<PAGE>   1
 
================================================================================
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-Q
 
(Mark One)
[X]             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
 
                                       OR
 
[ ]            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 1-2700
 
                            ------------------------
 
                          EL PASO NATURAL GAS COMPANY
             (Exact Name of Registrant as Specified in its Charter)
 
<TABLE>
<S>                                                 <C>
                   DELAWARE                                      74-0608280
         (State or Other Jurisdiction                         (I.R.S. Employer
      of Incorporation or Organization)                     Identification No.)

           EL PASO ENERGY BUILDING
        1001 LOUISIANA, HOUSTON, TEXAS                             77002
   (Address of Principal Executive Offices)                      (Zip Code)
</TABLE>
 
      Registrant's Telephone Number, Including Area Code:  (713) 757-2131
 
     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 [X]     No [ ]
 
     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
 
<TABLE>
<CAPTION>
                    CLASS                                       OUTSTANDING
                    -----                                       -----------
<S>                                                 <C>
   Common Stock, par value $3.00 per share
            as of August 11, 1997                            59,341,964 shares
</TABLE>
 
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<PAGE>   2
 
                                    GLOSSARY
 
     The following abbreviations, acronyms, or defined terms used in this Form
10-Q are defined below:
 
<TABLE>
<CAPTION>
                                                       DEFINITIONS
                                                       -----------
<S>                     <C>
CAPSA.................  Companias Asociadas Petroleras SA, a privately held integrated energy
                        company in Argentina
Company...............  El Paso Natural Gas Company and its subsidiaries
Cornerstone...........  Cornerstone Natural Gas, Inc.
Court of Appeals......  United States Court of Appeals for the District of Columbia Circuit
Distributions.........  Various intercompany transfers and distributions which restructured,
                        divided and separated the businesses, assets and liabilities of Old
                        Tenneco and its subsidiaries so that all the assets, liabilities and
                        operations related to the automotive parts, packaging and administrative
                        services businesses and the shipbuilding business were spun-off to Old
                        Tenneco's then existing common stockholders
EPG...................  El Paso Natural Gas Company, unless the context otherwise requires
EPTPC.................  El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), an indirect
                        subsidiary of El Paso Natural Gas Company
FERC..................  The Federal Energy Regulatory Commission
GSR...................  Gas supply realignment
Merger................  The acquisition of El Paso Tennessee Pipeline Co. by El Paso Natural Gas
                        Company in December 1996
MW(s).................  Megawatt(s)
NGL(s)................  Natural gas liquid(s)
New Tenneco...........  Tenneco Inc., subsequent to the Merger and Distributions, consisting of
                        the automotive parts, packaging and administrative services businesses
Old Tenneco...........  Tenneco Inc. (renamed El Paso Tennessee Pipeline Co.), prior to its
                        acquisition by the Company
PCB(s)................  Polychlorinated biphenyl(s)
Pemex.................  Pemex Gas Petroquimica Basica, the Mexican state-owned energy company
PRP(s)................  Potentially responsible party(ies)
SFAS..................  Statement of Financial Accounting Standards
TGP...................  Tennessee Gas Pipeline Company, a wholly owned subsidiary of El Paso
                        Tennessee Pipeline Co.
TransAmerican.........  TransAmerican Natural Gas Corporation
</TABLE>
 
                                        i
<PAGE>   3
 
                        PART I -- FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
                          EL PASO NATURAL GAS COMPANY
 
                       CONSOLIDATED STATEMENTS OF INCOME
                 (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                           SECOND QUARTER        SIX MONTHS
                                                           ENDED JUNE 30,      ENDED JUNE 30,
                                                          ----------------    ----------------
                                                           1997      1996      1997      1996
                                                          ------    ------    ------    ------
<S>                                                       <C>       <C>       <C>       <C>
Operating revenues......................................  $  979    $  587    $2,810    $1,193
                                                          ------    ------    ------    ------
Operating expenses
  Cost of gas and other products........................     620       420     2,058       854
  Operation and maintenance.............................     156        73       315       147
  Employee separation and asset impairment charge.......      --        --        --        99
  Depreciation, depletion, and amortization.............      57        21       124        43
  Taxes, other than income taxes........................      21        11        49        21
                                                          ------    ------    ------    ------
                                                             854       525     2,546     1,164
                                                          ------    ------    ------    ------
Operating income........................................     125        62       264        29
                                                          ------    ------    ------    ------
Other (income) and expense
  Interest and debt expense.............................      59        25       120        48
  Other -- net..........................................     (14)       (3)      (24)       (1)
                                                          ------    ------    ------    ------
                                                              45        22        96        47
                                                          ------    ------    ------    ------
Income (loss) before income taxes and minority
  interest..............................................      80        40       168       (18)
Income tax expense (benefit)............................      31        16        65        (7)
                                                          ------    ------    ------    ------
Income (loss) before minority interest..................      49        24       103       (11)
Minority interest
  Preferred stock dividend requirement of subsidiary....       6        --        12        --
                                                          ------    ------    ------    ------
Net income (loss).......................................  $   43    $   24    $   91    $  (11)
                                                          ======    ======    ======    ======
Earnings (loss) per common share........................  $  .75    $  .69    $ 1.60    $ (.31)
                                                          ======    ======    ======    ======
Average common shares outstanding.......................    57.3      35.5      56.4      35.3
                                                          ======    ======    ======    ======
Dividends declared per common share.....................  $.3650    $.3475    $.7300    $.6950
                                                          ======    ======    ======    ======
</TABLE>
 
  The accompanying Notes are an integral part of these Consolidated Financial
                                  Statements.
 
                                        1
<PAGE>   4
 
                          EL PASO NATURAL GAS COMPANY
 
                          CONSOLIDATED BALANCE SHEETS
                      (IN MILLIONS, EXCEPT SHARE AMOUNTS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                               JUNE 30,
                                                                 1997        DECEMBER 31,
                                                              (UNAUDITED)        1996
                                                              -----------    ------------
<S>                                                           <C>            <C>
Current assets
  Cash and temporary investments............................    $   78          $  200
  Accounts and notes receivable, net........................       889           1,273
  Inventories...............................................        77              87
  Deferred income tax benefit...............................       113             141
  Other.....................................................       285             395
                                                                ------          ------
          Total current assets..............................     1,442           2,096
Property, plant, and equipment, net.........................     6,385           5,938
Other.......................................................       827             809
                                                                ------          ------
          Total assets......................................    $8,654          $8,843
                                                                ======          ======
 
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable..........................................    $  726          $1,089
  Short-term borrowings (including current maturities of
     long-term debt)........................................       510             841
  Accrual for regulatory issues.............................       201             309
  Other.....................................................       613             604
                                                                ------          ------
          Total current liabilities.........................     2,050           2,843
                                                                ------          ------
Long-term debt, less current maturities.....................     2,188           2,215
                                                                ------          ------
Deferred income taxes.......................................     1,399           1,092
                                                                ------          ------
Other.......................................................       814             720
                                                                ------          ------
Minority interest
  Preferred stock of subsidiary.............................       300             296
                                                                ------          ------
  Other minority interest...................................        40              39
                                                                ------          ------
Commitments and contingencies (See Note 2)
Stockholders' equity
  Common stock, par value $3 per share; authorized
     100,000,000 shares; issued 60,783,803 and 56,726,734
     shares.................................................       182             170
  Additional paid-in capital................................     1,537           1,355
  Retained earnings.........................................       273             227
  Less: Treasury stock (at cost) 1,465,104 and 1,451,922
        shares..............................................        45              45
         Deferred compensation..............................        84              69
                                                                ------          ------
          Total stockholders' equity........................     1,863           1,638
                                                                ------          ------
          Total liabilities and stockholders' equity........    $8,654          $8,843
                                                                ======          ======
</TABLE>
 
  The accompanying Notes are an integral part of these Consolidated Financial
                                  Statements.
 
