<PAGE>   1
 
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                                 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, 1998
 
                                       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) 420-2131
 
     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 July 31, 1998                             119,864,487 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>
ALJ...................  Administrative Law Judge
Bcf...................  Billion cubic feet
Bcf/d.................  Billion cubic feet per day
Board.................  Board of directors of El Paso Natural Gas Company
Company...............  El Paso Natural Gas Company and its subsidiaries
Court of Appeals......  United States Court of Appeals for the District of Columbia Circuit
Dynegy................  Dynegy Inc., formerly known as NGC Corporation
EBIT..................  Earnings before interest expense and income taxes, excluding affiliated
                        interest income
Edison................  Southern California Edison Company
EPA...................  United States Environmental Protection Agency
EPEC..................  El Paso Energy Corporation
EPFS..................  El Paso Field Services Company, a wholly owned subsidiary of El Paso
                        Natural Gas Company
EPG...................  El Paso Natural Gas Company, unless the context otherwise requires
EPTPC.................  El Paso Tennessee Pipeline Co., a subsidiary of El Paso Natural Gas
                        Company
FERC..................  The Federal Energy Regulatory Commission
GSR...................  Gas supply realignment
MW(s).................  Megawatt(s)
PCB(s)................  Polychlorinated biphenyl(s)
PLN...................  Perusahaan Listrik Negara, the Indonesian government-owned electric
                        utility
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
 
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                 (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                            QUARTER             SIX MONTHS
                                                        ENDED JUNE 30,        ENDED JUNE 30,
                                                       -----------------     -----------------
                                                        1998       1997       1998       1997
                                                       ------     ------     ------     ------
<S>                                                    <C>        <C>        <C>        <C>
Operating revenues...................................  $1,296     $  979     $2,915     $2,810
                                                       ------     ------     ------     ------
Operating expenses
  Cost of gas and other products.....................     919        628      2,128      2,069
  Operation and maintenance..........................     175        148        355        304
  Depreciation, depletion, and amortization..........      67         57        132        124
  Taxes, other than income taxes.....................      22         21         46         49
                                                       ------     ------     ------     ------
                                                        1,183        854      2,661      2,546
                                                       ------     ------     ------     ------
Operating income.....................................     113        125        254        264
                                                       ------     ------     ------     ------
Other (income) and expense
  Interest and debt expense..........................      61         59        125        120
  Other -- net.......................................     (36)       (14)       (58)       (24)
                                                       ------     ------     ------     ------
                                                           25         45         67         96
                                                       ------     ------     ------     ------
Income before income taxes and minority interest.....      88         80        187        168
Income tax expense...................................      27         31         62         65
                                                       ------     ------     ------     ------
Income before minority interest......................      61         49        125        103
Minority interest
  Preferred stock dividend requirement of
     subsidiary......................................       6          6         12         12
                                                       ------     ------     ------     ------
Net income...........................................  $   55     $   43     $  113     $   91
                                                       ======     ======     ======     ======
Comprehensive income.................................  $   51     $   42     $  108     $   90
                                                       ======     ======     ======     ======
Basic earnings per common share......................  $ 0.47     $ 0.38     $ 0.97     $ 0.80
                                                       ======     ======     ======     ======
Diluted earnings per common share....................  $ 0.45     $ 0.37     $ 0.92     $ 0.78
                                                       ======     ======     ======     ======
Basic average common shares outstanding..............   116.0      114.6      116.0      112.9
                                                       ======     ======     ======     ======
Diluted average common shares outstanding............   129.0      117.5      125.5      115.7
                                                       ======     ======     ======     ======
Dividends declared per common share..................  $ 0.19     $ 0.19     $ 0.38     $ 0.37
                                                       ======     ======     ======     ======
</TABLE>
 
  The accompanying Notes are an integral part of these Condensed Consolidated
                             Financial Statements.
 
