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Article by DailyStocks_admin    (04-02-08 04:53 AM)

El Paso Corp. CEO DOUGLAS L FOSHEE bought 50,000 shares on 3-26-2008 at 15.82

BUSINESS OVERVIEW

Business and Strategy
We are an energy company, originally founded in 1928 in El Paso, Texas that primarily operates in the natural gas transmission and exploration and production sectors of the energy industry. Our purpose is to provide natural gas and related energy products in a safe, efficient and dependable manner.
Natural Gas Transmission. We own or have interests in North America’s largest interstate pipeline system with approximately 42,000 miles of pipe that connect North America’s major natural gas producing basins to its major consuming markets. We also provide approximately 230 Bcf of storage capacity and have an LNG receiving terminal and related facilities in Elba Island, Georgia with 806 MMcf of daily base load sendout capacity. The size, connectivity and diversity of our U.S. pipeline system provides growth opportunities through infrastructure development or large scale expansion projects and gives us the capability to adapt to the dynamics of shifting supply and demand. Our focus is to enhance the value of our transmission business by successfully executing on our backlog of committed expansion projects in the United States and Mexico and developing new growth projects in our market and supply areas.
Exploration and Production. Our exploration and production business is currently focused on the exploration for and the acquisition, development and production of natural gas, oil and NGL in the United States, Brazil and Egypt. As of December 31, 2007, we held an estimated 2.9 Tcfe of proved natural gas and oil reserves, not including our equity share in the proved reserves of an unconsolidated affiliate of 0.2 Tcfe. In this business, we are focused on growing our reserve base through disciplined capital allocation and portfolio management, cost control and marketing our natural gas and oil production at optimal prices while managing associated price risks.
Our operations are conducted through two core segments, Pipelines and Exploration and Production. We also have Marketing and Power segments. Our business segments provide a variety of energy products and services and are managed separately as each segment requires different technology and marketing strategies. For a further discussion of our business segments, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8, Financial Statements and Supplementary Data, Note 16.
Pipelines Segment
Our Pipelines segment includes our interstate natural gas transmission systems and related operations conducted through four separate, wholly owned pipeline systems, three majority-owned systems and three partially owned systems. These systems connect the nation’s principal natural gas supply regions to the five largest consuming regions in the United States: the Gulf Coast, California, the northeast, the southwest and the southeast. We also have access to systems in Canada and assets in Mexico. Our Pipelines segment also includes our ownership of storage capacity through our transmission systems, two underground storage facilities and our LNG terminal and related facilities.
Each of our U.S. pipeline systems and storage facilities operate under Federal Energy Regulatory Commission (FERC) approved tariffs that establish rates, cost recovery mechanisms, and other terms and conditions of service to our customers. The fees or rates established under our tariffs are a function of our costs of providing services to our customers, including a reasonable return on our invested capital.

Our strategy is to enhance the value of our transmission and storage business by:
• Successfully executing on our backlog of committed expansion projects;

• Developing new growth projects in our market and supply areas;

• Recontracting or contracting available or expiring capacity;

• Focusing on efficiency and synergies across our systems;

• Ensuring the safety of our pipeline systems and assets; and

• Providing outstanding customer service.
In November 2007, we formed El Paso Pipeline Partners, L.P., our master limited partnership (MLP). We contributed our Wyoming Interstate system and 10 percent general partner interests in each of Southern Natural Gas and Colorado Interstate Gas to the MLP. Our ownership interest in the MLP at December 31, 2007 consists of a two percent general partner interest and a 64.8 percent limited partner interest.

Intrastate Transmission Systems
CIG has a 50 percent interest in WYCO Development, L.L.C. (WYCO). WYCO owns a state regulated intrastate gas pipeline that extends from the Cheyenne Hub in northeast Colorado to Public Service Company of Colorado’s (PSCo) Fort St. Vrain electric generation plant. WYCO also owns a compressor station on our WIC system’s Medicine Bow lateral in Wyoming and leases these pipeline and compression facilities to PSCo and WIC, respectively, under long-term leases. WYCO currently has two expansion projects underway, the High Plains pipeline and Totem storage expansion projects, expected to be completed in 2008 and 2009. CIG will lease these facilities and will be the operator of these projects.
Underground Natural Gas Storage Facilities

