UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

OR

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

For the transition period from                    to          

Commission File Number 1-14365

El Paso Corporation

Delaware		76-0568816
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
El Paso Building 1001 Louisiana Street Houston, Texas (Address of Principal Executive Offices)		77002 (Zip Code)

Telephone Number: (713) 420-2600
Internet Website: www.elpaso.com

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

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

Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o

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

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

     Common stock, par value $3 per share. Shares outstanding on November 2, 2007: 700,486,166

 

 

EL PASO CORPORATION
TABLE OF CONTENTS

Caption		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		42
Item 4. Controls and Procedures		43
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		44
Item 1A. Risk Factors		44
Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3. Defaults Upon Senior Securities		45
Item 4. Submission of Matters to a Vote of Security Holders		45
Item 5. Other Information		45
Item 6. Exhibits		45
Signatures		46
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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

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

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

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

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

EL PASO CORPORATION

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

		Quarters Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Operating revenues		$	1,166			$	942			$	3,386			$	3,368
Operating expenses
Cost of products and services			55				69				170				201
Operation and maintenance			348				334				978				957
Depreciation, depletion and amortization			293				260				850				766
Taxes, other than income taxes			53				61				185				180
			749				724				2,183				2,104
Operating income			417				218				1,203				1,264
Earnings (losses) from unconsolidated affiliates			(6	)			55				75				121
Loss on debt extinguishment			—				(17	)			(287	)			(26	)
Other income, net			72				51				178				142
Interest and debt expense			(228	)			(294	)			(742	)			(941	)
Income before income taxes from continuing operations			255				13				427				560
Income taxes			100				(98	)			151				14
Income from continuing operations			155				111				276				546
Discontinued operations, net of income taxes			—				24				674				95
Net income			155				135				950				641
Preferred stock dividends			9				9				28				28
Net income available to common stockholders		$	146			$	126			$	922			$	613
Basic earnings per common share
Income from continuing operations		$	0.21			$	0.15			$	0.36			$	0.77
Discontinued operations, net of income taxes			—				0.03				0.97				0.14
Net income per common share		$	0.21			$	0.18			$	1.33			$	0.91
Diluted earnings per common share
Income from continuing operations		$	0.20			$	0.15			$	0.35			$	0.74
Discontinued operations, net of income taxes			—				0.03				0.96				0.13
Net income per common share		$	0.20			$	0.18			$	1.31			$	0.87
Dividends declared per common share		$	0.04			$	0.04			$	0.12			$	0.12

See accompanying notes.

EL PASO CORPORATION

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

		September 30,				December 31,
		2007				2006
ASSETS
Current assets
Cash and cash equivalents		$	389			$	537
Accounts and notes receivable
Customers, net of allowance of $18 in 2007 and $28 in 2006			445				516
Affiliates			195				192
Other			210				495
Assets from price risk management activities			166				436
Assets held for sale and from discontinued operations			—				4,161
Deferred income taxes			358				478
Other			266				352
Total current assets			2,029				7,167
Property, plant and equipment, at cost
Pipelines			16,407				15,672
Natural gas and oil properties, at full cost			18,673				16,572
Other			537				566
			35,617				32,810
Less accumulated depreciation, depletion and amortization			16,698				16,132
Total property, plant and equipment, net			18,919				16,678
Other assets
Investments in unconsolidated affiliates			1,638				1,707
Assets from price risk management activities			238				414
Other			1,257				1,295
			3,133				3,416
Total assets		$	24,081			$	27,261

See accompanying notes.

EL PASO CORPORATION

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

		September 30,				December 31,
		2007				2006
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Trade		$	381			$	478
Affiliates			1				3
Other			498				569
Current maturities of long-term financing obligations			567				1,360
Liabilities from price risk management activities			276				278
Liabilities related to discontinued operations			—				1,817
Accrued interest			250				269
Other			804				1,377
Total current liabilities			2,777				6,151
Long-term financing obligations, less current maturities			12,445				13,329
Other
Liabilities from price risk management activities			884				924
Deferred income taxes			1,204				950
Other			1,743				1,690
			3,831				3,564
Commitments and contingencies (Note 7)
Securities of subsidiaries			22				31
Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized 50,000,000 shares; issued 750,000 shares of 4.99% convertible perpetual stock; stated at liquidation value			750				750
Common stock, par value $3 per share; authorized 1,500,000,000 shares; issued 709,015,253 shares in 2007 and 705,833,206 shares in 2006			2,127				2,118
Additional paid-in capital			4,724				4,804
Accumulated deficit			(1,994	)			(2,940	)
Accumulated other comprehensive loss			(413	)			(343	)
Treasury stock (at cost); 8,475,883 shares in 2007 and 8,715,288 shares in 2006			(188	)			(203	)
Total stockholders’ equity			5,006				4,186
Total liabilities and stockholders’ equity		$	24,081			$	27,261

See accompanying notes.

EL PASO CORPORATION

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

		Nine Months Ended
		September 30,
		2007				2006
Cash flows from operating activities
Net income		$	950			$	641
Less income from discontinued operations, net of income taxes			674				95
Income from continuing operations			276				546
Adjustments to reconcile net income to net cash from operating activities
Depreciation, depletion and amortization			850				766
Deferred income taxes			127				(15	)
Earnings from unconsolidated affiliates, adjusted for cash distributions			81				16
Loss on debt extinguishment			287				26
Other			(52	)			53
Asset and liability changes			(76	)			340
Cash provided by continuing activities			1,493				1,732
Cash provided by (used in) discontinued activities			(31	)			280
Net cash provided by operating activities			1,462				2,012
Cash flows from investing activities
Capital expenditures			(1,796	)			(1,510	)
Cash paid for acquisitions, net of cash acquired			(1,182	)			—
Net proceeds from the sale of assets and investments			82				501
Net change in restricted cash			33				101
Other			17				24
Cash used in continuing activities			(2,846	)			(884	)
Cash provided by discontinued activities			3,660				229
Net cash provided by (used) in investing activities			814				(655	)
Cash flows from financing activities
Net proceeds from issuance of long-term debt			5,253				125
Payments to retire long-term debt and other financing obligations			(7,286	)			(2,990	)
Dividends paid			(112	)			(108	)
Net proceeds from issuance of common stock			—				500
Contributions from discontinued operations			3,346				277
Other			4				(25	)
Cash provided by (used in) continuing activities			1,205				(2,221	)
Cash used in discontinued activities			(3,629	)			(509	)
Net cash used in financing activities			(2,424	)			(2,730	)
Change in cash and cash equivalents			(148	)			(1,373	)
Cash and cash equivalents
Beginning of period			537				2,132
End of period		$	389			$	759

See accompanying notes.

