pool.  After the 2006 financial results became available, the Compensation Committee determined the appropriate funding of the 2006 annual incentive bonus pool based on the level of El Paso’s performance (and, where appropriate, the performance of its business units) relative to the financial and non-financial performance goals that were established for the year. The Compensation Committee also considered any unplanned or extraordinary factors during the year that impacted the level of performance of El Paso and its business units relative to the target goals that were established. When unplanned or extraordinary factors occur during the year, the Compensation Committee determines whether it is appropriate to consider adjustments to actual levels of performance in determining the amount of the annual incentive bonuses and total

compensation levels. The following table sets forth the percentage that the annual incentive bonus pool is funded based on the level of performance relative to the performance goals that were established for the year.

 

Funding of the
Annual Incentive Bonus Pool

 

 

 

 

Individual Performance Adjustment.  Our named executive officers receive an individual performance rating based on an evaluation of the executive officer’s individual contribution and performance against his or her individual performance goals for the year and determined through our Performance Management Program. The Compensation Committee applies the individual rating as an adjustment performance factor to determine the executive officer’s actual annual cash incentive award. The following table sets forth the adjustment factors based on individual performance ratings.

 

Individual Performance Adjustment

 

 

Under this formula, the maximum bonus opportunity is 225 percent of the target bonus calculated by taking 150 percent of the maximum annual incentive bonus pool times 150 percent of the maximum individual performance adjustment factor in the case of exceptional performance by El Paso and the individual executive. The range of annual cash incentive bonuses, based on the level of El Paso’s performance (and, where appropriate, the performance of its business units) and the individual executive, is illustrated as a percentage of base salary for each named executive officer in the following table. The actual percentage of cash incentive bonuses could be at any level between the minimum and maximum percentages based on performance.

 

Range of Cash Incentive Bonuses as a Percentage of Base Salary for 2006

 

 

 

 

The potential range of values of the annual cash incentive awards for 2006 performance for each of the named executive officers is reflected in the Grants of Plan-Based Awards table in the “Estimated Possible Payouts under Non-Equity Incentive Plan Awards” column on page 46 of this proxy statement.

 

El Paso Performance.  On February 13, 2007, the Compensation Committee reviewed the actual performance of El Paso and its business units relative to the financial and non-financial performance goals that were established for the year. For 2006, El Paso achieved (i) its minimum outstanding debt (net of cash) performance goal of $15 billion by continuing to reduce debt (net of cash) to $14.9 billion (including discontinued operations) at December 31, 2006 and (ii) substantially all of its non-financial goals. El Paso’s regulated pipeline business experienced solid growth and continued to provide a strong base of earnings and cash flow. El Paso’s non-regulated exploration and production business continued success in its drilling program resulting in higher production levels each quarter despite certain unplanned or extraordinary factors experienced during 2006. The non-regulated business unit experienced the unplanned departure of its former president, lower than planned annual production as a result of delays in bringing certain production online, delays in recovering lost volumes due to Hurricanes Katrina and Rita, higher than planned maintenance in certain onshore fields and volatile commodity prices. The Compensation Committee considered the impact of these unplanned factors on the level of performance and determined that adjustments made to actual performance levels were appropriate. Based on these adjustments, the Compensation Committee determined that El Paso achieved its earnings per share and cash flow from operations performance goals. Specifically, El Paso’s adjusted earnings per share at approximately $1.00 was above its target performance goal of $0.96 and El Paso’s adjusted cash flow from operations at $2.151 billion was above its minimum performance goal of $2.080 billion. To the extent the performance measure was applicable, these adjustments were made to determine other employee incentive opportunities.

 

In addition to the financial factors discussed above, the Compensation Committee considered the intensely competitive market for talent in the industry during 2006 which is expected to continue into 2007. During 2006, El Paso experienced higher than anticipated employee attrition rates in its shared services group and lower than expected petrotechnical staffing levels in its non-regulated business unit. El Paso expects the industry will continue to experience strong competition for high quality employees in 2007 and that retention should be a key factor in determining total compensation levels. In light of this, the Compensation Committee determined that to remain competitive in the market and retain high quality employees it needed to pay competitive annual incentive bonuses for 2006.