In September 2007, we received FERC approval to expand the Elba Island LNG receiving terminal and construct the Elba Express Pipeline. The expansion is anticipated to increase the peak sendout capacity of the terminal from 1.2 Bcf/d to 2.1 Bcf/d. The Elba Express Pipeline will consist of approximately 190 miles of pipeline with a total capacity of 1.2 Bcf/d, which will transport natural gas from the Elba Island LNG terminal to markets in the southeastern and eastern United States. In February 2008, we completed our acquisition of a 50 percent interest in the Gulf LNG Clean Energy Project, which is constructing a FERC approved liquefied natural gas terminal in Pascagoula, Mississippi that is expected to be placed in service in late 2011.
Markets and Competition
Our Pipelines segment provides natural gas services to a variety of customers, including natural gas producers, marketers, end-users and other natural gas transmission, distribution and electric generation companies. In performing these services, we compete with other pipeline service providers as well as alternative energy sources such as coal, nuclear energy, wind, hydroelectric power and fuel oil.
Imported LNG is one of the fastest growing supply sectors of the natural gas market. LNG terminals and other regasification facilities can serve as important sources of supply for pipelines, enhancing their delivery capabilities and operational flexibility and complementing traditional supply transported into market areas. However, these LNG delivery systems may also compete with our pipelines for transportation of gas into the market areas we serve.
Electric power generation is the fastest growing demand sector of the natural gas market. The growth of the electric power industry potentially benefits the natural gas industry by creating more demand for natural gas turbine generated electric power. This potential benefit is offset, in varying degrees, by increased generation efficiency, the more effective use of surplus electric capacity, increased natural gas prices and the use and availability of other fuel sources for power generation. In addition, in several regions of the country, new additions in electric generating capacity have exceeded load growth and electric transmission capabilities out of those regions. These developments may inhibit owners of new power generation facilities from signing firm transportation contracts with natural gas pipelines.
Our existing contracts mature at various times and in varying amounts of throughput capacity. Our ability to extend our existing contracts or remarket expiring capacity is dependent on competitive alternatives, the regulatory environment at the federal, state and local levels and market supply and demand factors at the relevant dates these contracts are extended or expire. The duration of new or renegotiated contracts will be affected by current prices, competitive conditions and judgments concerning future market trends and volatility. Subject to regulatory requirements, we attempt to recontract or remarket our capacity at the rates allowed under our tariffs although, at times, we discount these rates to remain competitive. The level of discount varies for each of our pipeline systems. The table below shows our firm transportation contracts as of December 31, 2007 for our wholly and majority owned systems that expire by year over the next five years and thereafter.

The following table details information related to our pipeline systems, including the customers, contracts, markets served and the competition faced by each as of December 31, 2007. Firm customers reserve capacity on our pipeline system, storage facilities or LNG terminalling facilities and are obligated to pay a monthly reservation or demand charge, regardless of the amount of natural gas they transport or store, for the term of their contracts. Interruptible customers are customers without reserved capacity that pay usage charges based on the volume of gas they request to transport, store, inject or withdraw.

Regulatory Environment. Our interstate natural gas transmission systems and storage operations are regulated by the FERC under the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and the Energy Policy Act of 2005. Each of our interstate pipeline systems and storage facilities operates under tariffs approved by the FERC that establish rates, cost recovery mechanisms, and terms and conditions for services to our customers. Generally, the FERC’s authority extends to:
• rates and charges for natural gas transportation, storage and related services;

• certification and construction of new facilities;

• extension or abandonment of services and facilities;

• maintenance of accounts and records;

• relationships between pipelines and certain affiliates;

• terms and conditions of service;

• depreciation and amortization policies;

• acquisition and disposition of facilities; and

• initiation and discontinuation of services.
Our interstate pipeline systems are also subject to federal, state and local pipeline and LNG plant safety and environmental statutes and regulations of the U.S. Department of Transportation, the U.S. Department of Interior and the U.S. Coast Guard. We have ongoing inspection programs designed to keep our facilities in compliance with pipeline safety and environmental requirements, and we believe that our systems are in material compliance with the applicable regulations.

