In spite of this unprecedented volatility, we stayed focused on our two core businesses and closed the year with some significant achievements under our belt. I will share some of these in this letter, but I don’t want to gloss over the fact that in spite of our efforts and in spite of these accomplishments, our stock performed poorly. In the current environment, there is a great temptation to lay all of this off on “the collapse of the market” or “conditions outside our control.” Two things to point out: First, that isn’t completely true; and, second, it doesn’t change the fact that you, our shareholders, lost money on your investment in El Paso in 2008. For that, I take full responsibility. Also, as a long-term shareholder and someone who has made significant purchases of our stock, I can safely say that no one suffered greater loss as a percentage of their personal worth than me. The same can be said for the rest of the leadership of your company, and we are all committed to leading El Paso through this challenging period and delivering long-term value to you that will make you glad that you allowed us to steward your investment.

Accomplishments
But for a precipitous drop in commodity prices during the fourth quarter, 2008 would have been our sixth consecutive year of improved earnings. Both core businesses—Pipeline and Exploration & Production—contributed to that success. In the Pipeline business, we placed seven growth projects in service during the year. In the successful completion of these projects we saw the positive effects of all of the investment we’ve made over the last two years in improving our commercial skills, our supply chain management expertise, and our ability to successfully execute on projects. These investments will pay huge 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 an incremental $1.2 billion in cash flow annually when fully in service. This is the best growth backlog in the industry, because it is supported by long-term capacity commitments from our customers and because we have mitigated a significant portion of the capital risk. And all of this was accomplished while achieving the best safety performance in our history.

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, large numbers of relatively lowrisk, repeatable drilling opportunities that allow us to achieve substantial benefits from continuous 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 million 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 in a year when most costs were at alltime highs. These accomplishments are a direct result of our asset high-grading process over the last few years, our continued improvement in our supply chain skills, and a focus on larger scale, more repeatable drilling programs. We also had exploration success during the year in Brazil and expect our first large development to come on stream in the second quarter of this year. In Egypt, we kicked off our drilling campaign after building a significant acreage position in the prolific onshore Western Desert area. Our cash flow from operations for 2008 was up 30 percent from 2007. In addition, during the year we worked diligently to 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 Mcf 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, and ever mindful of our capital needs going forward, we built liquidity significantly. As I write this letter in early March, we have $3.3 billion in liquidity, effectively eliminating our need to access capital markets under any commodity price scenario for the remainder of 2009.

Missteps
Our biggest single misstep during the year was not anticipating the bursting of the commodity bubble and the meltdown of the capital markets. Had we been able to do so, we would have certainly managed our business differently, hedging production out beyond 2009, cutting capital sooner, and paying down debt earlier. With hindsight, of course, we all should have seen this coming. But the fact is we did not. In addition, we allocated too much capital to our onshore Texas Gulf Coast region and stuck with our spending program too long when results were below expectations. The result of this was sub-par production volume performance for the year for this region, which dragged down otherwise good performance in the Exploration & Production business as a whole. We work to continuously improve as an organization, so we have incorporated the learnings from these missteps into our 2009 Plan.

2009 and Beyond
We find ourselves today in uncharted waters. Commodity prices are low and have descended at a much faster rate than costs. Demand for our primary product, natural gas, is down. We are trying to forecast when the effects of a dramatic drop-off in drilling activity will result in a rebalancing of the supply/demand equation. The global recession means some new realities in capital markets, maybe for the long term. The monetary and fiscal stimulus from Congress, the Treasury, and the Federal Reserve means that many of the macro-economic drivers for our business will suffer distortion. Any one of these would be a real leadership challenge, but, in combination, they result in an unprecedented need to lead this organization in real-time, to constantly reassess the assumptions in our plan, to maintain maximum flexibility to respond to near-term events, and to communicate regularly with our primary constituents, starting with the 5,000 members of Team El Paso.