 

For the 2006 performance period, the Compensation Committee determined that El Paso should award cash incentive bonuses above target for corporate performance, above target for its regulated business unit and below target for its non-regulated business unit. Financial goals were weighted 70 percent and non-financial goals were weighted 30 percent. The annual cash incentive bonuses for business unit heads, including Mr. Yardley, were weighted 75 percent on El Paso’s attainment of its corporate performance goals and 25 percent on the business unit’s attainment of its performance goals. The annual cash incentive bonus for business unit heads is weighted more heavily on corporate performance to ensure the business unit heads are aligning the performance of their business

units with corporate performance. There is no weighting attributed to each individual financial or non-financial performance goal.

 

Chief Executive Officer Compensation.  Based on the policies described earlier in this Compensation Discussion and Analysis, the Compensation Committee reviewed all elements of Mr. Foshee’s total compensation for 2006, including his annual base salary, annual cash incentive bonus and long-term incentive award. Based on the Compensation Committee’s review of these and external factors, they found Mr. Foshee’s total compensation to be reasonable and not excessive. The Compensation Committee believes El Paso’s performance in 2006 demonstrates that Mr. Foshee has been successful in the three-year commitment he made to shareholders in 2003. Mr. Foshee’s success is evident in that El Paso is positioned with a premium natural gas pipeline franchise and a greatly improved exploration and production business. During 2006, Mr. Foshee was instrumental in reducing El Paso’s gross debt and achieving a 27 percent total shareholder return. In addition, major legacy issues were eliminated, the exit from the domestic power business was completed, the trading business was significantly downsized and the ANR pipeline sale agreement was executed. As a result, El Paso returned to profitability during 2006 for the first time since 2000. El Paso’s credit ratings are improved and El Paso has become a financially strong and flexible company that is positioned to take advantage of growth opportunities and manage a volatile commodity price environment in 2007. Having reviewed the contribution that Mr. Foshee made to El Paso’s performance in 2006, the Compensation Committee believes that he continues to demonstrate the integrity, planning and leadership qualities that the executive compensation program was designed to foster and reward. In light of the foregoing, the Compensation Committee concluded that Mr. Foshee should receive an annual cash incentive bonus for his 2006 performance in the amount of $1,400,000, which is based upon El Paso’s above target performance and Mr. Foshee’s outstanding individual performance. The amount awarded to Mr. Foshee for his annual cash incentive bonus for 2006 performance is included in the Summary Compensation Table under the column “Non-Equity Incentive Plan Compensation” on page 43 of this proxy statement.

 

Compensation of Other Executive Officers.  The Compensation Committee reviewed all elements of total compensation for the other named executive officers for 2006 in the same manner as the Committee reviewed the total compensation of our CEO. The Committee also considered recommendations from our CEO regarding total compensation for those executives reporting directly to him. Based upon corporate and business unit performance for 2006, as well as the individual performance of the other named executive officers, the Committee concluded that Mr. Leland should receive an annual cash incentive bonus for his 2006 performance in the amount of $490,050, which is based upon El Paso’s above target performance and Mr. Leland’s outstanding individual performance. The Committee concluded that Mr. Baker should receive an annual cash incentive bonus for his 2006 performance in the amount of $401,885, which is based upon El Paso’s above target performance and Mr. Baker’s outstanding individual performance. The Committee concluded that Mr. Yardley should receive an annual cash incentive bonus for his 2006 performance in the amount of $569,536, which is based 75 percent on El Paso’s above target performance and 25 percent on the regulated business unit’s above target performance, as well as Mr. Yardley’s outstanding individual performance. The Committee concluded that Mr. Smolik should receive an annual cash incentive bonus for his 2006 performance in the amount of $177,000 based on Mr. Smolik’s highly valued individual performance since his hire date on November 1, 2006. The amount awarded to the other named executive officers for their annual cash incentive bonuses for 2006 performance is included in the Summary Compensation Table under the column “Non-Equity Incentive Plan Compensation” on page 43 of this proxy statement. The following is a comparison of each named executive officer’s target annual cash incentive bonus versus the actual amount that will be paid to the executive officer for his annual cash incentive bonus for 2006 performance.