                                        2
<PAGE>   5
 
                          EL PASO NATURAL GAS COMPANY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                 SIX MONTHS
                                                               ENDED JUNE 30,
                                                              ----------------
                                                               1997      1996
                                                              -------    -----
<S>                                                           <C>        <C>
Cash flows from operating activities
  Net income (loss).........................................  $    91    $ (11)
  Adjustments to reconcile net income (loss) to net cash
     from operating activities
     Depreciation, depletion, and amortization..............      124       43
     Deferred income tax expense (benefit)..................      178      (24)
     Net employee separation and asset impairment charge....       --       79
     Working capital changes................................     (127)      49
     Other..................................................      (23)       4
                                                              -------    -----
          Net cash provided by operating activities.........      243      140
                                                              -------    -----
Cash flows from investing activities
  Capital expenditures......................................      (77)     (45)
  Investment in equity securities...........................     (139)     (48)
  Net cash flow impact of acquisitions......................       --      (99)
  Collection of note receivable from partnership............       53       --
  Other.....................................................       15       18
                                                              -------    -----
          Net cash used in investing activities.............     (148)    (174)
                                                              -------    -----
Cash flows from financing activities
  Net commercial paper proceeds/(payments)..................       69      (66)
  Revolving credit borrowings...............................       --      263
  Revolving credit repayments...............................   (1,200)    (163)
  Retirement of long-term debt..............................     (105)     (16)
  Net proceeds from long-term debt issuance.................      883       --
  Net proceeds from equity offering.........................      152       --
  Dividends paid on common stock............................      (35)     (24)
  Other.....................................................       19       51
                                                              -------    -----
          Net cash provided by (used in) financing
            activities......................................     (217)      45
                                                              -------    -----
Increase (decrease) in cash and temporary investments.......     (122)      11
Cash and temporary investments
          Beginning of period...............................      200       39
                                                              -------    -----
          End of period.....................................  $    78    $  50
                                                              =======    =====
</TABLE>
 
  The accompanying Notes are an integral part of these Consolidated Financial
                                  Statements.
 
                                        3
<PAGE>   6
 
                          EL PASO NATURAL GAS COMPANY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
 
     The 1996 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Form 10-Q. The condensed consolidated financial statements
at June 30, 1997, and for the six months and quarters ended June 30, 1997, and
1996, are unaudited. The condensed balance sheet at December 31, 1996, is
derived from audited financial statements. These financial statements do not
include all disclosures required by generally accepted accounting principles. In
the opinion of management, all material adjustments necessary to present fairly
the results of operations for such periods have been included. All such
adjustments are of a normal recurring nature. Results of operations for any
interim period are not necessarily indicative of the results of operations for
the entire year due to the cyclical nature of the Company's businesses.
Financial statements for the previous periods include certain reclassifications
which were made to conform to current presentation. Such reclassifications have
no effect on reported net income or stockholders' equity.
 
  Derivative Financial Instruments
 
     The Company utilizes derivative financial instruments to manage price risks
associated with certain energy commodities and interest and foreign currency
exchange rates. In its price risk management activities, the Company engages in
both trading and non-trading activities. The financial instruments used include
swap agreements, futures, options and hedge contracts.
 
     Activities for trading purposes generally consist of services provided to
the energy sector and are accounted for using the mark-to-market method. Such
trading activities are conducted through a variety of financial instruments,
including forward contracts involving cash settlements or physical delivery of
an energy commodity, swap contracts which require payments to (or receipt of
payments from) counterparties based on the differential between a fixed and
variable price for the commodity, options, and other contractual arrangements.
 
     Under mark-to-market accounting, financial instruments with third parties
are reflected at estimated market value, with resulting unrealized gains and
losses recorded in operating income in the Consolidated Statements of Income.
The net gains or losses recognized in the current period result primarily from
transactions originating within the period and the impact of price movements on
transactions originating in previous periods. The assets and liabilities
resulting from mark-to-market accounting are presented as other current assets
and other current liabilities in the Consolidated Balance Sheets. Terms
regarding cash settlement of the contracts vary with respect to the actual
timing of cash receipts and payments. Receivables and payables resulting from
these timing differences are presented in accounts and notes receivable, net,
and accounts payable in the Consolidated Balance Sheets. Cash inflows and
outflows associated with these price risk management activities are recognized
in operating cash flow as the settlement of transactions occur.
 
     The market prices used to value these financial instruments reflect
management's best estimate considering various factors including exchange and
over-the-counter quotations, time value and volatility factors underlying the
commitments. The values are adjusted to reflect the potential impact of
liquidating the Company's position in an orderly manner over a reasonable period
of time under present market conditions.
 
     Activities for non-trading purposes consist of transactions entered into by
the Company to hedge the impact of market fluctuations on assets, liabilities,
production, or other contractual commitments. In order to meet the requirements
of a hedge, the transactions must be designated as a hedge, meet certain
correlation criteria, and reduce price risk. The Company uses forwards, swaps,
and other contracts to hedge the impact of market fluctuations. Changes in the
market value of these financial instruments are deferred until the gains or
losses on the hedged item are recognized. Cash inflows and outflows are
recognized in operating cash flow as the settlement of transactions occurs. Upon
maturity, the gain or loss on derivatives designated as a hedge is
 
                                        4
<PAGE>   7
 
recognized when the underlying transaction gain or loss is recognized. When the
underlying asset being hedged is sold, deferred gains or losses are recognized
at the time of the sale of the underlying asset. Deferred gains or losses are
also recognized at the time it becomes probable that an anticipated transaction
or a portion thereof will not occur.
 
2. COMMITMENTS AND CONTINGENCIES
 
  Rates and Regulatory Matters
 
     TGP -- In February 1997, TGP filed with FERC a settlement of all issues
related to the recovery by TGP of its GSR and other transition costs and related
proceedings (the "GSR Stipulation and Agreement"). On April 16, 1997, FERC
approved the settlement and TGP implemented the settlement on May 1, 1997. Under
the terms of the GSR Stipulation and Agreement, TGP will be entitled to collect
from customers a total of up to $770 million, of which approximately $647
million has been collected as of June 30, 1997. TGP is entitled to recover
additional transition costs, up to the remaining $123 million, through a demand
transportation surcharge and an interruptible transportation surcharge. The
demand transportation surcharge portion is scheduled to be recovered over a
period extending through December 1998. There is no time limit for collection of
the interruptible transportation surcharge portion. The terms of the GSR
Stipulation and Agreement also provides for a rate case moratorium through
November 2000 (subject to certain limited exceptions) and provides an escalating
rate cap, indexed to inflation, through October 2005, for certain of TGP's
customers.
 