Exploration and Production Segment
Our Exploration and Production segment’s business strategy focuses on the exploration for and the acquisition, development and production of natural gas, oil and NGL in the United States, Brazil and Egypt. As of December 31, 2007, we controlled over four million net leasehold acres and our proved natural gas and oil reserves at December 31, 2007, were approximately 2.9 Tcfe, which does not include 0.2 Tcfe related to our unconsolidated investment in Four Star Oil and Gas Company (Four Star). During 2007, daily equivalent natural gas production averaged approximately 792 MMcfe/d, not including 70 MMcfe/d from our equity investment in Four Star.
We completed the acquisition of Peoples Energy Production Company (Peoples) in September 2007 for $887 million. This acquisition upgraded our portfolio of assets across a number of our operating regions, primarily the Onshore and Texas Gulf Coast regions. We are also further upgrading our portfolio by selling selected non-core properties that no longer meet our strategic objectives. In January 2008, we entered into agreements to sell $517 million of certain non-core properties in our Onshore and Texas Gulf Coast regions with estimated proved reserves of 191 Bcfe at December 31, 2007. While we do not anticipate exiting any region, our divestitures will be weighted towards the Gulf of Mexico and south Texas areas.

CEO BACKGROUND

Mr. Braniff has served as a director since 1997. Mr. Braniff has been Managing Partner of Capital I Ltd. Partners and a Partner in Alpha Patrimonial S.A. de C.V. in Mexico City since August 2005. Mr. Braniff was a business consultant from January 2004 to August 2005. Mr. Braniff served Grupo FinancĂ­ero 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 has served as a director since 2003. Mr. Dunlap has primarily been engaged in business consulting since 1999. Mr. Dunlap previously 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 Advisory Council of the Nantucket Conservation Foundation, a trustee of the Culver Educational Foundation and a member of the Corporation of the Woods Hole Oceanographic.

Mr. Foshee has been President, Chief Executive Officer and a director of El Paso since September 2003. Mr. Foshee 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. Foshee serves on the board of directors of El Paso Pipeline GP Company, L.L.C., the general partner of El Paso’s publicly-traded master limited partnership, El Paso Pipeline Partners, L.P.

Mr. Goldman has served as a director since 2003. Mr. Goldman’s primary occupation has been as a financial consultant since October 2002. Prior to that, Mr. Goldman 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, Mr. Goldman 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. Mr. Goldman serves on the board of directors of McDermott International, Inc., Parker Drilling Company and Tesoro Corporation. Mr. Goldman also serves on the Board of Trustees of Kenyon College, Gambier, Ohio.

Mr. Hall has served as a director since 2001. Mr. Hall has been Chief Administrative Officer of the City of Houston since January 2004. Mr. Hall served as the City Attorney for the City of Houston from March 1998 to January 2004. Mr. Hall 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. Mr. Hall is a director of Houston Endowment Inc. and Chairman of the Boulé Foundation.

Mr. Hix has served as a director since 2004. Mr. Hix has been a business consultant since January 2003. Mr. Hix 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 Health Care Service Corporation.

Dr. Joyce has served as a director since 2004. Dr. Joyce served as Chairman of the Board and Chief Executive Officer of Nalco Company from November 2003 to December 2007. From May 2001 to October 2003, Dr. Joyce 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 has served as a director since 1999 and 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 Inc. from June 1984 until his retirement on October 25, 1999. Mr. Kuehn was Chairman of the Board of Sonat Inc. from April 1986 until his retirement. Mr. Kuehn is a director of Praxair, Inc. and served on the Board of Directors of The Dun & Bradstreet Corporation until September 30, 2007 and Regions Financial Corporation until April 19, 2007. Mr. Kuehn serves as Chairman of the Board of El Paso Pipeline GP Company, L.L.C.

Ms. McClean has served as a director since 2006. 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 served as a director since 2006. From October 2000 to April 2006, Mr. Shapiro 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. Mr. Shapiro is a member of the board of directors of Barrick Gold Corporation.

Mr. Talbert has served as a director since 2003. Mr. Talbert served as executive Chairman of the Board of Transocean Inc. from October 2002 to October 2004 and as non-executive Chairman from October 2004 to November 2007. Previously, Mr. Talbert 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. Mr. Talbert 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. Talbert is a member of the board of directors of Transocean Inc.