 

Target vs. Actual
Annual Cash Incentive Bonuses
Paid for 2006 Performance

 

 

 

 

Determination of 2006 and 2007 Long-Term Incentive Awards

 

Annual long-term incentive awards in the form of restricted stock and stock options are granted under the 2005 Omnibus Incentive Compensation Plan. Under the 2005 Omnibus Incentive Compensation Plan, the Compensation Committee is the plan administrator with respect to employees subject to Section 162(m) of the Code and Section 16 of the Exchange Act, which includes all of the named executive officers. The Compensation Committee determines the timing of when the annual grants of restricted stock and stock options will occur as well as the terms and restrictions applicable to such grants. The Compensation Committee’s current practice is to approve the annual grant after the financial results are available for the prior fiscal year and select a future grant date (usually several weeks subsequent to the Compensation Committee’s action) when the awards will be granted. For the past several years, the Compensation Committee has selected the first trading day of the quarter following the filing of the Annual Report on Form 10-K as the grant date for long-term incentive awards, which historically has been the first trading day of April. Stock options are granted with an exercise price (or strike price) based upon the fair market value of our common stock on the date of grant. The fair market value is determined for the exercise price (or strike price) of stock options by computing the average between the high and low selling prices at which our common stock traded on the grant date. Once the exercise price for the stock options is determined, a grant letter is prepared as soon as administratively possible reflecting the number of stock options and shares of restricted stock granted. The Compensation Committee also considers and approves new grants for individual officers who are hired or promoted to positions that are subject to Section 16 of the Exchange Act. A senior management committee (consisting of our CEO and Senior Vice President of Human Resources and Administration) acts as the plan administrator for non-Section 16 officers and employees and can approve individual grants of awards of not more than 100,000 stock options or 50,000 shares of restricted stock. Within these limitations, the senior management committee has delegated to the Vice President of Corporate Human Resources the authority to approve individual grants of awards to non-Section 16 officers and other employees.

 

On March 10, 2006, the Compensation Committee approved an annual grant of long-term incentive awards in the form of restricted stock and stock options based on 2005 performance. These long-term incentive awards were granted to the named executive officers on April 3, 2006. The amount of equity that was available to fund the equity pool for grants made in April 2006 for 2005 performance was based 50 percent on corporate achievement of the annual overall corporate financial goals and 50 percent on El Paso’s relative total shareholder return (“TSR”) compared to its peer group of companies. TSR is determined by calculating stock price appreciation between the 20 day average of stock prices at the beginning of the year and the end of the year. The total cash dividends paid for the year are divided by the beginning of the year 20 day average stock price and the dividend yield is added to the stock price appreciation to calculate TSR. For equity grants made in 2006 for 2005 performance, the portion of the

equity pool that was funded based on El Paso’s TSR compared to its peer group of companies was determined as follows:

 

Funding of Portion of Equity Pool
Based on Total Shareholder Return
for Equity Grants made in 2006 for 2005 Performance

 

 

 

 