     In January 1995, FERC accepted TGP's rate case which was filed in December
1994, suspended its effectiveness for the maximum period of five months pursuant
to the normal regulatory process, and set the matter for hearing. On July 1,
1995, TGP began collecting rates, subject to refund, reflecting an $87 million
increase in TGP's annual revenue requirement. A stipulation was filed with an
Administrative Law Judge in this proceeding in April 1996. This stipulation
resolves the rates that are the subject of the December 1994 rate case,
including a structural rate design change that results in a larger proportion of
TGP's transportation revenues being dependent upon throughput. In October 1996,
FERC approved the stipulation with certain modifications and clarifications
which are not material. In January 1997, FERC issued an order denying requests
for rehearing of the October 1996 order. Under the stipulation, TGP's refund
obligation was approximately $185 million, inclusive of interest, of which $161
million was refunded to customers in March and June 1997 with the remaining $24
million refund obligation offset against GSR recoveries in accordance with
particular customer elections. TGP had provided a reserve for these rate refunds
as revenues were collected. One party to the rate proceeding, a competitor of
TGP, filed with the Court of Appeals a Petition for Review of the FERC orders
approving the stipulation. The Company believes the FERC orders will be upheld.
 
     In July 1997, FERC issued an order on rehearing of its July 1996 order
addressing cost allocation and rate design issues of TGP's 1991 general rate
proceeding. All cost of service issues were previously resolved pursuant to a
settlement that was approved by FERC. In the July 1996 order, FERC remanded to
the presiding Administrative Law Judge the issue of proper allocation of TGP's
New England lateral costs. In the July 1997 order on rehearing, FERC clarified
among other things, that although the ultimate resolution as to the proper
allocation of costs will be applied retroactively to July 1, 1995, the cost of
service settlement does not allow TGP to recover from other customers amounts
that TGP may ultimately be required to refund. TGP will seek rehearing of this
order. Management believes that the resolution of this issue will not have a
material impact on the financial position or results of operations of the
Company.
 
     EPG -- In January 1997, the Chief Administrative Law Judge certified EPG's
March 1996 settlement to FERC and severed contesting parties. In April 1997,
FERC approved EPG's settlement as filed and determined that only Southern
California Edison Company should be severed for separate determination of the
rates it pays EPG. Hearings to determine Southern California Edison Company's
rates are scheduled to begin January 1998. In July 1997, FERC issued an order
denying the requests for rehearing of the April 1997 order. Southern California
Edison Company has filed with the Court of Appeals a petition for review of
FERC's July 1997 order. Revenues collected subject to refund through June 30,
1997, were $185 million,
 
                                        5
<PAGE>   8
 
including interest. It is anticipated that refunds to the customers that were
parties to the settlement will be made in the third quarter of 1997. Settlement
rates for the settled parties were effective July 1, 1997. EPG provided a
reserve for rate refunds as revenues were collected and will continue to provide
a reserve for rate refunds for non-settled parties.
 
     Under FERC procedures, take-or-pay cost recovery filings may be challenged
by pipeline customers on prudence and certain other grounds. Certain parties
sought review in the Court of Appeals of FERC's determination in the October
1992 order that certain buy-down/buy-out costs were eligible for recovery. In
January 1996, the Court of Appeals remanded the order to FERC with direction to
clarify the basis for its decision that the take-or-pay buy-down/buy-out costs
were eligible for recovery. In March 1996, FERC issued an order to the effect
that categories of costs which had been determined to be eligible for recovery
might in fact be ineligible for recovery and established a technical conference
which was held in May 1996. In March 1997, following a technical conference and
the submission of statements of position and replies, FERC issued an order
determining that the costs related to all but one of EPG's disputed contracts
were eligible for recovery. The costs ruled ineligible for recovery totaled
approximately $3 million, including interest, and were refunded to customers in
the second quarter of 1997. The contesting parties, who contended that EPG
should have been ordered to refund up to $42 million plus interest, have filed a
request for rehearing of FERC's March 1997 order.
 
  Environmental Matters
 
     As of June 30, 1997, the Company had a reserve of approximately $236
million related to the environmental assessments and remediation activities
discussed below.
 
     Since 1988, TGP has been engaged in an internal project to identify and
deal with the presence of PCBs and other substances on the United States
Environmental Protection Agency List of Hazardous Substances, at compressor
stations and other facilities operated by both its interstate and intrastate
natural gas pipeline systems. While there are still uncertainties relating to
the ultimate costs which may be incurred, based upon the Company's evaluation
and experience to date, the Company believes that the recorded estimate for the
reserve is adequate.
 
     In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
established a mechanism for recovering a substantial portion of the
environmental costs identified in the internal project. In November 1995, FERC
issued an order approving the Environmental Stipulation. Although one shipper
filed for rehearing, FERC denied rehearing of its order in February 1996. This
shipper filed a Petition of Review in April 1996 in the Court of Appeals; TGP
believes the FERC order approving the Environmental Stipulation will be upheld
on appeal. The Environmental Stipulation was effective July 1, 1995. As of June
30, 1997, a balance of $37 million remains to be collected under this agreement.
 
     The Company and certain of its subsidiaries have been designated, have
received notice that they should be designated, or have been asked for
information to determine whether they could be designated as a PRP with respect
to 32 sites under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA or Superfund) or state equivalents. The Company has sought
to resolve its liability as a PRP with respect to these Superfund sites through
indemnification by third parties and/or settlements which provide for the
payment of the Company's allocable share of remediation costs. Because the
clean-up costs are estimates and are subject to revision as more information
becomes available about the extent of remediation required, the Company's
estimate of its share of remediation costs could change. Moreover, liability
under the federal Superfund statute is joint and several, meaning that the
Company could be required to pay in excess of its pro rata share of remediation
costs if other parties are unable to pay. The Company's understanding of the
financial strength of other PRPs has been considered, where appropriate, in its
determination of its estimated liability as described herein. The Company
presently believes that the recorded estimate for the reserve associated with
the Superfund sites is adequate.
 
                                        6
<PAGE>   9
 
     In addition, the Company has identified a number of formerly owned or
leased sites, and certain other sites associated with its discontinued
operations, where environmental remediation may be required. The Company
presently believes that the recorded estimate for the reserve associated with
these sites is adequate.
 