Mr. Vagt has served as a director since 2005. Mr. Vagt has served as President of The Heinz Endowments since January 2008. Prior to that time, he served as President of Davidson College from July 1997 to August 2007. Mr. Vagt served as President and Chief Operating Officer of Seagull Energy Corporation from 1996 to 1997. From 1992 to 1996, he served as President, Chairman and Chief Executive Officer of Global Natural Resources. Mr. Vagt served as President and Chief Operating Officer of Adobe Resources Corporation from 1989 to 1992. Prior to 1989, he served in various positions with Adobe Resources Corporation and its predecessor entities.

Mr. Whitmire has served as a director since 2003. 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. Mr. Whitmire 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 Transocean Inc.

Mr. Wyatt has served as a director since 1999. Mr. Wyatt has served as 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.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
Our Management’s Discussion and Analysis (MD&A) should be read in conjunction with our consolidated financial statements and the accompanying footnotes. MD&A includes forward-looking statements that are subject to risks and uncertainties that may result in actual results differing from the statements we make. These risks and uncertainties are discussed further beginning on page 27. Listed below is a general outline of our MD&A:
Our Business — includes a summary of our business purpose and description, factors influencing profitability, a summary of our 2007 performance, an outlook for 2008 and an update of our credit profile;
Results of Operations — includes a year-over-year analysis beginning on page 44 of the results of our business segments, our corporate activities and other income statement items, including trends that may impact our business in the future;
Liquidity and Capital Resources — includes a general discussion beginning on page 65 of our debt obligations, available liquidity, expected 2008 cash flows, and significant factors that could impact our liquidity, as well as an overview of cash flow activity during 2007;
Off Balance Sheet Arrangements, Contractual Obligations, and Commodity-Based Derivative Contracts — includes a discussion beginning on page 68 of our (i) off balance sheet arrangements, including guarantees and letters of credit, (ii) other contractual obligations, and (iii) derivative contracts used to manage the price risks associated with our natural gas and oil production and;
Critical Accounting Estimates — includes a discussion beginning on page 71 of accounting estimates that involve the use of significant assumptions and/or judgments in the preparation of our financial statements.
Our Business
Our business purpose is to provide natural gas and related energy products in a safe, efficient and dependable manner. We own or have interests in North America’s largest interstate natural gas pipeline systems and are a large independent natural gas and oil producer focused on growing our reserve base through disciplined capital investment and portfolio management, cost control and marketing and selling our natural gas and oil production at optimal prices while managing associated price risks.
Factors Influencing Our Profitability. Our pipeline operations are rate-regulated and accordingly we generate profit based on our ability to earn a return in excess of our costs through the rates we charge our customers. Our exploration and production operations generate profits dependent on the prices for natural gas and oil and the volumes we are able to produce, among other factors. Our future profitability in each of our operating segments will be primarily influenced by the following factors:
Pipelines
• Successfully executing on our backlog of committed expansion projects and developing new growth projects in our market and supply areas;

• Contracting and recontracting pipeline capacity with our customers;

• Maintaining or obtaining approval by FERC of acceptable rates and terms of service; and

• Improving operating efficiency.
Exploration and Production
• Increasing our natural gas and oil proved reserve base and production volumes through successful drilling programs and/or acquisitions;

• Finding and producing natural gas and oil at a reasonable cost; and

• Managing price risks to optimize realized prices on our natural gas and oil production.

In addition to these factors, our future profitability will also continue to be impacted by our debt level and related interest costs, the successful resolution of our historical contingencies and completing the orderly exit of our remaining power assets, historical derivative contracts and other remaining non-core assets.
Summary of Overall Performance in 2007. The year ended December 31, 2007 marked our fifth consecutive year of improved profitability, driven primarily by a strong base of earnings and cash flow in our pipeline and exploration and production businesses as well as an interest expense reduction of approximately 20 percent. Across our pipeline system, we made progress on our backlog of committed expansion projects and created El Paso Pipeline Partners, L.P., our master limited partnership. In our exploration and production business, we experienced continued success in our worldwide exploration and drilling programs. These successes allowed us to replace our worldwide natural gas and oil reserves and move forward in high grading our portfolio to improve our cost structure.