EL PASO CORPORATION

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

										Nine Months
		Quarters Ended								Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net income		$	155			$	135			$	950			$	641
Foreign currency translation adjustments (net of income taxes of less than $1 in 2006)			—				3				—				5
Net reclassification adjustments (net of income taxes of $3 and $10 in 2007) associated with pension and other postretirement obligations			5				—				18				—
Cash flow hedging activities:
Unrealized mark-to-market gains arising during period (net of income taxes of $22 and $3 in 2007 and $51 and $174 in 2006)			39				92				6				311
Reclassification adjustments for changes in initial value to the settlement date (net of income taxes of $22 and $46 in 2007 and $3 and $18 in 2006)			(38	)			4				(78	)			29
Investments available for sale:
Unrealized gains (losses) arising during period (net of income taxes $2 in 2007 and $1 and $4 in 2006)			—				(2	)			3				7
Realized gains arising during period (net of income taxes of $8 in 2007)			—				—				(15	)			—
Other comprehensive income (loss)			6				97				(66	)			352
Comprehensive income		$	161			$	232			$	884			$	993

See accompanying notes.

EL PASO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  Basis of Presentation and Significant Accounting Policies

  Basis of Presentation

     We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the United States Securities and Exchange Commission (SEC). Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by U.S. generally accepted accounting principles. You should read this Quarterly Report on Form 10-Q along with our 2006 Annual Report on Form 10-K, which contains a summary of our significant accounting policies and other disclosures. The financial statements as of September 30, 2007, and for the quarters and nine months ended September 30, 2007 and 2006, are unaudited. We derived the condensed consolidated balance sheet as of December 31, 2006, from the audited balance sheet filed in our 2006 Annual Report on Form 10-K. In our opinion, we have made all adjustments, which are of a normal recurring nature, to fairly present our interim period results. Due to the seasonal nature of our businesses, information for interim periods may not be indicative of our operating results for the entire year. Our results for all periods reflect ANR Pipeline Company (ANR), our Michigan storage assets and our 50 percent interest in Great Lakes Gas Transmission (Great Lakes) as discontinued operations. Additionally, our financial statements for prior periods include reclassifications that were made to conform to the current period presentation. Those reclassifications did not impact our reported net income or stockholders’ equity.

  Significant Accounting Policies

     The information below provides an update to the significant accounting policies and accounting pronouncements issued but not yet adopted discussed in our 2006 Annual Report on Form 10-K.

     Accounting for Uncertainty in Income Taxes.  On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes and its related interpretation. FIN No. 48 clarifies Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, and requires us to evaluate our tax positions for all jurisdictions and for all years where a statute of limitations has not expired. FIN No. 48 requires companies to meet a “more-likely-than-not” threshold (i.e., a greater than 50 percent likelihood that a tax position would be sustained under examination) prior to recording a benefit for their tax positions. Additionally, for tax positions meeting this “more-likely-than-not” threshold, the amount of benefit is limited to the largest benefit that has a greater than 50 percent probability of being realized upon effective settlement. For information on the impact on our financial statements of the adoption of this interpretation, see Note 3.

     Accounting for Offsetting Contractual Amounts.  In April 2007, the FASB issued FASB Staff Position (FSP) No. FIN 39-1. The FSP amends FIN No. 39, Offsetting of Amounts Related to Certain Contracts, and allows companies to offset amounts recorded for their derivative contracts with cash collateral posted or held if the contracts are executed with the same counterparty and under the same master netting arrangement. This pronouncement is effective for fiscal years beginning after November 15, 2007, although early application is permitted. We are currently evaluating the manner in which we will apply this pronouncement.

2.  Acquisitions and Divestitures

Acquisitions

     On September 28, 2007, we acquired Peoples Energy Production Company (Peoples) for $879 million in cash using cash on hand and borrowings under our revolving credit facilities. Peoples is an exploration and production company with natural gas and oil properties located primarily in the ArkLaTex, Texas Gulf Coast and Mississippi areas and in the San Juan and Arkoma Basins. We accounted for this acquisition under the purchase method of accounting and preliminarily allocated the purchase price to natural gas and oil properties on our balance sheet. This allocation is subject to change. We did not record any goodwill associated with this transaction.

     In January 2007, we acquired producing properties and undeveloped acreage in Zapata County, Texas for $254 million. Also, in the third quarter of 2007, we increased our ownership interest in Four Star, our unconsolidated affiliate, from 43 percent to 49 percent.

Divestitures

     Under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classify assets to be disposed of as held for sale or, if appropriate, discontinued operations when they have received appropriate approvals to be disposed of by our management or Board of Directors and when they meet other criteria. Cash flows from our discontinued businesses are reflected as discontinued operating, investing, and financing activities in our statement of cash flows. To the extent these discontinued operations do not maintain separate cash balances, we reflect the net cash flows generated from these businesses as a contribution to our continuing operations in cash flows from continuing financing activities. As of December 31, 2006, we had total assets of $4.1 billion and total liabilities of $1.8 billion related to our discontinued operations, the composition of which is disclosed in our 2006 Annual Report on Form 10-K. We also had $28 million of assets held for sale as of December 31, 2006. As of September 30, 2007, all of our assets and liabilities related to our discontinued operations and our assets held for sale had been sold.