                                        1
<PAGE>   4
 
                          EL PASO NATURAL GAS COMPANY
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                      (IN MILLIONS, EXCEPT SHARE AMOUNTS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                               JUNE 30,
                                                                 1998        DECEMBER 31,
                                                              (UNAUDITED)        1997
                                                              -----------    ------------
<S>                                                           <C>            <C>
Current assets
  Cash and temporary investments............................    $   89          $  116
  Accounts and notes receivable, net........................       730             989
  Inventories...............................................        46              68
  Deferred income tax benefit...............................       111             168
  Other.....................................................       450             288
                                                                ------          ------
          Total current assets..............................     1,426           1,629
Property, plant, and equipment, net.........................     7,172           7,116
Other.......................................................     1,032             787
                                                                ------          ------
          Total assets......................................    $9,630          $9,532
                                                                ======          ======
 
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable..........................................    $  718          $  886
  Short-term borrowings (including current maturities of
     long-term debt)........................................       746             885
  Other.....................................................       833             693
                                                                ------          ------
          Total current liabilities.........................     2,297           2,464
                                                                ------          ------
Long-term debt, less current maturities.....................     2,113           2,119
                                                                ------          ------
Deferred income taxes.......................................     1,497           1,550
                                                                ------          ------
Other.......................................................     1,014           1,075
                                                                ------          ------
Commitments and contingencies (See Note 3)
Company-obligated mandatorily redeemable convertible
  preferred securities of El Paso Energy Capital Trust I....       325              --
                                                                ------          ------
Minority interest
  Preferred stock of subsidiary.............................       300             300
                                                                ------          ------
  Other minority interest...................................        65              65
                                                                ------          ------
Stockholders' equity
  Common stock, par value $3 per share; authorized
     275,000,000 shares; issued 123,877,431 and 122,581,816
     shares.................................................       372             368
  Additional paid-in capital................................     1,416           1,389
  Retained earnings.........................................       393             327
  Less: Accumulated other comprehensive income..............        12               7
        Treasury stock (at cost) 3,979,724 and 2,946,832
            shares..........................................        84              47
        Deferred compensation...............................        66              71
                                                                ------          ------
          Total stockholders' equity........................     2,019           1,959
                                                                ------          ------
          Total liabilities and stockholders' equity........    $9,630          $9,532
                                                                ======          ======
</TABLE>
 
  The accompanying Notes are an integral part of these Condensed Consolidated
                             Financial Statements.
 
                                        2
<PAGE>   5
 
                          EL PASO NATURAL GAS COMPANY
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                SIX MONTHS
                                                                   ENDED
                                                                 JUNE 30,
                                                              ---------------
                                                              1998     1997
                                                              -----   -------
<S>                                                           <C>     <C>
Cash flows from operating activities
  Net income................................................  $ 113   $    91
  Adjustments to reconcile net income to net cash provided
     by operating activities
     Depreciation, depletion, and amortization..............    132       124
     Deferred income taxes..................................     21       178
     Other..................................................    (22)        5
  Working capital changes...................................     79      (127)
  Other.....................................................    (41)      (28)
                                                              -----   -------
          Net cash provided by operating activities.........    282       243
                                                              -----   -------
Cash flows from investing activities
  Capital expenditures......................................   (116)      (77)
  Investment in joint ventures and equity investees.........   (318)     (139)
  Collection of note receivable from partnership............     --        53
  Other.....................................................     19        15
                                                              -----   -------
          Net cash used in investing activities.............   (415)     (148)
                                                              -----   -------
Cash flows from financing activities
  Net commercial paper proceeds.............................     19        69
  Revolving credit repayments...............................   (142)   (1,200)
  Long-term debt retirements................................    (21)     (105)
  Net proceeds from issuance of El Paso Energy Capital Trust
     I preferred securities.................................    317        --
  Net proceeds from issuance of long-term debt..............     --       883
  Net proceeds from equity offering.........................     --       152
  Acquisition of treasury stock.............................    (33)       --
  Dividends paid on common stock............................    (45)      (35)
  Other.....................................................     11        19
                                                              -----   -------
          Net cash provided by (used in) financing
           activities.......................................    106      (217)
                                                              -----   -------
Decrease in cash and temporary investments..................    (27)     (122)
Cash and temporary investments
          Beginning of period...............................    116       200
                                                              -----   -------
          End of period.....................................  $  89   $    78
                                                              =====   =======
</TABLE>
 
  The accompanying Notes are an integral part of these Condensed Consolidated
                             Financial Statements.
 
                                        3
<PAGE>   6
 
                          EL PASO NATURAL GAS COMPANY
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
1. BASIS OF PRESENTATION
 
     The 1997 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, 1998, and for the six months and quarters ended June 30, 1998, and
1997, are unaudited. The condensed consolidated balance sheet at December 31,
1997, is derived from the audited financial statements at that date. 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 seasonal
nature of the Company's businesses. Financial statements for the previous
periods include certain reclassifications which were made to conform to the
current presentation. Such reclassifications have no effect on reported net
income or total stockholders' equity.
 