  Legal Proceedings
 
     In November 1993, TransAmerican filed a complaint in a Texas state court,
TransAmerican Natural Gas Corporation v. El Paso Natural Gas Company, et al.,
alleging fraud, tortious interference with contractual relationships, economic
duress, civil conspiracy, and violation of state antitrust laws arising from a
settlement agreement entered into by EPG, TransAmerican, and others in 1990 to
settle litigation then pending and other potential claims. The complaint, as
amended, seeks unspecified actual and exemplary damages. EPG is defending the
matter in the State District Court of Dallas County, Texas. In April 1996, a
former employee of TransAmerican filed a related case in Harris County, Texas,
Vickroy Stone v. Godwin & Carlton, P.C., et al. (including EPG), seeking
indemnification and other damages in unspecified amounts relating to litigation
consulting work allegedly performed for various entities, including EPG, in
cases involving TransAmerican. The trials in TransAmerican and Stone are set to
commence in May 1998 and September 1998, respectively. Based on information
available at this time, management believes that the claims asserted against it
in both cases have no factual or legal basis and that the ultimate resolution of
these matters will not have a materially adverse effect on the Company's
financial position or results of operations.
 
     In July 1996, EPG and TGP were served with a complaint in the matter of
Jack J. Grynberg v. Alaska Pipeline Co., et al., filed in the U.S. District
Court for the District of Columbia (the "Court"). The plaintiff filed this
action under the False Claims Act against most interstate pipelines and others
alleging that the defendants mismeasured natural gas produced from federal and
Indian land, which deprived the United States of royalties otherwise due it.
Among other things, the plaintiff sought to recover unspecified treble damages
on behalf of the United States. The plaintiff also sought to recover his
finder's fee and attorneys' fees. In response to motions filed by most
defendants, the Court, in March 1997, issued an order dismissing the complaint.
EPG and TGP cannot predict what action the plaintiff will take in response to
the Court's order. Based on information available at this time, EPG and TGP do
not believe that the ultimate resolution of this matter will have a materially
adverse effect on the Company's financial position or results of operations.
 
     In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court, Docket
No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency alleged
that TGP discharged pollutants into the waters of the state without a permit and
disposed of PCBs without a permit. The agency sought an injunction against
future discharges, sought an order to remediate or remove PCBs, and sought a
civil penalty. TGP has entered into agreed orders with the agency to resolve
many of the issues raised in the original allegations, has received water
discharge permits for its Kentucky stations from the agency, and continues to
work to resolve the remaining issues. Management believes that the resolution of
this issue will not have a materially adverse effect on the Company's financial
position or results of operations.
 
     The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a materially adverse effect on the Company's financial position
or results of operations.
 
                                        7
<PAGE>   10
 
3. FINANCING TRANSACTIONS
 
     The Company had short-term borrowings, including current maturities of long
term debt, at June 30, 1997 and December 31, 1996, as follows:
 
<TABLE>
<CAPTION>
                                                              1997    1996
                                                              ----    ----
<S>                                                           <C>     <C>
EPG Revolving Credit Facility...............................  $ --    $ 17
EPTPC Revolving Credit Facility.............................   417     700
Commercial paper............................................    69      --
Current maturities of long term debt........................    24     124
                                                              ----    ----
                                                              $510    $841
                                                              ====    ====
</TABLE>
 
     At December 31, 1996, EPTPC had an additional $900 million outstanding
under its credit facility which was reflected as long-term debt because it was
expected to be refinanced with long-term debt during the first quarter of 1997.
 
     In January 1997, EPG's 6.90% notes, which had an aggregate principal amount
of $100 million, matured and were retired.
 
     In February 1997, EPG issued an additional 3 million shares of common
stock. Proceeds of approximately $152 million, net of issuance costs, were used
to repay a portion of EPTPC's credit facility and for general corporate
purposes.
 
     In March 1997, TGP closed the sale of $300 million aggregate principal of
7 1/2% debentures due 2017, $300 million aggregate principal of 7% debentures
due 2027, and $300 million aggregate principal of 7 5/8% debentures due 2037.
Proceeds of approximately $883 million, net of issuance costs, were used to
repay a portion of EPTPC's credit facility and for general corporate purposes.
 
     During the first six months of 1997, the Company made payments of $150
million on EPTPC's credit facilities out of operating cash flows.
 
4. PROPERTY, PLANT, AND EQUIPMENT
 
     Property, plant, and equipment at June 30, 1997, and December 31, 1996,
consisted of the following:
 
<TABLE>
<CAPTION>
                                                               1997      1996
                                                              ------    ------
                                                               (IN MILLIONS)
<S>                                                           <C>       <C>
Property, plant, and equipment, at cost.....................  $5,489    $5,474
Less accumulated depreciation and depletion.................   1,300     1,207
                                                              ------    ------
                                                               4,189     4,267
Additional acquisition cost assigned to utility plant, net
  of accumulated amortization...............................   2,196     1,671
                                                              ------    ------
          Total property, plant, and equipment, net.........  $6,385    $5,938
                                                              ======    ======
</TABLE>
 
     The increase in additional acquisition cost assigned to plant is a result
of the Company's continuing efforts to evaluate the fair market value of the
assets and liabilities acquired in conjunction with the Merger.
 
5. INVENTORIES
 
     Inventories at June 30, 1997, and December 31, 1996, consisted of the
following:
 
<TABLE>
<CAPTION>
                                                              1997        1996
                                                              ----        ----
                                                               (IN MILLIONS)
<S>                                                           <C>         <C>
Materials and supplies......................................  $50         $51
Gas in storage..............................................   27          36
                                                              ---         ---
                                                              $77         $87
                                                              ===         ===
</TABLE>
 
                                        8
<PAGE>   11
 
     Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
 
6. ACCOUNTING FOR REGULATED OPERATIONS
 
     The Company's businesses that are subject to the regulations and accounting
requirements of FERC have followed the accounting requirements of SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation, which may differ from
those accounting methods used by non-regulated entities. Changes in the
regulatory and economic environment may, at some point in the future, create
circumstances in which the application of regulatory accounting principles would
no longer be appropriate. During the first quarter of 1997, FERC approved TGP's
GSR Stipulation and Agreement and EPG's settlement (discussed previously in
Rates and Regulatory Matters of Note 2). The Company is currently evaluating the
impact the FERC approvals may have on the continued application of regulatory
accounting principles. If these accounting principles should no longer be
applied, an amount would be charged to earnings as an extraordinary item in
accordance with SFAS No. 101, Regulated Enterprises -- Accounting for
Discontinuation of Application of SFAS No. 71. At June 30, 1997, this amount was
estimated to be approximately $89 million, net of income taxes. Any potential
charge would be non-cash and would not have a direct effect on the regulated
companies' ability to seek recovery of the underlying deferred costs in their
future rate proceedings or on their ability to collect the rates set thereby.
 
7. RECENT PRONOUNCEMENTS
 
  Earnings per share
 
     In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which establishes new guidelines for calculating
earnings per share. The pronouncement is effective for reporting periods ending
after December 15, 1997, with earlier application not permitted. SFAS No. 128
will require companies to present both a basic and diluted earnings per share
amount on the face of the statement of income and to restate prior period
earnings per share amounts. Pro forma basic and diluted earnings per share
amounts calculated in accordance with SFAS No. 128 are presented below for the
six months and quarters ended June 30, 1997 and 1996.
 