     Discontinued Operations.  In February 2007, we sold ANR, our Michigan storage assets and our 50 percent interest in Great Lakes to TransCanada Corporation and TC Pipeline, LP for net cash proceeds of approximately $3.7 billion and recorded a gain on the sale of $648 million, net of taxes of $354 million. Included in the net assets of these discontinued operations as of the date of the sale were net deferred tax liabilities assumed by TransCanada. During 2006, we completed the sale of all of our discontinued international power operations for net proceeds of approximately $368 million including our interest in Macae, a wholly owned power plant facility in Brazil, and certain power assets in Asia and Central America.

     Below is summarized income statement information regarding our discontinued operations:

		ANR and
		Related
		Operations				Other				Total
		(In millions)
Nine Months Ended September 30, 2007
Revenues		$	101			$	—			$	101
Costs and expenses			(43	)			—				(43	)
Other expense(1)			(7	)			—				(7	)
Interest and debt expense			(10	)			—				(10	)
Income taxes			(15	)			—				(15	)
Income from operations			26				—				26
Gain on sale, net of income taxes of $354 million			648				—				648
Net income from discontinued operations		$	674			$	—			$	674
Quarter Ended September 30, 2006
Revenues		$	120			$	28			$	148
Costs and expenses			(82	)			(33	)			(115	)
Other income			14				2				16
Interest and debt expense			(16	)			(1	)			(17	)
Income taxes			(12	)			4				(8	)
Net income from discontinued operations		$	24			$	—			$	24
Nine Months Ended September 30, 2006
Revenues		$	439			$	131			$	570
Costs and expenses			(251	)			(144	)			(395	)
Other income			45				4				49
Interest and debt expense			(49	)			(14	)			(63	)
Income taxes			(67	)			1				(66	)
Net income (loss) from discontinued operations		$	117			$	(22	)		$	95

     Continuing operations asset sales.  During the nine months ended September 30, 2007, we received approximately $82 million of proceeds from the sales of assets and investments, primarily related to the sale of a pipeline lateral and our investment in the New York Mercantile Exchange (NYMEX). During the nine months ended September 30, 2006 we received approximately $501 million of proceeds, primarily related to the sale of our interests in power plants in Brazil, Asia and Central America and certain natural gas and oil properties in south Texas.

3.  Income Taxes

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

		Quarters Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
						(In millions, except rates)
Income taxes		$	100			$	(98	)		$	151			$	14
Effective tax rate			39	%			(754	)%			35	%			3	%

     We compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss, except for significant unusual or infrequently occurring items. Significant tax items, which may include the conclusion of income tax audits, are recorded in the period that the item occurs. Our 2007 overall year-to-date effective tax rate on continuing operations was consistent with the statutory rate. Increases to our effective tax rate due to impairments on foreign investments for which there were no corresponding income tax benefits, along with state income taxes (net of federal income tax effects) and the reversal of deferred tax assets on certain foreign investments were offset by tax benefits associated with recent tax law changes and dividend exclusions on earnings from unconsolidated affiliates where we anticipate receiving dividends. Our 2007 quarterly effective tax rate was higher than the statutory rate due primarily to impairments on foreign investments for which there were no corresponding income tax benefits.

     During 2006, our overall effective tax rate on continuing operations was lower than the statutory rate of 35 percent primarily due to conclusion of IRS audits of The Coastal Corporation’s 1998-2000 tax years and El Paso’s 2001 and 2002 tax years which resulted in the reduction of tax contingencies and the reinstatement of certain tax credits. Also, impacting the rate were net tax benefits recognized on certain foreign investments. The total net tax benefit associated with the items above was $105 million and $163 million for the quarter and nine months ended September 30, 2006.

     We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With a few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1999. Additionally, the Internal Revenue Service has completed an examination of El Paso’s U.S. income tax returns for 2003 and 2004, with a tentative settlement at the appellate level for all issues.  While the settlement of these matters is expected to change our unrecognized tax benefits in the next twelve months, we do not anticipate the impact to be material to our results of operations, financial condition or liquidity.  For our remaining open tax years, our unrecognized tax benefits (liabilities for uncertain tax matters) could increase or decrease our income tax expense and effective income tax rates as these matters are finalized.

     Upon the adoption of FIN No. 48, we recorded additional liabilities for unrecognized tax benefits of $2 million, including interest and penalties, which we accounted for as an increase of $4 million to the January 1, 2007 accumulated deficit and an increase of $2 million to additional paid-in capital. The additional amounts recorded increased our overall unrecognized tax benefits (including interest and penalties) to $178 million as of January 1, 2007. During the third quarter, we increased our gross liability by $25 million related to various tax positions. As a result, our overall unrecognized tax benefits are $207 million as of September 30, 2007. Of these amounts, approximately $109 million as of January 1, 2007 and $136 million as of September 30, 2007 (net of federal tax benefits) would favorably affect our income tax expense and our effective income tax rate if recognized in future periods. While the amount of our unrecognized tax benefits could change in the next twelve months, we do not expect this change to have a significant impact on our results of operations or financial position.

     We recognize interest and penalties related to unrecognized tax benefits in income tax expense on our income statement. Total interest and penalties recognized in our income statement was not material for the quarters and nine months ended September 30, 2007 and 2006. As of January 1, 2007, we had approximately $39 million of liabilities for interest and penalties related to our unrecognized tax benefits, which have not materially changed as of September 30, 2007.