In addition, our 2007 performance was impacted by our Marketing and Power segments where we continued to reduce the size and volatility of these operations and by corporate costs incurred in conjunction with simplifying and strengthening our balance sheet. Specifically, we incurred (i) mark-to-market losses in our Marketing segment on production-related option contracts and legacy positions, including our Pennsylvania-New Jersey-Maryland (PJM) power contracts and (ii) incremental losses in our Power segment on Brazilian power investments. Additionally, in 2007, we (i) incurred debt extinguishment costs of approximately $291 million in conjunction with repurchasing or refinancing more than $5 billion of debt to strengthen our balance sheet and (ii) resolved certain legal and contractual disputes (see, Item 8, Financial Statements and Supplementary Data, Note 12).

Outlook. For 2008, we expect the current operating trends in our core pipeline and exploration and production businesses to continue with a focus on growing these businesses. For each business, we expect the following:
Pipelines — We anticipate that our pipeline operations will continue to provide strong operating results based on its expansion plans, the current levels of contracted capacity, and the status of its rate and regulatory actions. In the pipeline industry, a favorable macroeconomic environment supports continued industry growth. We expect to spend significant pipeline growth capital in 2008. These expenditures should lay the foundation for future growth and the advancement of our significant backlog of committed expansion projects in our market and supply areas and in the development of significant new infrastructure opportunities. Additionally, we will continue to pursue proposed joint venture development projects that would use our incumbent pipeline infrastructure to connect supply areas to areas of high demand in the West, Northeast and Southeast. Finally, we expect to grow our MLP through organic growth opportunities, potential acquisitions, or through future asset contributions. Currently we have in excess of $2 billion in net operating losses available to us to offset any potential tax gains on future asset contributions to the MLP.
Exploration and Production — We expect to continue with the momentum established in 2007 and seek to create value through a disciplined and balanced capital investment program. Our drilling programs will focus on growing reserves at reasonable finding and development costs, and growing production efficiently through active cost management. In 2008, our domestic programs will constitute approximately 80 percent of our planned capital and substantially all of our expected production. Performance of these programs will require successful integration and execution of our 2007 acquisitions and our 2008 planned divestitures. In 2008, our International capital is expected to increase approximately 50 percent over our 2007 program. Successful execution of these programs, primarily in Brazil, will require effective project management, partner relations and successful negotiations with regulatory agencies. Our future financial results will be primarily dependent on the continued successful execution of these drilling programs and favorable commodity prices to the extent our anticipated natural gas and oil production is unhedged. Based on our current derivative positions, we anticipate our 2008 hedging program will provide protection from price exposure on a substantial portion of our anticipated natural gas and oil production as previously described.
Credit Profile. Our outstanding debt was $12.8 billion at December 31, 2007. In 2007, we strengthened our credit profile as a result of several actions taken during the year including:
• Reducing debt by approximately $2.6 billion (including debt of our discontinued ANR operations) primarily with proceeds from the sale of ANR;

• Refinancing approximately $2.0 billion of the debt of our subsidiaries SNG, EPNG, and EPEP;

• Receiving upgraded senior unsecured debt ratings for El Paso of Ba3 with a positive outlook from Moody’s, BB- with a positive outlook from Standard and Poor’s and BB+ from Fitch Ratings and receiving investment grade senior unsecured debt ratings on our pipeline subsidiaries of Baa3 with a positive outlook from Moody’s, BB with a positive outlook from Standard and Poor’s and an investment grade rating of BBB- from Fitch Ratings. This improvement should provide us a lower cost of capital on planned expansions in our pipeline business;

• Restructuring the El Paso and EPEP revolving credit facilities with improved terms and total capacities of $1.5 billion and $1.0 billion, respectively; and

• Completing our pipeline MLP initial public offering in November 2007 providing us a lower cost of capital for further pipeline growth projects and entering into a $750 million revolving credit facility available to the MLP and non-recourse to El Paso.

Results of Operations
Overview
As of December 31, 2007, our core operating business segments were Pipelines and Exploration and Production. We also have a Marketing segment that markets our natural gas and oil production and manages our legacy trading activities and a Power segment that has interests in several international power plants. Our segments are managed separately, provide a variety of energy products and services, and require different technology and marketing strategies. Our corporate activities include our general and administrative functions, as well as other miscellaneous businesses, contracts and assets all of which are immaterial.
Our management uses earnings before interest expense and income taxes (EBIT) to assess the operating results and effectiveness of our business segments, which consist of both consolidated businesses and investments in unconsolidated affiliates. We believe EBIT is useful to our investors because it allows them to evaluate our operating performance using the same performance measure analyzed internally by our management. We define EBIT as net income (loss) adjusted for (i) items that do not impact our income or loss from continuing operations, such as discontinued operations and the impact of accounting changes, (ii) income taxes and (iii) interest and debt expense. We exclude interest and debt expense from this measure so that investors may evaluate our operating results without regard to our financing methods or capital structure. EBIT may not be comparable to measurements 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 flows.