<TABLE>
<CAPTION>
                                              SECOND QUARTER                        SIX MONTHS
                                     ---------------------------------   ---------------------------------
                                          1997              1996              1997              1996
                                     ---------------   ---------------   ---------------   ---------------
                                     BASIC   DILUTED   BASIC   DILUTED   BASIC   DILUTED   BASIC   DILUTED
                                     -----   -------   -----   -------   -----   -------   -----   -------
<S>                                  <C>     <C>       <C>     <C>       <C>     <C>       <C>     <C>
(In millions, except per common
  share amounts)
Net income (loss)..................  $  43    $  43    $  24    $  24    $  91    $  91    $ (11)   $ (11)
                                     =====    =====    =====    =====    =====    =====    =====    =====
Average common shares
  outstanding......................   57.3     57.3     35.5     35.5     56.4     56.4     35.3     35.3
Effect of dilutive securities
          Stock options............     --      1.5       --       --       --      1.4       --       --
                                     -----    -----    -----    -----    -----    -----    -----    -----
Adjusted average common shares
  outstanding......................   57.3     58.8     35.5     35.5     56.4     57.8     35.3     35.3
                                     =====    =====    =====    =====    =====    =====    =====    =====
Earnings (loss) per common
  share............................  $ .75    $ .74    $ .69    $ .69    $1.60    $1.56    $(.31)   $(.31)
                                     =====    =====    =====    =====    =====    =====    =====    =====
</TABLE>
 
  Capital structure
 
     In March 1997, the Financial Accounting Standards Board issued SFAS No.
129, Disclosure of Information about Capital Structure, which consolidates
capital structure reporting requirements previously required by other accounting
standards. This pronouncement, which will become effective for reporting periods
ending after December 15, 1997, will have no impact on the Company's disclosure
of capital structure information.
 
                                        9
<PAGE>   12
 
  Comprehensive Income
 
     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This pronouncement is
effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact of this pronouncement.
 
  Segment Reporting
 
     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes the way that public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This pronouncement
is effective for financial statements for periods beginning after December 15,
1997. The Company is currently evaluating the impact of this pronouncement.
 
  Derivative Disclosure
 
     The Securities and Exchange Commission recently issued Financial Reporting
Release No. 48, Disclosure of Derivative and Other Financial Instruments, which
requires enhanced disclosure related to accounting policies for derivatives and
quantitative and qualitative disclosure concerning market risk inherent in
derivatives and other financial instruments.
 
     The effective date for the enhanced-accounting policy disclosure
requirements is for fiscal periods ending after June 15, 1997 (see Note 1). The
requirements for quantitative and qualitative disclosures about market risks are
effective for the Company for December 31, 1997. The Company is currently
evaluating the impact of this pronouncement.
 
  Other
 
     The Company adopted SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, SFAS No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125, and
Statement of Position No. 96-1, Environmental Remediation Liabilities, effective
January 1, 1997. These pronouncements did not have a material impact on the
Company's financial position or results of operations.
 
                                       10
<PAGE>   13
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, in
addition to the interim consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
 
                             RESULTS OF OPERATIONS
 
NATURAL GAS TRANSMISSION
 
<TABLE>
<CAPTION>
                                                     SECOND QUARTER       SIX MONTHS
                                                     ---------------     -------------
                                                     1997      1996      1997     1996
                                                     -----     -----     ----     ----
                                                               (IN MILLIONS)
<S>                                                  <C>       <C>       <C>      <C>
Operating revenues.................................   $316      $126     $659     $254
Operating expenses.................................    175        76      376      157
                                                      ----      ----     ----     ----
Operating income...................................   $141      $ 50     $283     $ 97
                                                      ====      ====     ====     ====
</TABLE>
 
  Second Quarter 1997 Compared to Second Quarter 1996
 
     Operating revenues for the quarter ended June 30, 1997, were $190 million
higher than for the same period of 1996 primarily due to the acquisition of
EPTPC.
 
     Operating expenses for the quarter ended June 30, 1997, were $99 million
higher than for the same period of 1996 primarily due to the acquisition of
EPTPC. This increase in operating expenses was partially offset by lower
operation and maintenance expense, specifically the cost of labor and benefits,
as a result of the reduction in staffing levels during 1996.
 
  Six Months Ended 1997 Compared with Six Months Ended 1996
 
     Operating revenues for the six months ended June 30, 1997, were $405
million higher than for the same period of 1996 primarily due to the acquisition
of EPTPC.
 
     Operating expenses for the six months ended June 30, 1997, were $219
million higher than for the same period of 1996 primarily due to the acquisition
of EPTPC. This increase in operating expenses was partially offset by lower
operation and maintenance expense, specifically the cost of labor and benefits,
as a result of the reduction in staffing levels during 1996.
 
FIELD AND MERCHANT SERVICES
 
<TABLE>
<CAPTION>
                                                        SECOND QUARTER       SIX MONTHS
                                                        ---------------     -------------
                                                        1997      1996      1997     1996
                                                        -----     -----     ----     ----
                                                                  (IN MILLIONS)
<S>                                                     <C>       <C>       <C>      <C>
Gathering and treating margin.........................   $23       $18      $59      $37
Processing margin.....................................    13        11       32       17
Marketing margin......................................    (2)       10       (7)      30
Other.................................................     3         3        4        3
                                                         ---       ---      ---      ---
          Total gross margin..........................    37        42       88       87
Operating expenses....................................    42        28       83       55
                                                         ---       ---      ---      ---
Operating income......................................   $(5)      $14      $ 5      $32
                                                         ===       ===      ===      ===
</TABLE>
 
  Second Quarter 1997 Compared to Second Quarter 1996
 
     Total gross margin (revenue less cost of sales) for the quarter ended June
30, 1997, was $5 million lower than for the same period of 1996. The decrease
was primarily the result of generally lower industry-wide gas
 
                                       11
<PAGE>   14
 
marketing margins. The lower marketing margins were partially offset by higher
gathering and treating margins due to an increase in volumes arising from the
Cornerstone and EPTPC acquisitions.
 
     Operating expenses for the quarter ended June 30, 1997, were $14 million
higher than for the same period of 1996 primarily due to the acquisitions of
Cornerstone and EPTPC.
 
  Six Months Ended 1997 Compared with Six Months Ended 1996
 
     Total gross margin for the six months ended June 30, 1997, was $1 million
higher than for the same period of 1996. The increases experienced in the
gathering and treating margin and the processing margin were primarily the
result of higher natural gas prices in the San Juan Basin, slightly higher NGL
prices, an increase in gathering and treating volumes due to the acquisitions of
Cornerstone and EPTPC, and an increase in NGLs attributable to the Chaco
cryogenic plant, which began processing in the second quarter of 1996. Partially
offsetting the increase in total gross margin was a decrease in the marketing
margin resulting from generally lower industry-wide gas marketing margins in the
second quarter of 1997, as well as extreme market volatility which negatively
impacted natural gas marketing activities and trading positions during the first
quarter of 1997.
 