So in this environment, what are we doing? First, we acted quickly to address our liquidity for 2009, and now we’re working on 2010 and beyond. Second, we have cut our capital spending plans, and may cut further to the extent that market conditions dictate. But we’ve made these cuts with some principles in mind. Our highest priority is to execute on the growth backlog in our Pipeline business, and do that on-time and onbudget. We view our Exploration & Production expenditures in this environment as largely discretionary, but we want to preserve our inventory so that as commodity prices recover we can capture that value. We are working to shorten the duration of our supply chain so that we can maximize our ability to reduce costs in areas where overcapacity exists, and we continue to work with our vendor partners to reduce costs. Finally, we’re taking actions to ensure that we can withstand a prolonged period of low commodity prices.

This is as challenging a time in our industry as any of us have ever experienced. 2009 will be a difficult year. But we have three core strengths to build on that put us in good stead. First, our primary commodity, natural gas, is uniquely positioned to help address our country’s energy needs and environmental challenges. Natural gas is abundant, it is clean, and it will be the primary bridge fuel as we continue to work to reduce our carbon footprint nationally. Second, we have assets that are well-suited to benefit from the growth of natural gas as a primary energy source. We have the best natural gas pipeline assets in the business, and we will grow them significantly over the next five years with the projects already in hand. We have a great Exploration & Production business that will live within its means during this time of low commodity prices, while preserving the optionality that exists in its large inventory of low-risk unconventional properties. And third, we have an important strategic weapon at El Paso—5,000 team members who are engaged and committed to achieving our longer-term vision for this company to be the Place to Work, the Neighbor to Have, and the Company to Own. We know they are talented, motivated, and engaged because we measure it. And we’ve been honest with them about the challenges ahead and the sacrifices that we will ask them to make for our future. Our employees are battle-tested and capable of leading the company through just this kind of environment.

Thank you for the faith you show in us by allowing us to be stewards of your investment. We will work tirelessly to make that a wise decision.

Due to the size, connectivity, and diversity of our U.S. pipeline system, we have been able to capitalize on growth opportunities and the dynamics of shifting supply and demand. Our backlog of committed pipeline projects has grown from $4 billion as we entered 2008 to nearly $8 billion. 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 675-mile, 42-inch pipeline which will connect competitively priced natural gas reserves in the Rocky Mountain region with markets in the Western United States. It will be ready for service in early 2011. This backlog of projects gives us a clear line of sight to annual pipeline earnings growth for the next five years.

But we’re not just pipelines. A key component of the natural gas delivery system is the ability to store gas for delivery to meet the market’s needs. We own approximately 230 billion cubic feet of storage capacity that provides our customers the operational and financial flexibility they need.

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. 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 sendout capacity of more than 1.2 billion cubic feet. And we’ll place in service a major expansion of our Elba Island facility in 2010.

In 2009, our focus is to enhance the value of our transmission business by successfully executing on our backlog of committed expansion projects and continuing to develop growth projects in our market and supply areas. Our decisions are continually guided by El Paso’s common purpose to deliver natural gas and related energy products in a safe, efficient, and dependable manner.

At the end of 2008, we controlled 3.8 million net leasehold acres. Our proved natural gas and oil reserves were about 2.3 trillion cubic feet equivalent, excluding 0.2 trillion cubic feet related to our unconsolidated investment in Four Star Oil and Gas Company. 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 million cubic feet equivalent per day, including 74 million cubic feet equivalent per day attributable to our share of Four Star equity volumes. We have a significant portfolio of development and exploration projects that includes both long- and shorter-lived properties, which we operate in four U.S. regions and internationally.

Strategic acquisitions have been a big part of our growth story over the past five years. Significant acquisitions include Medicine Bow, with operations in the Western United States and an ownership interest in Four Star; Peoples Energy Production Company, with operations in east and south Texas, north Louisiana, and Mississippi; and producing properties and undeveloped acreage in Zapata County in south Texas. We have also completed smaller “bolt-on” acquisitions of incremental interests where we already had existing operations.

In addition to acquisitions, strategic divestitures have allowed us to highlight 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 recently began operations in Egypt. 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 million cubic feet per day equivalent in 2008. Our Egyptian operations include 1.2 million net acres in two blocks onshore in Egypt’s Western Desert.

Our program has upside potential in the areas of infill drilling, emerging shale plays, and international exploration. In 2009, we will continue to focus on lower-risk, repeatable programs in the onshore regions of the United States, while preserving opportunities for future growth as business cycles emerge from the current global economic challenges.