Pipelines Segment
Overview
Our Pipelines segment operates primarily in the United States and consists of interstate natural gas transmission, storage and LNG terminalling related services. We face varying degrees of competition in this segment from other existing and proposed pipelines and proposed LNG facilities, as well as from alternative energy sources used to generate electricity, such as hydroelectric power, nuclear energy, wind, solar, coal and fuel oil.

The FERC regulates the rates we can charge our customers. These rates are generally a function of the cost of providing services to our customers, including a reasonable return on our invested capital. Because of our regulated nature and the high percentage of our revenues attributable to reservation charges, our revenues have historically been relatively stable. However, our financial results can be subject to volatility due to factors such as changes in natural gas prices, market conditions, regulatory actions, competition, weather and declines in the creditworthiness of our customers. We also experience earnings volatility at certain pipelines when the amount of natural gas used in operations differs from the amounts we receive for that purpose.
Historically, much of our business was conducted through long-term contracts with customers. However, many of our customers have shifted from a traditional dependence on long-term contracts to a portfolio approach, which balances short-term opportunities with long-term commitments. This shift, which can increase the volatility of our revenues, is due to changes in market conditions and competition driven by state utility deregulation, local distribution company mergers, new supply sources, volatility in natural gas prices, demand for short-term capacity and new power plant markets.
We continue to manage our recontracting process to limit the risk of significant impacts on our revenues from expiring contracts. Our ability to extend existing customer contracts or remarket expiring contracted capacity is dependent on competitive alternatives, the regulatory environment at the federal, state and local levels and market supply and demand factors at the relevant dates these contracts are extended or expire. The duration of new or renegotiated contracts will be affected by current prices, competitive conditions and judgments concerning future market trends and volatility. Subject to regulatory requirements, we attempt to recontract or remarket our capacity at the rates allowed under our tariffs, although we discount these rates at various levels for each of our pipeline systems to remain competitive. Our existing contracts mature at various times and in varying amounts of throughput capacity.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Operating revenues. During 2007, revenues increased compared with 2006 due to higher realized natural gas and oil prices, including the effects of our hedging program. Realized gains on hedging transactions were $177 million during 2007, as compared to losses of $58 million in 2006. During 2007, we also benefited from an increase in production volumes in all domestic regions over 2006.
Other revenue. During 2007, we recognized mark-to-market gains of $7 million compared to losses of $40 million in 2006 related to the change in fair value of derivatives not designated as hedges, including a portion of our oil and natural gas fixed price swaps, option contracts and basis swaps.
Depreciation, depletion and amortization expense. During 2007, our depletion rate increased as compared to the same periods in 2006 as a result of the Peoples and Zapata County, Texas property acquisitions and higher finding and development costs.
Production costs. Our production taxes increased during 2007 as compared to 2006 primarily due to higher natural gas and oil revenues and lower severance tax credits in 2007.
General and administrative expenses. Our general and administrative expenses increased during 2007 as compared to 2006 primarily due to higher marketing and other costs previously included in our Marketing segment and higher corporate overhead allocations.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Operating Results for the Periods Ended September 30, 2007
Average Daily Production. Our average daily production for the nine months ended September 30, 2007, was 774 MMcfe/d (excluding 67 MMcfe/d from our equity investment in Four Star). Average daily production was within our expected production range for the third quarter of 2007 and, excluding our equity investment in Four Star, increased eight percent for the nine months ended September 30, 2007 compared with the same period in 2006.

We have increased production volumes across all of our domestic operating regions. In our Onshore region, our 2007 production continued to increase through capital projects where we maintained or increased production in most of our major operating areas, with the majority of growth coming from the Rockies and ArkLaTex areas. In the Texas Gulf Coast region, the acquisition of properties in Zapata County during the first quarter of 2007 and success of our subsequent drilling program more than offset natural production declines and the sale of certain non-strategic south Texas properties in 2006. In the Gulf of Mexico Shelf/south Louisiana region, we began producing from development wells in the western gulf and south Louisiana and several exploratory discoveries occurring prior to 2007. We also recovered volumes shut-in by hurricane damage, which when coupled with these new production sources, helped to offset natural production declines. In Brazil, production volumes decreased due to natural production declines and a contractual reduction of our ownership interest in the Pescada-Arabaiana fields in early 2006.