     Operating expenses for the six months ended June 30, 1997, were $28 million
higher than for the same period of 1996 primarily due to the acquisitions of
Cornerstone and EPTPC.
 
CORPORATE AND OTHER
 
     The operating loss for the quarter ended June 30, 1996, was $10 million
higher than for the same period of 1996 due to costs related to discontinued
operations assumed as part of the EPTPC acquisition and additional development
expenses related to the Company's international operations.
 
     The operating loss for the six months ended June 30, 1997, was $75 million
less than for the same period in 1996 primarily as a result of the $99 million
employee separation and asset impairment charge recorded in March 1996.
 
OTHER INCOME AND EXPENSE
 
  Second Quarter 1997 Compared to Second Quarter 1996
 
     Interest and debt expense for the quarter ended June 30, 1997, was $34
million higher than for the same period of 1996 due primarily to the debt
assumed in connection with the acquisition of EPTPC and the Company's debt and
capital realignment efforts.
 
     Other income for the quarter ended June 30, 1997, was $11 million higher
than for the same period of 1996 primarily due to an increase in equity income
from unconsolidated subsidiaries resulting from the acquisition of EPTPC.
 
  Six Months Ended 1997 Compared to Six Months Ended 1996
 
     Interest and debt expense for the six months ended June 30, 1997, was $72
million higher than for the same period of 1996 due primarily to the debt
assumed in connection with the acquisition of EPTPC.
 
     Other income for the six months ended June 30, 1997, was $23 million higher
than for the same period of 1996 primarily due to an increase in equity income
from unconsolidated subsidiaries which were acquired in connection with the
acquisition of EPTPC.
 
                                       12
<PAGE>   15
 
                        LIQUIDITY AND CAPITAL RESOURCES
 
  Cash From Operating Activities
 
     Net cash provided by operating activities was $103 million higher for the
six months ended June 30, 1997, compared to the same period of 1996. This
increase was primarily a result of the acquisition of EPTPC, an income tax
refund in 1997, and other working capital changes. The increase was partially
offset by higher interest payments resulting from debt assumed in the
acquisition of EPTPC, dividends on EPTPC's Series A Preferred Stock, and a rate
refund to TGP's customers in March 1997.
 
  Cash From Investing Activities
 
     Net cash used in investing activities was $26 million lower for the six
months ended June 30, 1997, compared to the same period of 1996. The decrease
was attributable to the collection of a $53 million note receivable for the
Company's partnership in a 103 MW cogeneration plant near Bartow, Florida and
the June 1996 acquisition of Cornerstone for approximately $99 million. Higher
expenditures for equity investments and capital expenditures offset the decrease
in net cash used in investing activities. Expenditures related to equity
investments were primarily attributed to the Company's international operations.
The increase in capital expenditures was due to activities on EPTPC's pipeline
systems.
 
     Future funding for capital expenditures, acquisitions, and other investing
expenditures is expected to be provided by internally generated funds,
commercial paper issuances, and/or available capacity under existing credit
facilities.
 
  Cash From Financing Activities
 
     Net cash used in financing activities was $262 million higher for the six
months ended June 30, 1997, compared to the same period of 1996 due in large
part to the Company's efforts to realign its debt and capital structure
following the EPTPC acquisition. Specifically, this change was primarily a
result of increased credit facility repayments. Funds used to repay the credit
facility were provided by internally generated cash flows, the net proceeds of
$883 million received from the issuance of long-term debt, and the net proceeds
of $152 million from the issuance of an additional 3 million shares of common
stock. Also contributing to the change were the retirement of EPG's 6.90% notes
in January 1997, increased common stock dividends, and a reduction in revolving
credit borrowings.
 
     During the second quarter of 1997, the Company issued commercial paper for
general corporate purposes, with $69 million outstanding at June 30, 1997.
 
     The following table reflects quarterly dividends declared and paid on EPG's
common stock:
 
<TABLE>
<CAPTION>
                                          AMOUNT PER
           DECLARATION DATE              COMMON SHARE      PAYMENT DATE       TOTAL AMOUNT
           ----------------              ------------      ------------       -------------
                                                                              (IN MILLIONS)
<S>                                      <C>             <C>                  <C>
October 11, 1996.......................      0$.3475      January 2, 1997          $13
January 22, 1997.......................      0$.3650       April 1, 1997           $22
April 23, 1997.........................      0$.3650       July 1, 1997            $22
</TABLE>
 
     On July 18, 1997, the Board declared a quarterly dividend of $.3650 per
share on EPG's common stock, payable on October 1, 1997, to stockholders of
record on September 5, 1997.
 
     Future funding for long-term debt retirements, dividends, and other
financing expenditures are expected to be provided by internally generated
funds, commercial paper issuances, and/or available credit facilities.
 
     At June 30, 1997, the Company had $1 billion available under its revolving
credit facilities. The availability of borrowings under the Company's credit
facilities is subject to certain specified conditions, which management believes
it currently meets.
 
                                       13
<PAGE>   16
 
                         COMMITMENTS AND CONTINGENCIES
 
  Rates and Regulatory Matters
 
     See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
 
  Legal Proceedings
 
     See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
 
  Environmental Matters
 
     See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
 
                                     OTHER
 
  Ongoing and Future Investment and Capital Projects
 
     Significant events during the first six months of 1997 impacting the
Company's development projects are discussed below.
 
     International Operations
 
     Australia Project. The Company's 30 percent owned Australian joint venture
was selected to construct the 270 mile expansion project on the Dampier to
Bunburry natural gas pipeline in Western Australia at an estimated cost of $250
million. The joint venture is evaluating project financing options and
anticipates completion of financing in early 1998. The expansion project is
expected to be operational in the third quarter of 1999.
 
     Czech Republic Project. As of June 1997, the Company has acquired a 31.2
percent interest in a $401 million project to expand to 343 MW, an existing gas
and coal-fired power plant located in Kladno, Czech Republic. Project financing
was finalized in June 1997 for approximately $300 million of the $401 million
expansion cost.
 
     Mexico Project. During the second quarter, both FERC and the Comision
Reguladora de Energia of Mexico issued permits allowing construction, operation
and maintenance of the 45 mile pipeline expansion which connects EPG's existing
pipeline system in west Texas to Pemex's pipeline system in northern Mexico.
Construction is anticipated to begin in the third quarter of 1997 with
completion expected by December 1997.
 
     Hungary Project. The Company's $26 million acquisition of a 50 percent
interest in an operating 70 MW power plant located in Dunaujvaros, Hungary,
closed in the second quarter of 1997. The acquisition did not involve any
financing. Political risk insurance has been obtained from the Overseas Private
Investment Corporation.
 
     CAPSA. In March 1997, the Company acquired an interest in CAPSA consisting
of a 10.5 percent acquisition of CAPSA stock and an equity swap for an
additional 18.5 percent of CAPSA stock. The total 29 percent interest is valued
at $157 million. The assets of CAPSA include an interest in CAPEX, a company
publicly traded on the Argentine and Luxembourg stock exchanges which owns
certain power plants and gas and oil reserves in Argentina.
 