During 2005, El Paso achieved above target performance of its financial and non-financial performance goals, resulting in the funding of one-half of the equity pool at 115%. During 2005, El Paso’s TSR relative to its peer group of companies was in the fourth quartile, resulting in the funding of one-half of the equity pool at zero percent. Accordingly, the long-term incentive awards that were granted to the named executive officers on April 3, 2006 based on 2005 performance were funded at 57.5 percent of overall target and were adjusted for individual performance. In addition, on August 11, 2006, in connection with Mr. Yardley’s appointment as Executive Vice President of El Paso and Chairman of our Pipeline Group, the Compensation Committee approved an additional grant of long-term incentive awards for Mr. Yardley in the form of stock options to purchase 20,000 shares of our common stock at a price equal to the fair market value of the stock on August 16, 2006, the date of grant, and 10,000 shares of restricted stock. The restricted stock and stock options granted as part of the 2006 annual grant of long-term incentive awards will vest in three equal annual installments beginning one year from the date of grant. The number of shares and grant date fair market value of the restricted stock and stock options awarded as part of the 2006 annual grant of long-term incentive awards to each named executive officer is reflected in the Grants of Plan-Based Awards table on page 46 of this proxy statement.

 

In April 2006, the Compensation Committee approved certain changes to the funding of the 2007 long-term incentive awards. The Compensation Committee determined that the amount of equity available to fund the restricted stock portion of the equity pool for grants made in April 2007 for 2006 performance will be based 50 percent on corporate achievement of the annual overall corporate financial goals and 50 percent on El Paso’s relative TSR compared to its peer group of companies. If El Paso’s TSR for 2006 is in the first quartile, funding of the restricted stock portion of the equity pool will be at 150 percent. If El Paso’s TSR for 2006 is in the second quartile, funding will be a maximum of 150 percent based on actual TSR results. If El Paso’s TSR for 2006 is in the third or forth quartiles and El Paso has achieved at least one of the pre-established 2006 corporate or business unit financial or non-financial performance goals, funding will be at 100 percent with the actual level of funding adjusted downward by the Compensation Committee, as necessary. If El Paso’s TSR for 2006 is at the bottom of the fourth quartile relative to its peer group of companies, funding will be at zero percent. Stock options will be granted at target and will not be adjusted for corporate or individual performance. On February 13, 2007, the Compensation Committee approved the 2007 annual grant of long-term incentive awards in the form of restricted stock and stock options based on 2006 performance. These long-term incentive awards are expected to be granted to the named executive officers in April 2007. During 2006, El Paso achieved above target performance of its financial and non-financial performance goals, resulting in the funding of one-half of the restricted stock portion of the equity pool at 110 percent. During 2006, El Paso’s TSR relative to its peer group of companies was in the second quartile, resulting in the funding of one-half of the restricted stock portion of the equity pool at 144 percent. Accordingly, restricted stock grants that will occur in April 2007 based upon 2006 performance will be funded at 127 percent of overall target and the value of each named executive officer’s individual grant will be adjusted for individual performance, as described above. Stock options will be granted at target and will not be adjusted for corporate or

individual performance. The following table sets forth the 2007 annual grant of long-term incentive awards that will be granted in April 2007 for 2006 performance for each of the named executive officers.

 

2007 Annual Grant of
Long-Term Incentive Awards
based on 2006 Performance

 

 

For 2007 performance, the Compensation Committee approved a slightly revised methodology to calculate TSR relative to the peer group of companies based on a recommendation from Deloitte. The revised methodology is based on the assumption that a shareholder reinvests cash dividends into the company’s stock. Thus, for equity grants made in 2008 based on 2007 performance, TSR will be calculated by including fractional shares purchased by cash dividends. While there would have been no impact on El Paso’s percentile rank if the revised methodology had been used to determine 2006 performance, there are differences in the calculation methodologies that could influence the outcome in future years.

 

Determination of 2007 Annual Base Salary Adjustments and 2007 Target Bonus Opportunities

 

On February 13, 2007, the Compensation Committee also considered whether adjustments should be made to the annual base salaries and target bonus opportunities for the named executive officers for 2007. The Compensation Committee adjusted Messrs. Foshee’s, Leland’s and Baker’s base salary effective April 1, 2007, based on individual performance and 2007 market conditions. No adjustments were made to the named executive officer’s 2007 target bonus opportunities. The following table sets forth the 2007 base salaries and 2007 annual target bonus opportunities for the named executive officers. As described earlier, actual target bonus opportunities assume target level corporate performance and individual performance in the highly valued category.

