2008 in Review

For most of the year, El Paso enjoyed strong and rising commodity prices, growth in both of our core businesses, strong earnings and cash flow, and a stock that rose to a six-year high. In the latter part of 2008, however, the environment was much different. A worldwide recession gained momentum, capital markets collapsed, commodity prices were falling, and our stock neared a five-year low. We also experienced a very active hurricane season that impacted our operations offshore in the Gulf of Mexico, onshore along the Gulf Coast, and even at our headquarters in Houston.

Before the steep drop in commodity prices during the fourth quarter, the company was on track to make 2008 our sixth consecutive year of improved earnings. In spite of unprecedented volatility, we stayed focused on our Pipeline and Exploration & Production businesses and realized some significant achievements.

Pipeline Group Performance

With more than 42,000 miles of pipeline in North America and an average daily throughput of approximately 19 billion British thermal units in 2008, we have the size, connectivity, and diversity to capitalize on growth opportunities and the dynamics of shifting supply and demand. This year, our Pipeline Group placed seven growth projects in service, while achieving the best safety record in the company’s history. The successful completion of these projects was the result of investments we’ve made during the last two years to continue to improve our commercial skills, our supply chain management expertise, and our ability to successfully execute on projects. These investments will continue to pay dividends as we move forward on our signature achievement for 2008—increasing our backlog of committed growth projects to $8 billion, which we expect to generate significant annual incremental cash flow when fully in service. This backlog of projects gives us a clear line of sight to annual pipeline earnings growth for the next five years.

In 2008, we committed to new growth projects in the Northeast, Southeast, and West, which will be placed in service between 2009 and 2012. The largest of these is our Ruby Pipeline, a new 680-mile, 42-inch pipeline which will connect competitively priced natural gas reserves in the Rocky Mountain region with markets in the Western United States. Ruby will be in service in early 2011.

Tennessee Gas Pipeline announced the 300 Line Expansion Project that will transport natural gas produced in the Appalachian and Marcellus shale regions to markets in the Northeast United States. The expansion facilities will consist of approximately 128 miles of 30-inch pipeline and approximately 55,000 horsepower of additional compression facilities to be constructed along our existing pipeline corridor in Pennsylvania and New Jersey. We anticipate construction will begin in late 2010, with the line being placed in service in late 2011. We have secured a customer commitment to a 15-year term for 100 percent of the expansion’s capacity.

Colorado Interstate Gas announced the expansion of the natural gas pipeline transmission system that serves the Raton basin. The expansion project, which will consist of 118 miles of 16-inch pipeline, is supported by transportation commitments with three shippers for nearly all of the expansion’s capacity. The in-service target is the second quarter of 2010. El Paso Pipeline Partners announced an expansion of the Wyoming Interstate Company pipeline system to transport natural gas from the Uinta Basin and Wamsutter production areas. This project will be in service in 2011.

Reliable supplies of liquefied natural gas (LNG) are also a critical component of the U.S. energy mix going forward. We own one of North America’s best-located LNG facilities, Elba Island, near Savannah, Georgia, with 933 million cubic feet of daily base load send-out capacity. Elba Island receives regular LNG shipments from stable supply sources and serves as a key natural gas supply hub for markets in the Southeastern and Eastern United States, with current daily send-out capacity of more than 1.2 billion cubic feet. And we’ll place a major expansion of our Elba Island facility in service in 2010..

Exploration & Production Company Performance

In our Exploration & Production business, we grew our non-proved inventory by almost 30 percent year-over-year. And that growth was in areas that have all the attributes we look for—significant acreage positions that are largely held by production, and large numbers of relatively low-risk, repeatable drilling opportunities that allow us to achieve substantial benefits from continuous process improvement and longevity of reserves. This business unit also replaced almost 200 percent of its reserves during the year at a cost per unit domestically of $2.87 per thousand cubic feet equivalent (Mcfe), before considering the effects of the price-related oil and gas reserve revision at year-end. This was a 12-percent improvement over 2007 during a year when most costs were at all-time highs.

These accomplishments are a direct result of our efforts to high-grade our portfolio; improve supply chain management; and focus on larger scale, more repeatable drilling programs.

In addition, during the year we put in place commodity price protection for 2009. The end result is that we achieved a floor price for 75 percent of our 2009 domestic gas production at around $9 per thousand cubic feet and 60 percent of our oil was sold at approximately $110 a barrel for 2009. As market conditions declined in the second half of the year, we built significant liquidity to position us to address our capital needs going forward.

At the end of 2008, the E&P Company controlled 3.8 million net leasehold acres. Our proved natural gas and oil reserves were about 2.3 trillion cubic feet equivalent¹². In addition to our proved reserves, we closed out 2008 with significant resource inventory, including 3.5 trillion cubic feet equivalent of net risked unproved resource potential. During the year, our production averaged about 816 Mcfe per day.¹³

Strategic divestitures have allowed us to enhance the strength of our remaining assets. During 2008, as part of our efforts to high-grade our asset portfolio, we completed the sale of non-core properties primarily in the Texas Gulf Coast and Gulf of Mexico regions. In January 2009, we completed the sale of additional non-core natural gas producing properties in our Western and Central regions. These transactions have increased the weighting of our existing inventory toward lower-risk, onshore basins in the United States.

Internationally, the company has established operations in Brazil and began operations in Egypt in 2008. Our operations in Brazil cover approximately 329,000 net acres in seven blocks and eight development areas in the Camamu, Espirito Santo, and Potiguar basins located offshore Brazil. Production in Brazil averaged 11 Mcfe per day in 2008. Our Egyptian operations included 1.2 million net acres in two onshore blocks in Egypt’s Western Desert at the close of 2008.

¹²Excluding 0.2 trillion cubic feet related to our unconsolidated investment in Four Star Oil and Gas Company