4.  Earnings Per Share

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

		2007								2006
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Quarter Ended September 30,
Income from continuing operations		$	155			$	155			$	111			$	111
Convertible preferred stock dividends			(9	)			—				(9	)			(9	)
Income from continuing operations available to common stockholders			146				155				102				102
Discontinued operations, net of income taxes			—				—				24				24
Net income available to common stockholders		$	146			$	155			$	126			$	126
Weighted average common shares outstanding			696				696				693				693
Effect of dilutive securities:
Options and restricted stock			—				5				—				4
Convertible preferred stock			—				58				—				—
Weighted average common shares outstanding and dilutive securities			696				759				693				697
Earnings per common share:
Income from continuing operations		$	0.21			$	0.20			$	0.15			$	0.15
Discontinued operations, net of income taxes			—				—				0.03				0.03
Net income		$	0.21			$	0.20			$	0.18			$	0.18

		2007								2006
		Basic				Diluted				Basic				Diluted
		(In millions, except per share amounts)
Nine Months Ended September 30,
Income from continuing operations		$	276			$	276			$	546			$	546
Convertible preferred stock dividends			(28	)			(28	)			(28	)			—
Income from continuing operations available to common stockholders			248				248				518				546
Discontinued operations, net of income taxes			674				674				95				95
Net income available to common stockholders		$	922			$	922			$	613			$	641
Weighted average common shares outstanding			695				695				673				673
Effect of dilutive securities:
Options and restricted stock			—				4				—				4
Convertible preferred stock			—				—				—				57
Weighted average common shares outstanding and dilutive securities			695				699				673				734
Earnings per common share:
Income from continuing operations		$	0.36			$	0.35			$	0.77			$	0.74
Discontinued operations, net of income taxes			0.97				0.96				0.14				0.13
Net income		$	1.33			$	1.31			$	0.91			$	0.87

     We exclude potentially dilutive securities (such as employee stock options, restricted stock, convertible preferred stock, and trust preferred securities) from the determination of diluted earnings per share when their impact on income from continuing operations per common share is antidilutive. These antidilutive securities included certain employee stock options and our trust preferred securities in all periods presented, and our convertible preferred stock for the nine months ended September 30, 2007 and quarter ended September 30, 2006. Additionally, our zero coupon convertible debentures (redeemed in April 2006), were antidilutive in both periods in 2006. For a further discussion of our potentially dilutive securities, see our 2006 Annual Report on Form 10-K.

5.  Price Risk Management Activities

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

		September 30,				December 31,
		2007				2006
		(In millions)
Net assets (liabilities):
Derivatives designated as accounting hedges		$	23			$	61
Other commodity-based derivative contracts(1)			(861	)			(456	)
Total commodity-based derivatives			(838	)			(395	)
Interest rate and foreign currency derivatives			82				43
Net liabilities from price risk management activities		$	(756	)		$	(352	)

6.  Long-Term Financing Obligations and Other Credit Facilities

		September 30,				December 31,
		2007				2006
		(In millions)
Current maturities of long-term financing obligations		$	567			$	1,360
Long-term financing obligations			12,445				13,329
Total		$	13,012			$	14,689

     Changes in Long-Term Financing Obligations.  During the nine months ended September 30, 2007, we had the following changes in our long-term financing obligations (in millions):

										Cash
						Book Value				Received /
Company		Interest Rate				Increase (Decrease)				(Paid)
Issuances
El Paso Exploration and Production Company (EPEP)
Revolving credit facility		variable				$	955			$	952
El Paso
Revolving credit facility		variable					2,200				2,200
Notes due 2014			6.875	%			374				371
Notes due 2017			7.00	%			893				886
El Paso Natural Gas (EPNG) notes due 2017			5.95	%			354				350
Southern Natural Gas (SNG) notes due 2017			5.90	%			500				494
Increases through September 30, 2007						$	5,276			$	5,253
Repayments, repurchases and other
El Paso			6.375%-10.75	%		$	(2,880	)		$	(3,054	)
El Paso-Euro			7.125	%			(157	)			(165	)
EPEP			7.75	%			(1,199	)			(1,267	)
SNG			6.70	%			(52	)			(52	)
SNG			8.875	%			(398	)			(418	)
EPNG			7.625	%			(299	)			(314	)
Other		various					32				(16	)
							(4,953	)			(5,286	)
Revolving Credit Facilities
EPEP		variable					(200	)			(200	)
El Paso		variable					(1,800	)			(1,800	)
Decreases through September 30, 2007						$	(6,953	)		$	(7,286	)

     During the first nine months of 2007, we recorded $287 million of pre-tax losses on the extinguishment of certain debt obligations repurchased and debt refinanced above. During the quarter and nine months ended September 30, 2006, we recorded $17 million and $26 million of pre-tax losses on the extinguishment of certain debt obligations repurchased and debt refinanced.

     Other.  Approximately $10 billion of our debt obligations provide us the ability to call the debt prior to its stated maturity date. If redeemed prior to their stated maturities, we will be required to pay a make-whole or fixed premium in addition to repaying the principal and accrued interest.

     Prior to their redemption in 2006, we recorded accretion expense on our zero coupon debentures. During the nine months ended September 30, 2006, we redeemed $615 million of our zero coupon debentures, of which $110 million represented an increase in the principal balance of long-term debt due to the accretion of interest on the debentures we redeemed. We account for these redemptions as financing activities in our statement of cash flows.

  Credit Facilities/Letters of Credit

     Credit Facilities. As of September 30, 2007, we had available capacity under various credit agreements of approximately $0.7 billion. Below is a discussion of changes to our existing credit facilities and our new facilities entered into in 2007. For a further discussion of our credit facilities, see our 2006 Annual Report on Form 10-K.

$1.75 billion credit agreement. As of September 30, 2007, we had approximately $0.6 billion available under our $1.75 billion credit agreement. As a result of upgrades to our credit ratings in March 2007, we can borrow funds utilizing the revolver under this credit agreement at rates of LIBOR plus 1.25% or issue letters of credit at a rate of 1.40%. The commitment fee on any unused capacity under the revolver is 0.25%.

EPEP $1.0 billion revolving credit agreement. In September 2007, we amended and restated EPEP’s revolving credit facility, increasing the capacity by $0.5 billion to $1.0 billion. The other material terms and conditions of this facility remain the same. As of September 30, 2007, we had available capacity under this facility of $0.1 billion. Based on current borrowing levels, we pay interest at LIBOR plus 1.50% on borrowings, and a commitment fee of 0.35% on any unused capacity.

Unsecured Credit Facility.  In June 2007, we entered into a $150 million unsecured facility that provides for both borrowings and issuing letters of credit. As of September 30, 2007, we increased the size of this facility to $300 million and in October 2007 added an additional $200 million of capacity to this facility, bringing total capacity to $500 million. The facility matures in various tranches during 2009. Based on this facility size, we are required to pay a fixed facility fee at a weighted average rate of 1.64% per annum (1.44% as of September 30, 2007) on the full facility amount. Borrowings carry an interest rate of LIBOR in addition to the facility fee. Substantially all of the capacity was used to issue letters of credit under the facility.