 

2007 Annual Base Salary Adjustments and
2007 Target Bonus Opportunities

 

 

Tax Considerations

 

Section 409A.  Section 409A of the Code imposes new requirements for deferred compensation arrangements, which may include certain equity compensation awards and separation pay plans. During 2005 and 2006, an analysis of our equity compensation and employee benefits plans was prepared to determine which plans would need to be revised to bring our plans in compliance with Section 409A and the related proposed regulations. Based on this analysis, the Compensation Committee recommended that the Board approve an amendment to our prior supplemental benefits plan and the adoption of the 2005 Supplemental Benefits Plan. The

2005 Supplemental Benefits Plan replaces our prior supplemental benefits plan for benefits accruing after 2004. The prior supplemental benefits plan was amended to utilize certain grandfathering provisions under Section 409A and to provide that participants will cease to accrue benefits under it effective as of December 31, 2004. The 2005 Supplemental Benefits Plan provides for the same benefits as under the prior plan, with benefits to begin accruing effective January 1, 2005. See the description of our supplemental benefits plans beginning on page 52 of this proxy statement. We continue to review all of our plans and will make recommendations to the Compensation Committee of any further changes that may need to be made to our plans as additional guidance is issued by the IRS pursuant to Section 409A. The Compensation Committee will make recommendations to the Board of any further changes that may need to be made to our plans, as necessary.

 

Section 162(m).  Section 162(m) of the Code may limit El Paso’s federal income tax deduction for compensation paid to our CEO and other named executive officers whose total compensation is required to be reported in the proxy statement under the Exchange Act. To the extent compensation is “performance-based” within the meaning of Section 162(m), the Section’s limitations will not apply. Our executive compensation plans, including the 2005 Omnibus Incentive Compensation Plan, are structured so that awards under the plans are intended to qualify as performance-based compensation under Section 162(m). Specifically, annual cash incentive awards, stock options and performance-based restricted stock are designed to meet the requirements of Section 162(m). While the Compensation Committee strives to make awards under our plans that are intended to qualify as performance-based compensation under Section 162(m), it is possible under certain circumstances that some portion of the compensation paid to our executive officers will not meet the standards of deductibility under Section 162(m). The Compensation Committee reserves the right to award compensation which does not qualify as performance-based under Section 162(m) if it determines that such awards are necessary to provide a competitive compensation package to attract and retain qualified executive talent. The annual cash incentive awards, stock options and performance-based restricted stock that were granted to the named executive officers during 2006 were intended to be performance-based within the meaning of Section 162(m) and, therefore, should not be subject to any deductibility limitations under Section 162(m). Certain restricted stock grants awarded during 2006 and prior years may be considered non-performance-based within the meaning of Section 162(m) and, therefore, subject to the deductibility limitations under Section 162(m) when they vest in future years.

 

Forfeiture of Certain Awards in the event of an Accounting Restatement

 

Under our 2005 Omnibus Incentive Compensation Plan, which provides for grants of annual cash incentive awards and long-term incentive awards, if it is determined that an executive officer in the plan knowingly engaged in, or was grossly negligent with respect to, misconduct that causes El Paso to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws, the executive is required to reimburse El Paso the amount of any payment in settlement of an award earned under the plan during the twelve-month period following the public issuance or filing of the financial document that is required to be restated. See the description of our 2005 Omnibus Incentive Compensation Plan beginning on page 66 of this proxy statement.

 

The following table and the narrative text that follows it provide a summary of the compensation earned or paid in 2006 to our CEO, our CFO and our three other most highly compensated executive officers according to applicable SEC regulations. The compensation reflected for each individual was for their services provided in all capacities to us and our subsidiaries. This table also identifies the principal capacity in which each of the named executive officers served us at the end of 2006.