Drilling
The following is a discussion of our drilling results for the nine months ended September 30, 2007:
Onshore. We realized a 100 percent success rate on 469 gross wells drilled.
Texas Gulf Coast. We experienced a 90 percent success rate on 61 gross wells drilled.
Gulf of Mexico Shelf /south Louisiana. We drilled four successful wells and six unsuccessful wells.
Brazil. We completed drilling two successful exploratory wells south of the Pinauna Field in the BM-CAL-4 concession in the Camamu Basin that extend the southern limits of the Pinauna project. We are currently evaluating test results and assessing development options. We currently own 100 percent of the BM-CAL-4 concession and are in the process of marketing up to a 50 percent non-operating interest in this concession. In addition, we completed drilling and testing an exploratory well with Petrobras in the ES-5 Block in the Espirito Basin. This well confirmed the extension of an earlier discovery by Petrobras on a block to the south and we have begun drilling an appraisal well on the ES-5 Block to further delineate this structure.
Egypt. In April 2007, we received formal government approval and signed the concession agreement for the South Mariut Block. We paid $3 million for the concession and agreed to a $22 million firm working commitment over three years. The block is approximately 1.2 million acres and is located onshore in the western part of the Nile Delta.
Cash Operating Costs. We monitor the cash operating costs required to produce our natural gas and oil volumes. These costs are generally reported on a per Mcfe basis and include total operating expenses less depreciation, depletion and amortization expense and cost of products and services on our income statement. During the nine months ended September 30, 2007, cash operating costs per unit increased to $1.89/Mcfe as compared to $1.85/Mcfe for the same period in 2006, primarily as a result of higher workover activity levels, industry inflation in services, labor and material costs, lower severance tax credits, higher marketing and other costs and higher corporate overhead allocations.
Capital Expenditures. Our total natural gas and oil capital expenditures on an accrual basis were approximately $2 billion for the nine months ended September 30, 2007, including $879 million for our Peoples acquisition in September 2007, $254 million to acquire producing properties and undeveloped acreage in Zapata County, Texas in January 2007 and $27 million to increase our ownership interest in Four Star from 43 percent to 49 percent. The Peoples acquisition complements our operations in the ArkLaTex and Texas Gulf Coast areas while the acquisition in Zapata County complements our existing Texas Gulf Coast operations and provides a re-entry into the Lobo area.
Outlook
For the full year 2007, we anticipate the following on a worldwide basis:
• Average daily production volumes of approximately 785 MMcfe/d to 800 MMcfe/d, which excludes approximately 65 MMcfe/d to 70 MMcfe/d from our equity investment in Four Star;

• Total capital expenditures, excluding acquisitions, between $1.4 billion and $1.5 billion. While more than 80 percent of the 2007 capital program is allocated to our domestic program, we have invested approximately $179 million internationally through September 2007, primarily in our Brazil exploration and development program;

• Average cash operating costs which include production costs, general and administrative expenses and taxes (other than production and income) of approximately $1.85/Mcfe to $1.95/Mcfe; and

• An overall depreciation, depletion, and amortization rate between $2.60/Mcfe and $2.75/Mcfe.

Price Risk Management Activities
As part of our strategy, we enter into derivative contracts on our natural gas and oil production to stabilize cash flows, to reduce the risk and financial impact of downward commodity price movements on commodity sales and to protect the economic assumptions associated with our capital investment programs. Because this strategy only partially reduces our exposure to downward movements in commodity prices, our reported results of operations, financial position and cash flows can be impacted significantly by movements in commodity prices from period to period. Adjustments to our hedging strategy and the decision to enter into new positions or to alter existing positions are made based on the goals of the overall company.
During the nine months ended September 30, 2007, we entered into floor and ceiling option contracts, 77 TBtu of basis swaps and 28 TBtu of fixed price swaps, all related to anticipated 2008 natural gas production.