Contingent Letter of Credit Facility.  In January 2007, we entered into a $250 million unsecured contingent letter of credit facility that matures in March 2008. Letters of credit are available under the facility if the average NYMEX gas price strip for the remaining calendar months through March 2008 is equal to or exceeds $11.75 per MMBtu, which has not occurred. The facility fee, if triggered, is 1.66% per annum.
 

     Letters of Credit.  We enter into letters of credit in the ordinary course of our operating activities as well as periodically in conjunction with the sales of assets or businesses. As of September 30, 2007, we had outstanding letters of credit of approximately $1.4 billion of which approximately $0.9 billion secures our recorded obligations related to price risk management activities.

7.  Commitments and Contingencies

  Legal Proceedings

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

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

     Retiree Medical Benefits Matters.  We serve as the plan administrator for a medical benefits plan that covers a closed group of retirees of the Case Corporation who retired on or before July 1, 1994. Case was formerly a subsidiary of Tenneco, Inc. that was spun off in 1994. Tenneco retained an obligation to provide certain medical benefits at the time of the spin-off and we assumed this obligation as a result of our merger with Tenneco. Pursuant to an agreement with the applicable union for Case employees, our liability for these benefits was subject to a cap, such that costs in excess of the cap were to be assumed by plan participants. In 2002, we and Case were sued by individual retirees in a federal court in Detroit, Michigan in an action entitled Yolton et al. v. El Paso Tennessee Pipeline Co. and Case Corporation. The suit alleges, among other things, that El Paso and Case violated ERISA and that they should be required to pay all amounts above the cap. Case further filed claims against El Paso asserting that El Paso was obligated to indemnify Case for the amounts it would be required to pay. In separate rulings in 2004, the court ruled that, pending a trial on the merits, Case must pay the amounts incurred above the cap and that El Paso must reimburse Case for those payments. In January 2006, these rulings were upheld on appeal by the U.S. Court of Appeals for the 6th Circuit. In October 2007, pending a trial on the merits, the court expanded the number of retirees that were covered by its prior preliminary rulings. We will proceed with a trial on the merits with regard to the issues of whether the cap is enforceable and to what degree benefits have actually vested. Until this is resolved, El Paso will indemnify Case for payments Case makes above the cap, which are currently about $2 million per month. We continue to defend the action and have filed for approval by the trial court various amendments to the medical benefit plans which would allow us to deliver the benefits to plan participants in a more cost effective manner. Although it is uncertain what plan amendments will ultimately be approved, the approval of plan amendments could reduce our overall costs and, as a result, could reduce our recorded obligation. We have established an accrual for this matter which we believe is adequate.

     Natural Gas Commodities Litigation.  Beginning in August 2003, several lawsuits were filed against El Paso Marketing L.P. (EPM) alleging that El Paso, EPM and other energy companies conspired to manipulate the price of natural gas by providing false price information to industry trade publications that published gas indices. The first cases were consolidated in federal court in New York for all pre-trial purposes and are styled In re: Gas Commodity Litigation. In September 2005, the court certified the class to include all persons who purchased or sold NYMEX natural gas futures between January 1, 2000 and December 31, 2002. A settlement was finalized and has been paid. The second set of cases, involving similar allegations on behalf of commercial and residential customers, was transferred to a multi-district litigation proceeding (MDL) in the U.S. District Court for Nevada and styled In re: Western States Wholesale Natural Gas Antitrust Litigation. These cases were dismissed. The U.S. Court of Appeals for the Ninth Circuit, however, reversed the dismissal and ordered that these cases be remanded to the trial court. Defendants have filed a motion for reconsideration of that ruling. The third set of cases also involve similar allegations on behalf of certain purchasers of natural gas. These include Farmland Industries v. Oneok Inc. (filed in state court in Wyandotte County, Kansas in July 2005) and Missouri Public Service Commission v. El Paso Corporation, et al. (filed in the circuit court of Jackson County, Missouri at Kansas City in October 2006), and the purported class action lawsuits styled: Leggett, et al. v. Duke Energy Corporation, et al. (filed in Chancery Court of Tennessee in January 2005); Ever-Bloom Inc. v. AEP Energy Services Inc., et al. (filed in federal court for the Eastern District of California in September 2005); Learjet, Inc. v. Oneok Inc., (filed in state court in Wyandotte County, Kansas in September 2005); Breckenridge, et al. v. Oneok Inc., et al. (filed in state court in Denver County, Colorado in May 2006); Arandell, et al. v. Xcel Energy, et al. (filed in the circuit court of Dane County, Wisconsin in December 2006); and Heartland, et al. v. Oneok Inc., et al. (filed in the circuit court of Buchanan County, Missouri in March 2007). The Leggett case was dismissed by the Tennessee state court and has been appealed. The remaining cases have all been transferred to the MDL proceeding. Defendants’ motions to dismiss in Farmland, Learjet and Breckenridge have been denied. Our costs and legal exposure related to these lawsuits and claims are not currently determinable.

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

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

     MTBE.  Certain of our subsidiaries used the gasoline additive methyl tertiary-butyl ether (MTBE) in some of their gasoline. Certain subsidiaries have also produced, bought, sold and distributed MTBE. A number of lawsuits have been filed throughout the U.S. regarding the potential impact of MTBE on water supplies. Some of our subsidiaries are among the defendants in approximately 80 such lawsuits. Although these suits had been consolidated for pre-trial purposes in multi-district litigation in the U.S. District Court for the Southern District of New York, a recent appellate court decision directed two of the cases to be remanded back to state court. A limited number of cases have since been remanded to separate state court proceedings. It is possible many of the other cases will also be remanded. The plaintiffs, certain state attorneys general, various water districts and a limited number of individual water customers, generally seek remediation of their groundwater, prevention of future contamination, damages (including natural resource damages), punitive damages, attorney’s fees and court costs. Among other allegations, plaintiffs assert that gasoline containing MTBE is a defective product and that defendant refiners are liable in proportion to their market share. While the damages claimed in these actions are substantial, there remains significant legal uncertainty regarding the validity of causes of action asserted and availability of the relief sought by plaintiffs. Although there have been preliminary settlement discussions with the plaintiffs in the past, such discussions have been unsuccessful to date. We have tendered the matter to our insurers and, although the primary layer has agreed to reimburse us for reasonable defense costs, they have reserved their rights to deny coverage for any losses incurred by way of settlement or judgment associated with these proceedings. As a result, our costs and legal exposure related to these lawsuits are not currently determinable.