 

Summary Compensation Table

 

 

 

 

 

All Other Compensation included in the Summary Compensation Table

 

 

 

 

In addition to the items included in the above table that could be characterized as having a personal benefit, El Paso also provides a separate parking space for Mr. Foshee. Mr. Foshee’s use of the parking space is not included in the table because there is no incremental cost to El Paso for Mr. Foshee’s use of this parking space. The named executive officers may use season tickets purchased by El Paso to attend sporting events when the tickets are not otherwise being used for business purposes. The named executive officers’ use of these tickets for personal reasons is not included in the table because there is no incremental cost to El Paso.

 

 

The following is a description of material factors necessary to understand the information disclosed above in the Summary Compensation Table. As described in the Compensation Discussion and Analysis, at the beginning of 2006, the Compensation Committee established a minimum, target and maximum annual cash incentive bonus level for each of the named executive officers and the financial and non-financial goals for El Paso and its business units. The annual cash incentive bonus opportunities for 2006 performance were capped at two times 2006 target bonus opportunities for the named executive officers, except for Mr. Smolik whose maximum annual cash incentive bonus opportunity for 2006 was approved at 202.50 percent of his annual base salary when he began his employment on November 1, 2006. The range of potential annual cash incentive bonuses for 2006 performance for each named executive officer is reflected as a dollar amount (based on the percentage of annual base salary) in the Grants of Plan-Based Awards table in the “Estimated Possible Payments under Non-Equity Incentive Plan Awards” column below. See the discussion under “Determination of Annual Cash Incentive Awards for 2006 Performance” in the Compensation Discussion and Analysis for additional information on the determination of annual cash incentive bonuses for 2006 performance, including the 2006 performance goals, a table that reflects the funding of the annual incentive bonus pool and a table that reflects the adjustment factors for individual performance, beginning on page 34 of this proxy statement. After the financial results were available for 2006, the Compensation Committee determined the appropriate funding of the annual incentive bonus pool based on the level of El Paso’s and its business units’ performance relative to the performance goals that were established for the year. Then the Compensation Committee determined the specific percentage cash bonus to be awarded to the named executive officers based on the individual performance adjustment factors. See the discussion under “El Paso Performance,” “Chief Executive Officer Performance” and “Compensation to Other Executive Officers” in the Compensation Discussion and Analysis for additional information about the financial and non-financial performance goals that were achieved and individual executive officer performance in

2006, beginning on page 37 of this proxy statement. The dollar amount earned (as of December 31, 2006) as an annual cash incentive bonus for 2006 performance by each of the named executive officers is reflected in the Summary Compensation Table in the “Non-Equity Incentive Plan Compensation” column. The annual cash incentive bonuses are expected to be paid to the named executive officers in April 2007.

 

 

The following table sets forth the range of potential annual cash incentive bonuses for 2006 performance as a dollar amount for each of the named executive officers. The table also sets forth the number of shares of restricted stock and the number of securities underlying stock options awarded during 2006 to the named executive officers. In satisfaction of applicable SEC regulations, the table further sets forth the date of grant for each restricted stock and stock option award and the date on which the Compensation Committee took action to approve the grant of such award. The table also sets forth the per-share exercise price of the stock options granted during 2006 and the grant date fair market value of the restricted stock and stock options awarded during 2006. The restricted stock and stock options in this table were granted under our 2005 Omnibus Incentive Compensation Plan, which provides that the average between the high and low selling prices at which our common stock traded on the date of grant is used as the exercise price (or strike price) for stock options. The exercise prices of the stock options granted to the named executive officers during 2006 were not less than the closing market price of our common stock on the dates of grant. Therefore, in accordance with applicable SEC regulations, this table does not reflect the closing market price of our common stock on the dates of grant of the stock options.

 

Grants of Plan-Based Awards
During the Year Ended December 31, 2006