     Aguaytia Project. During the first quarter of 1997, the Aguaytia project
consortium completed loan negotiations with the Inter-American Development Bank
which reduced the project equity requirements from 60 percent to approximately
40 percent. In addition, the Company increased its economic interest in the
Aguaytia project by approximately 2 percent to 26 percent in April 1997.
 
     Natural Gas Transmission Operations
 
     Eastern Express Project. TGP has announced that it is pursuing various
market and expansion opportunities in the northeast and mid-Atlantic regions of
the United States. TGP held an open season, which concluded in June 1997, to
gauge interest in the TGP Eastern Express Project designed to provide service to
 
                                       14
<PAGE>   17
 
these markets in 1999. TGP is pursuing discussions with customers that
participated in the open season to determine if their needs can be met by TGP.
The Company also announced a second phase of the Eastern Express Project to meet
the needs of shippers that expressed interest in alternate markets and/or
service commencing in the year 2000.
 
     Liquefied Natural Gas Peaking Service Joint Venture. The new venture,
Continental States Peaking Services L.L.C., will be equally owned by TGP and MCN
Investment Corporation, a subsidiary of MCN Energy Group Inc. The proposed $40
to $50 million project would provide liquefaction, storage and vaporization
services at a facility to be built on the Delmarva Peninsula, near Delaware's
border with Maryland. The project's size, and feasibility will be based upon the
results of an open season. Services are expected to begin in early 2000.
 
     DOMAC Lateral Project. TGP proposes to construct a meter station and
pipeline extension from DOMAC's liquefied natural gas plant in Everett,
Massachusetts to a point on TGP's existing Revere Lateral in Saugus,
Massachusetts. TGP will transport up to 90,000 decatherms per day from the
liquefied natural gas plant to customers on the TGP system. The estimated total
cost of the proposed facilities is $25.9 million.
 
     TransColorado. In late June 1997, EPG and its partners in the TransColorado
Pipeline Project ("TransColorado") announced a restructured partnership
arrangement for the project. Formerly, TransColorado was an equal one-third
partnership among affiliates of EPG, Questar Corporation and KN Energy, Inc.
Under the new arrangement, the affiliates of Questar Corporation and KN Energy,
Inc. will each retain a 50 percent interest in TransColorado, and EPG will
continue as the operator and a revenue participant in the constructed facilities
of Phase I which includes 25 miles of pipe from the discharge of Coyote Gulch
Gas Plant to EPG's pipeline at Blanco, New Mexico. EPG's participation in the
project under the new arrangement will cease upon the completion of the
additional Phase II facilities.
 
  Field and Merchant Services Operations
 
     San Juan Global Compression Project. In June 1997, the Company entered into
contracts with three of its major natural gas producers in the San Juan Basin,
providing for new global compression services to reduce field delivery pressures
and increase production by an estimated 130 million cubic feet per day. The
project cost is $50 million and includes the installation of approximately
36,000 horsepower of new field compression and construction of an additional 56
miles of pipeline system. The project is expected to be in service by October
1998.
 
     Viosca Knoll. During the second quarter of 1997, Viosca Knoll Gathering
Company, the Company's fifty-fifty joint venture with a subsidiary of Leviathan
Gas Pipeline Partners, L.P., announced its intent to construct, at a cost of $25
million, additional facilities to accommodate incremental capacity requirement
on its system, including a new 25 mile, 20-inch diameter pipeline from Main Pass
Block 261 to Viosca Knoll Block 817. Construction is expected to be completed by
the fourth quarter of 1997.
 
  Purchase Price Allocation
 
     The Company is continuing to evaluate the fair market value of the assets
and liabilities acquired in conjunction with the Merger. Management believes
that the final adjustments to the purchase price allocation will not have a
material impact on the Company's financial position or results of operations.
 
  Accounting for Regulated Operations
 
     The Company's interstate pipelines are subject to the regulations and
accounting procedures of FERC, and therefore, continue to follow the reporting
and accounting requirements of SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation. For a further discussion, see Part I, Financial
Information, Note 6, which is incorporated herein by reference.
 
  Recent Pronouncements
 
     See Part I, Financial Information, Note 7, which is incorporated herein by
reference.
 
                                       15
<PAGE>   18
 
      CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
             THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
 
     This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while such assumptions or
bases are believed to be reasonable and are made in good faith, assumed facts or
bases almost always vary from the actual results, and the differences between
assumed facts or bases and actual results can be material, depending upon the
circumstances. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions may
identify forward-looking statements.
 
     Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:
 
  Highly Competitive Industry
 
     The ability to maintain or increase current transmission, gathering,
processing, and sales volumes, or to remarket unsubscribed capacity, can be
subject to the impact of future weather conditions, including those that favor
hydroelectric generation or other alternative energy sources; price competition;
drilling activity and supply availability; and service competition, especially
due to excess pipeline capacity into California. Future profitability also may
be affected by the Company's ability to compete with the services offered by
other energy enterprises which may be larger, offer more services, and possess
greater resources. The ability of TGP to negotiate new contracts and to
renegotiate existing contracts (70 percent of which are expiring over the next
four years, principally in November 2000) could be adversely affected by the
proposed construction by other parties of additional pipeline capacity in the
Northeast U.S., the viability of the Company's expansion projects, reduced
demand due to higher gas prices, the availability of alternative energy sources,
and other factors that are not within its control.
 
  Impact of Natural Gas and Natural Gas Liquids Prices
 
     The value of natural gas transmission services is based on an all-in cost,
including the cost of the natural gas. Therefore, the Company's ability to
compete with other transporters is impacted by natural gas prices in the supply
basins connected to its pipeline systems compared to prices in other gas
producing regions, especially Canada. Additionally, revenues generated by the
Company from its gathering and processing contracts are dependent upon volumes
and rates, both of which can be affected by the prices of natural gas and
natural gas liquids. Fluctuations in energy prices are caused by a number of
factors, including regional, domestic and international demand, availability and
adequacy of transportation facilities, energy legislation, federal or state
taxes, if any, on the sale or transportation of natural gas and natural gas
liquids and the price and abundance of supplies of alternative energy sources.
 
  Use of Derivative Financial Instruments
 
     In the ordinary course and conduct of its business, some of the Company's
non-regulated subsidiaries are engaged in the gathering, processing and
marketing of natural gas and other energy commodities and utilize futures and
option contracts traded on the New York Mercantile Exchange and over-the-counter
options and price and basis swaps with other gas merchants and financial
institutions. The Company could incur financial losses in future periods as a
result of volatility in the market values of the underlying commodities or if
one of its counterparties fails to perform under a contract.
 