In October 2007, we entered into additional derivative contracts, which include (i) swaps at a fixed price of $8.00 per MMBtu on approximately 8 TBtu of anticipated 2007 natural gas production, (ii) option contracts on approximately 4 TBtu of anticipated 2008 natural gas production at a floor price of $8.00 per MMBtu and a ceiling price of $10.00 per MMBtu and (iii) basis swaps on 15 TBtu of anticipated 2009 natural gas production in the Onshore-Raton area.
Most of our floor and ceiling option contracts are designated as accounting hedges. Gains and losses associated with these natural gas contracts are deferred in accumulated other comprehensive income and will be recognized in earnings upon the sale of the related production at market prices, resulting in a realized price that is approximately equal to the hedged price. Our oil fixed price swaps and approximately 9 TBtu, 11 TBtu and 90 TBtu of our natural gas fixed price swaps, option contracts and basis swaps are not designated as accounting hedges. Accordingly, changes in the fair value of these derivatives are not deferred, but are recognized in earnings each period.
Additionally, the table above does not include (i) net realized gains on derivative contracts previously accounted for as hedges on which we will record an additional $15 million as natural gas and oil revenues for the remainder of 2007, which are also currently deferred in accumulated other comprehensive income or (ii) contracts entered into by our Marketing segment as further described in that segment. For the consolidated impact of the entirety of El Paso’s production-related price risk management activities on our liquidity, see the discussion of factors that could impact our liquidity in Liquidity and Capital Resources.

Operating revenues. During 2007, revenues increased compared with 2006 primarily due to higher realized natural gas prices, including the effects of our hedging program. Realized gains on hedging transactions were $71 million and $140 million during the quarter and nine months ended September 30, 2007, as compared to losses of less than $1 million and $55 million for the quarter and nine months ended September 30, 2006. During both periods in 2007, we also benefited from an increase in production volumes over 2006.
Other revenue. During the quarter and nine months ended September 30, 2007, we recognized mark-to-market gains of $7 million and $4 million as compared to losses of $43 million and $41 million for the same periods in 2006 related to the change in fair value of derivatives not designated as hedges including a portion of our oil and natural gas fixed-price swaps, option contracts and basis swaps.
Depreciation, depletion and amortization expense. During 2007, our depletion rate increased as compared to the same periods in 2006 as a result of downward revisions in previous estimates of reserves due to lower commodity prices and higher finding and development costs. Finding and development costs in 2006 were higher due to mechanical problems experienced in executing our drilling program and service cost inflation.
Production costs. Our lease operating costs increased during the nine months ended September 30, 2007 as compared to the same period in 2006 due to higher workover activity levels, industry-wide cost inflation for services, labor and material costs and lower severance tax credits. Our lease operating costs decreased during the quarter ended September 30, 2007 as compared to the same period in 2006 primarily due to lower workover activity levels.

General and administrative expenses. Our general and administrative expenses increased during the 2007 periods as compared to 2006 primarily due to higher labor costs, higher marketing and other costs previously in our Marketing segment, and higher corporate overhead allocations.
Marketing Segment
Overview. Our Marketing segment markets the majority of our Exploration and Production segment’s natural gas and oil production and manages the company’s overall commodity price risks, primarily through the use of natural gas and oil derivative contracts. This segment also manages our remaining legacy natural gas supply, transportation, power and other natural gas contracts entered into prior to our decision to exit the energy trading business. To the extent it is economical to do so, we may liquidate certain of these remaining legacy contracts before their expiration, which could affect our operating results in future periods. For a further discussion of our contracts in this segment including our expected earnings volatility by contract type, see our 2006 Annual Report on Form 10-K.
Operating Results. Our 2007 year-to-date results were primarily driven by mark-to-market losses on our legacy natural gas and power positions and on option contracts that were entered into to manage the price risk of the company’s natural gas and oil production. These positions were negatively impacted by changes in commodity prices and decreases in interest rates used in determining their fair value.

Production-related Natural Gas and Oil Derivative Contracts
Option contracts. Our production-related natural gas and oil derivative contracts are designed to provide protection to El Paso against changes in natural gas and oil prices. These are in addition to those contracts entered into by our Exploration and Production segment which are further discussed in that segment. For the consolidated impact of all of El Paso’s production-related price risk management activities, refer to our Liquidity and Capital Resources discussion. Our production-related derivatives consist of various option contracts which are marked-to-market in our results each period based on changes in commodity prices.

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