  Government Investigations and Inquiries

     Reserve Revisions.  In March 2004, we received a subpoena from the SEC requesting documents relating to our December 31, 2003 natural gas and oil reserve revisions. We originally self-reported this matter to the SEC and have been cooperating fully with the investigation, which has included producing a large volume of documents and making our employees available for interviews or testimony upon request. On July 13, 2007, we received a notice indicating the SEC staff has made a preliminary decision to recommend to the SEC that it institute an enforcement action against us and two of our subsidiaries related to the reserve revisions. We understand that the staff of the SEC may have also issued similar notices to several of our former employees related to the reserves revisions. We were given the opportunity to respond to the staff before it makes its formal recommendation on whether any action should be brought by the SEC, and on September 25, 2007 we submitted our response.

     Other Government Investigations.  We continue to provide information and cooperate with the inquiry or investigation of the U.S. Attorney and the SEC in response to requests for information regarding price reporting of transactional data to the energy trade press.

     In addition to the above proceedings, we and our subsidiaries and affiliates are named defendants in numerous lawsuits and governmental proceedings that arise in the ordinary course of our business. There are also other regulatory rules and orders in various stages of adoption, review and/or implementation. For each of these matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If we determine that an unfavorable outcome is probable and can be estimated, we establish the necessary accruals. While the outcome of these matters, including those discussed above, cannot be predicted with certainty, and there are still uncertainties related to the costs we may incur, based upon our evaluation and experience to date, we believe we have established appropriate reserves for these matters. It is possible, however, that new information or future developments could require us to reassess our potential exposure related to these matters and adjust our accruals accordingly, and these adjustments could be material. As of September 30, 2007, we had approximately $458 million accrued, net of related insurance receivables, for our outstanding legal and governmental proceedings.

Rates and Regulatory Matters

     EPNG Rate Case.  In August 2007, EPNG received approval of the settlement of its rate case from the FERC. The settlement provides benefits for both EPNG and its customers for a three year period ending December 31, 2008. Under the terms of the settlement, EPNG is required to file a new rate case to be effective January 1, 2009. EPNG has received approval from the FERC to begin billing the settlement rates on October 1, 2007 and it will refund amounts, with interest, within 120 days of that date. Our financial statements reflect EPNG’s proposed rates and we have reserved a sufficient amount to meet the refund obligations under this settlement.

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

  Other Contingencies

     Iraq Imports.  In December 2005, the Ministry of Oil for the State Oil Marketing Organization of Iraq (SOMO) sent an invoice to one of our subsidiaries for shipments of crude oil that SOMO alleged were purchased by Coastal in 1990 just before the 1990 invasion of Kuwait by Iraq. The invoice requests $144 million for such shipments, along with an allegation of an undefined amount of interest. Prior to our merger with Coastal in 2001, Coastal had accrued approximately $77 million for potential claims that SOMO might make for additional payments for these shipments. Following the completion of our review of the invoice and our defenses, including the expiration of the related statute of limitation periods, we determined that no amounts are owed to SOMO, and as a result, we reversed those accrued amounts to other income in our income statement during the third quarter of 2007.

     Navajo Nation.  Approximately 900 looped pipeline miles of the north mainline of our EPNG pipeline system are located on lands held in trust by the United States for the benefit of the Navajo Nation. Our rights-of-way on lands crossing the Navajo Nation are the subject of a pending renewal application filed in 2005 with the Department of the Interior’s Bureau of Indian Affairs. An interim agreement with the Navajo Nation expired at the end of December 2006. Negotiations on the terms of the long-term agreement are continuing. In addition, we continue to preserve other legal, regulatory and legislative alternatives, which includes continuing to pursue our application with the Department of the Interior for renewal of our rights-of-way on Navajo Nation lands. It is uncertain whether our negotiation, or other alternatives, will be successful, or if successful, what the ultimate cost will be of obtaining the rights-of-way and whether we will be able to recover these costs in our rates.

     Cheyenne Plains (CP) Compression Station Fire. In September 2007, the CP Compressor Station, located near the border between Colorado and Wyoming, experienced a fire which has required CP to temporarily shut down certain of its facilities and reduce service to its customers. We currently expect that full service will be restored in mid-November, and we will be required to provide partial demand charge credits to our shippers during the period in which service levels are reduced.  We have business interruption and property insurance and do not anticipate a material impact on our financial results as a result of the shut-down of these facilities. 

  Environmental Matters

     We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remedy the effect on the environment of the disposal or release of specified substances at current and former operating sites. As of September 30, 2007, we have accrued approximately $275 million, which has not been reduced by $29 million for amounts to be paid directly under government sponsored programs. Our accrual includes approximately $266 million for expected remediation costs and associated onsite, offsite and groundwater technical studies and approximately $9 million for related environmental legal costs.