                                       16
<PAGE>   19
 
  Acquisitions and Investments
 
     Opportunities for growth through acquisitions and investments in joint
ventures and the future operating results and success of such acquisitions and
joint ventures within and outside the U.S. may be subject to the effects of, and
changes in, U.S. and foreign trade and monetary policies, laws and regulations,
political and economic developments, inflation rates, and the effects of taxes
and operating conditions. Activities in areas outside the U.S. also are subject
to the risks inherent in foreign operations, including loss of revenue, property
and equipment as a result of hazards such as expropriation, nationalization,
wars, insurrection and other political risks, and the effects of currency
fluctuations and exchange controls. Such legal and regulatory delays and other
unforeseeable obstacles may be beyond the Company's control or ability to
manage.
 
  Potential Environmental Liabilities
 
     The Company 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, regulation and
enforcement polices thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future.
 
  Operating Hazards and Uninsured Risks
 
     While the Company maintains insurance against certain of the risks normally
associated with the transportation, gathering and processing of natural gas,
including explosions, pollution and fires, the occurrence of a significant event
that is not fully insured against could have a material adverse effect on the
Company.
 
  Potential Liabilities Related to the Merger
 
     The amount of the actual and contingent liabilities of EPTPC, which
remained the liabilities of the Company after the Merger, could vary materially
from the amount estimated by the Company, which was based upon assumptions which
could prove to be inaccurate. If New Tenneco or Newport News Shipbuilding Inc.
were unable or unwilling to pay their respective liabilities, a court could
require the Company, under certain legal theories which may or may not be
applicable to the situation, to assume responsibility for such obligations,
which could have a material adverse effect on the Company.
 
  Uncertainty Surrounding Integration of Operations
 
     The Company has begun to integrate the business and operations of EPTPC and
its subsidiaries to increase operating and administrative efficiency through
consolidation and reengineering of facilities, workforce reductions and
coordination of purchasing, sales and marketing activities. Management
anticipates that the complementary interstate and intrastate pipeline operations
and energy marketing activities of the combined company should provide increased
operating flexibility and access to additional customers and markets, although
the amount and timing of the realization of such benefits will depend upon the
Company's ability to integrate successfully the businesses and operations of the
companies, and the time period over which such integration is effected.
 
  Potential Federal Income Tax Liabilities
 
     In connection with the Merger and Distributions, the Internal Revenue
Service issued a private letter ruling to Old Tenneco, in which the Internal
Revenue Service ruled that for U.S. federal income tax purposes (i) the
Distributions would be tax-free to Old Tenneco and, except to the extent cash
was received in lieu of fractional shares, to its then existing stockholders,
(ii) the Merger would constitute a tax-free reorganization, and (iii) that
certain other transactions effected in connection with the Merger and
Distributions would be tax-free. If the Distributions were not to qualify as
tax-free distributions, then a corporate level federal income tax would be
assessed to the consolidated group of which Old Tenneco was the common parent.
This corporate level federal income tax would be payable by EPTPC. Under certain
limited circumstances, however,
 
                                       17
<PAGE>   20
 
New Tenneco and Newport News Shipbuilding Inc. have agreed to indemnify EPTPC
for a defined portion of such tax liabilities.
 
  Refinancing and Interest Rate Exposure Risks
 
     The business and operating results of the Company can be adversely affected
by factors such as the availability or cost of capital, changes in interest
rates, changes in the tax rates due to new tax laws, market perceptions of the
natural gas industry or the Company, or credit ratings.
 
  Potential for Changes in Accounting Standards
 
     Authoritative generally accepted accounting principles or policy changes
from such standard setting bodies as the Financial Accounting Standards Board,
FERC, and the Securities and Exchange Commission may affect the Company's
results of operations or financial position.
 
                                       18
<PAGE>   21
 
                          PART II -- OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
     See Part I, Financial Information, Note 2, which is incorporated herein by
reference.
 
ITEM 2. CHANGES IN SECURITIES
 
     None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
     None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
 
     EPG held its annual meeting of stockholders on April 22, 1997. Proposals
presented for a stockholders vote included the election of eight directors and
the ratification of the appointment of the Company's independent certified
public accountants for the fiscal year 1997.
 
     Each of the eight incumbent directors nominated by EPG were elected with
the following voting results:
 
<TABLE>
<CAPTION>
                                                                 FOR         WITHHELD
                                                              ----------    ----------
<S>                                                           <C>           <C>
Byron Allumbaugh............................................  49,656,335       170,213
Peter T. Flawn..............................................  49,637,214       189,334
Eugenio Garza Laguera.......................................  42,930,646     6,895,902
James F. Gibbons............................................  49,656,445       170,103
Ben F. Love.................................................  49,640,174       186,374
Kenneth L. Smalley..........................................  49,664,358       162,190
Malcolm Wallop..............................................  49,617,669       208,879
William A. Wise.............................................  49,658,685       167,864
</TABLE>
 
     The appointment of Coopers & Lybrand L.L.P. as the Company's independent
certified public accountants for the fiscal year 1997 was ratified with the
following voting results:
 
<TABLE>
<CAPTION>
                                            FOR         AGAINST       ABSTAIN
                                         ----------    ----------    ----------
<S>                                      <C>           <C>           <C>
Ratification of the appointment Coopers
  & Lybrand L.L.P. ....................  49,638,243        94,574        93,731
</TABLE>
 
     There were no broker non-votes for the election of directors or for the
ratification of Coopers & Lybrand L.L.P.
 
ITEM 5. OTHER INFORMATION
 
     On July 18, 1997, the Board of Directors of EPG adopted a resolution
amending its By-laws to add certain procedures governing stockholder nominations
for directors and the conduct of business at annual meetings.
 
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
 
     a. Exhibits
 
     Each exhibit identified below is filed as a part of this report.
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           3.B           -- By-laws of EPG, as amended July 18, 1997.
          11             -- Computation of Earnings per Common Share.
          27             -- Financial Data Schedule.
</TABLE>
 
                                       19
<PAGE>   22
 
          Undertaking
 
           The undersigned hereby undertakes, pursuant to Regulation S-K, Item
        601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
        Commission upon request all constituent instruments defining the rights
        of holders of long-term debt of EPG and its consolidated subsidiaries
        not filed herewith for the reason that the total amount of securities
        authorized under any of such instruments does not exceed 10 percent of
        the total consolidated assets of EPG and its consolidated subsidiaries.
 
     b. Reports on Form 8-K
 
        None.
 
                                       20
<PAGE>   23
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
                                           EL PASO NATURAL GAS COMPANY
 
Date: August 13, 1997                              /s/ H. BRENT AUSTIN
                                            ------------------------------------
                                                      H. Brent Austin
                                                Executive Vice President and
                                                  Chief Financial Officer
 
Date: August 13, 1997                             /s/ JEFFREY I. BEASON
                                            ------------------------------------
                                                     Jeffrey I. Beason
                                              Vice President, Controller, and
                                                  Chief Accounting Officer
 
                                       21
<PAGE>   24
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER
        -------
<C>                       <S>
            3.B           By-laws of EPG, as amended July 18, 1967
           11             Computation of Earnings per Common Shares
           27             Financial Data Schedule
</TABLE>