     Our estimates of potential liability range from approximately $275 million to approximately $486 million. Our accrual represents a combination of two estimation methodologies. First, where the most likely outcome can be reasonably estimated, that cost has been accrued ($19 million). Second, where the most likely outcome cannot be estimated, a range of costs is established ($256 million to $467 million) and if no one amount in that range is more likely than any other, the lower end of the expected range has been accrued. Our environmental remediation projects are in various stages of completion. Our recorded liabilities reflect our current estimates of amounts we will expend to remediate these sites. However, depending on the stage of completion or assessment, the ultimate extent of contamination or remediation required may not be known. As additional assessments occur or remediation efforts continue, we may incur additional liabilities. By type of site, our reserves are based on the following estimates of reasonably possible outcomes:

		September 30, 2007
Sites		Expected				High
		(In millions)
Operating		$	24			$	29
Non-operating			223				406
Superfund			28				51
Total		$	275			$	486

     Below is a reconciliation of our accrued liability from January 1, 2007 to September 30, 2007 (in millions):

Balance as of January 1, 2007		$	314
Additions/adjustments for remediation activities			19
Payments for remediation activities			(58	)
Balance as of September 30, 2007		$	275

     For the remainder of 2007, we estimate that our total remediation expenditures will be approximately $22 million, most of which will be expended under government directed clean-up programs. In addition, we expect to make capital expenditures for environmental matters of approximately $23 million in the aggregate for the remainder of 2007 through 2011. These expenditures primarily relate to compliance with clean air regulations.

     Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) Matters.  We have received notice that we could be designated, or have been asked for information to determine whether we could be designated, as a Potentially Responsible Party (PRP) with respect to 45 active sites under the CERCLA or state equivalents. We have sought to resolve our liability as a PRP at these sites through indemnification by third-parties and settlements, which provide for payment of our allocable share of remediation costs. As of September 30, 2007, we have estimated our share of the remediation costs at these sites to be between $28 million and $51 million. Because the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required, and in some cases we have asserted a defense to any liability, our estimates could change. Moreover, liability under the federal CERCLA statute is joint and several, meaning that we could be required to pay in excess of our pro rata share of remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in estimating our liabilities. Accruals for these issues are included in the previously indicated estimates for Superfund sites.

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

  Guarantees and Indemnifications

     We are involved in various joint ventures and other ownership arrangements that sometimes require additional financial support through the issuance of financial and performance guarantees. We also periodically provide indemnification arrangements related to assets or businesses we have sold. These arrangements include, but are not limited to, indemnifications for income taxes, the resolution of existing disputes, environmental matters, and necessary expenditures to ensure the safety and integrity of the assets sold.

     Our potential exposure under guarantee and indemnification agreements can range from a specified amount to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. For those arrangements with a specified dollar amount, we have a maximum stated value of approximately $785 million, for which we are indemnified by third parties for $15 million. These amounts exclude guarantees for which we have issued related letters of credit discussed in Note 6. Included in the above maximum stated value is approximately $440 million related to indemnification arrangements associated with the sale of ANR and related operations and approximately $119 million related to tax matters, related interest and other indemnifications and guarantees arising out of the sale of our Macae power facility. As of September 30, 2007, we have recorded obligations of $38 million related to our guarantees and indemnification arrangements, of which $9 million is related to ANR and related assets and Macae. We are unable to estimate a maximum exposure for our guarantee and indemnification agreements that do not provide for limits on the amount of future payments under the agreement due to the uncertainty of these exposures.

     In addition to the exposures described above, a trial court has ruled, which was upheld on appeal, that we are required to indemnify a third party for benefits being paid to a closed group of retirees of one of our former subsidiaries. We have a liability of approximately $371 million associated with our estimated exposure under this matter as of September 30, 2007. For a further discussion of this matter, see Retiree Medical Benefits Matters above.

8.  Retirement Benefits

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

		Quarters Ended September 30,																Nine Months Ended September 30,
										Other																Other
		Pension								Postretirement								Pension								Postretirement
		Benefits								Benefits								Benefits								Benefits
		2007				2006				2007				2006				2007				2006				2007				2006
		(In millions)
Service cost		$	4			$	4			$	—			$	—			$	13			$	12			$	—			$	—
Interest cost			30				29				6				7				90				87				19				21
Expected return on plan assets			(45	)			(44	)			(4	)			(4	)			(136	)			(132	)			(12	)			(12	)
Amortization of net actuarial loss			11				14				—				—				32				42				—				—
Amortization of prior service cost(1)			(1	)			—				1				—				(2	)			—				—				—
Special termination benefits(2)			—				—				—				—				6				—				—				—
Net benefit cost (income)		$	(1	)		$	3			$	3			$	3			$	3			$	9			$	7			$	9

     In December 2006, we adopted the recognition provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R) and began reflecting assets and liabilities related to our pension and other postretirement benefit plans based on their funded or unfunded status and reclassified all actuarial deferrals as a component of accumulated other comprehensive income. In March 2007, the FERC issued guidance requiring regulated pipeline companies to recognize a regulatory asset or liability for the funded status asset or liability that would otherwise be recorded in accumulated other comprehensive income under SFAS No. 158, if it is probable that amounts calculated on the same basis as SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions would be included in rates in future periods. Upon adoption of this FERC guidance, we reclassified approximately $4 million from the beginning balance of accumulated other comprehensive income to other non-current assets and liabilities on our balance sheet.

     During the nine months ended September 30, 2007 and 2006, we made $15 million and $54 million of cash contributions to our supplemental benefits plan and other postretirement benefit plans. We also made $2 million of cash contributions to our pension plans for the nine months ended September 30, 2007. For the remainder of 2007, we expect to contribute an additional $6 million to our other postretirement benefit plans, $1 million to our pension plans and less than $1 million to our supplemental benefits plan.

9.  Stockholders’ Equity

     In May 2006, we issued 35.7 million shares of common stock for net proceeds of approximately $500 million. The table below shows the amount of dividends paid and declared in 2007.

		Common Stock				Convertible Preferred Stock
		($0.04/Share per Qtr)				(4.99%/Year)
		($ in millions)
Amount paid through September 30, 2007		$	84			$	28
Amount paid in October 2007		$	27			$	9
Declared subsequent to September 30, 2007:
Date of declaration		October 25, 2007				October 25, 2007
Payable to shareholders on record		December 7, 2007				December 15, 2007
Date payable		January 7, 2008				January 7, 2008

     Dividends on our common stock and preferred stock are treated as a reduction of additional paid-in-capital since we currently have an accumulated deficit. For the remainder of 2007, we expect dividends paid on our common and preferred stock will be taxable to our stockholders because we anticipate they will be paid out of current or accumulated earnings and profits for tax purposes.

     The terms of our 750,000 outstanding shares of 4.99% convertible preferred stock prohibit the payment of dividends on our common stock unless we have paid or set aside for payment all accumulated and unpaid dividends on such preferred stock for all preceding dividend periods. In addition, although our credit facilities do not contain any direct restriction on the payment of dividends, dividends are included as a fixed charge in the calculation of our fixed charge coverage ratio under our credit facilities. If our fixed charge ratio were to exceed the permitted maximum level, our ability to pay additional dividends would be restricted.

10.  Business Segment Information

     As of September 30, 2007, our business consists of Pipelines, Exploration and Production, Marketing and Power segments. We have reclassified certain operations as discontinued operations for all periods presented (see Notes 1 and 2). Our segments are strategic business units that provide a variety of energy products and services. They are managed separately as each segment requires different technology and marketing strategies. Our corporate operations include our general and administrative functions, as well as other miscellaneous businesses, contracts and assets, all of which are immaterial. A further discussion of each segment follows:

     Pipelines.  Provides natural gas transmission, storage, and related services, primarily in the United States. As of September 30, 2007, we conducted our activities primarily through seven wholly owned and four partially owned transmission systems along with two underground natural gas storage entities and an LNG terminalling facility.

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

     Marketing.  Markets the majority of our natural gas and oil production, manages the associated commodity price risks and manages our remaining historical trading portfolio.

     Power.  Manages the risks associated with our remaining international power assets, primarily in Brazil, Asia and Central America. We continue to pursue the sale of certain of these assets.

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

		Quarters Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(In millions)
Segment EBIT		$	432			$	324			$	1,432			$	1,552
Corporate and other EBIT			51				(17	)			(263	)			(51	)
Interest and debt expense			(228	)			(294	)			(742	)			(941	)
Income taxes			(100	)			98				(151	)			(14	)
Income from continuing operations		$	155			$	111			$	276			$	546

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

		Segments
						Exploration and												Corporate
		Pipelines				Production				Marketing				Power				and Other(1)				Total
		(In millions)
Quarter Ended September 30, 2007
Revenue from external customers		$	572			$	290	(4)		$	284			$	—			$	20			$	1,166
Intersegment revenue			14				285	(4)			(293	)			—				(6	)			—
Operation and maintenance			199				106				4				5				34				348
Depreciation, depletion, and amortization			94				194				—				1				4				293
Earnings (losses) from unconsolidated affiliates			28				2				—				(36	)(2)			—				(6	)
EBIT			275				232				(8	)			(67	)(2)			51	(3)			483
2006
Revenue from external customers		$	567			$	186	(4)		$	162			$	1			$	26			$	942
Intersegment revenue			15				270	(4)			(267	)			2				(20	)			—
Operation and maintenance			198				109				6				14				7				334
Depreciation, depletion, and amortization			92				163				1				—				4				260
Earnings from unconsolidated affiliates			25				2				—				28				—				55
EBIT			253				141				(108	)			38				(17	)			307

		Segments
						Exploration and												Corporate
		Pipelines				Production				Marketing				Power				and Other(1)				Total
		(In millions)
Nine Months Ended September 30, 2007
Revenue from external customers		$	1,803			$	778	(4)		$	744			$	—			$	61			$	3,386
Intersegment revenue			41				877	(4)			(904	)			—				(14	)			—
Operation and maintenance			541				326				7				16				88				978
Depreciation, depletion, and amortization			279				553				2				1				15				850
Earnings (losses) from unconsolidated affiliates			83				4				—				(12	)(2)			—				75
EBIT			957				646				(138	)			(33	)(2)			(263	)(3)			1,169
2006
Revenue from external customers		$	1,759			$	501	(4)		$	1,015			$	4			$	89			$	3,368
Intersegment revenue			46				883	(4)			(897	)			2				(34	)			—
Operation and maintenance			540				295				18				44				60				957
Depreciation, depletion, and amortization			278				465				3				1				19				766
Earnings (losses) from unconsolidated affiliates			69				10				—				43				(1	)			121
EBIT			885				503				113				51				(51	)			1,501

     Total assets by segment are presented below:

		September 30,				December 31,
		2007				2006
		(In millions)
Pipelines		$	13,599			$	13,105
Exploration and Production			7,814				6,262
Marketing			499				1,143
Power			563				618
Total segment assets			22,475				21,128
Corporate and Other			1,606				2,000
Discontinued operations			—				4,133
Total assets		$	24,081			$	27,261

11.  Investments in, Earnings from and Transactions with Unconsolidated Affiliates

     We hold investments in unconsolidated affiliates which are accounted for using the equity method of accounting. The earnings from unconsolidated affiliates reflected in our income statement include (i) our share of net earnings directly attributable to these unconsolidated affiliates, and (ii) any impairments and other adjustments recorded by us. The information below related to our unconsolidated affiliates includes (i) our net investment and earnings (losses) we recorded from these investments, (ii) summarized financial information of our proportionate share of these investments, and (iii) revenues and charges with our unconsolidated affiliates.

										Earnings (Losses) from
										Unconsolidated Affiliates
Net investment and earnings (losses)		Investment								Quarters Ended								Nine Months Ended
		September 30,				December 31,				September 30,								September 30,
		2007				2006				2007				2006				2007				2006
		(In millions)								(In millions)
Domestic:
Four Star(1)		$	708			$	723			$	2			$	2			$	4			$	10
Citrus			560				597				21				19				65				48
Other			38				36				2				11				3				15
Foreign:
Bolivia to Brazil Pipeline			110				105				3				5				8				10
Manaus/Rio Negro			81				96				(7	)			4				2				15
Porto Velho(2)			(60	)			(34	)			(31	)			2				(24	)			1
Asian and Central American Investments(2)			26				27				—				2				(1	)			(3	)
Other(2)			175				157				4				10				18				25
Total		$	1,638			$	1,707			$	(6	)		$	55			$	75			$	121