  Holding Company Reorganization
 
     Effective on August 1, 1998, the Company reorganized into a holding company
form of organizational structure, whereby EPEC, a Delaware corporation, became
the holding company. The holding company organizational structure was effected
by a merger conducted pursuant to Section 251(g) of the Delaware General
Corporation Law (the "Merger"), which provides for the formation of a holding
company structure without a vote of the stockholders of EPG. In the Merger, El
Paso Energy Merger Company, a Delaware corporation ("Merger Sub"), merged with
and into EPG, with EPG as the surviving corporation. Prior to the Merger, Merger
Sub was a direct, wholly owned subsidiary of EPEC, which was a direct, wholly
owned subsidiary of EPG, organized for the purpose of implementing the holding
company organizational structure. By virtue of the Merger, EPG became a direct,
wholly owned subsidiary of EPEC, and all of EPG's outstanding capital stock was
converted, on a share for share basis, into capital stock of EPEC. As a result
of such restructuring, each outstanding share of common stock, $3.00 par value
per share, of EPG was converted into one share of common stock, $3.00 par value
per share, of EPEC, and each one-half outstanding preferred stock purchase right
of EPG was converted into one preferred stock purchase right associated with
each share of EPEC common stock, with such right representing the right to
purchase one two-hundredth (subject to adjustment) of a share of Series A Junior
Participating Preferred Stock of EPEC. EPEC will assume all of EPG's obligations
related to the Trust Preferred Securities, including assumption of EPG's
guarantee of the Trust Preferred Securities, and the Trust Preferred Securities
will be convertible into EPEC common stock, instead of EPG Common Stock. The
ticker symbol used by EPEC following the reorganization remains unchanged as
"EPG".
 
  Stock Split
 
     On January 21, 1998, the Board approved a two-for-one stock split of EPG's
common stock (the "Stock Split"), subject to stockholder approval of an
amendment to EPG's Restated Certificate of Incorporation to increase the number
of authorized shares of EPG's common stock to 275,000,000 shares (the
"Amendment"). EPG's stockholders approved the Amendment on March 2, 1998. In
connection with the Amendment, the Board increased the number of shares of EPG's
preferred stock designated as Series A Junior Participating Preferred Stock to
1,375,000 shares. The Stock Split was effected in the form of a stock dividend
of an aggregate of 60,944,417 shares of EPG's common stock, which was paid on
April 1, 1998, to stockholders of record on March 13, 1998. All common shares
and per common share amounts have been adjusted to give effect to the Stock
Split.
 
     After giving effect to the Stock Split in accordance with the adjustment
provisions of the Amended and Restated Shareholder Rights Agreement, dated as of
July 23, 1997, between EPG and The First National
 
                                        4
<PAGE>   7
 
Bank of Boston as Rights Agent, the number of rights to purchase one
one-hundredth of a share of the Series A Preferred Stock associated with each
share of common stock was adjusted to become one-half of such right (see Holding
Company Reorganization above, for the impact of the holding company
reorganization).
 
  Comprehensive Income
 
     In accordance with SFAS No. 130, Reporting Comprehensive Income, the
Company has displayed comprehensive income in the Condensed Consolidated
Statements of Income. The only component of comprehensive income is the
cumulative translation adjustment which results from differences in the
translation of foreign currencies. This amount is reflected as accumulated other
comprehensive income in the Condensed Consolidated Balance Sheets.
 
2. SEGMENTS
 
     The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. Accordingly, the Company has segregated its business activities
into five segments: El Paso Natural Gas segment, Tennessee Gas Pipeline segment,
El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso
Energy International segment. These segments are strategic business units that
offer a variety of different energy products and services. They are managed
separately as each business requires different technology and marketing
strategies.
 
     The El Paso Natural Gas segment, which includes the interstate pipeline
systems of EPG and Mojave Pipeline Company, transports natural gas primarily to
the California market. The Tennessee Gas Pipeline segment, which includes the
interstate pipeline systems of TGP, Midwestern Gas Transmission Company, and
East Tennessee Natural Gas Company, transports natural gas to the northeast,
midwest, and mid-Atlantic sections of the U.S. including the states of
Tennessee, Virginia and Georgia as well as the New York City, Chicago, and
Boston metropolitan areas. The El Paso Field Services segment provides natural
gas gathering, products extraction, dehydration, purification, compression and
intrastate transmission services. The El Paso Energy Marketing segment markets
and trades natural gas, power, and petroleum products and participates in the
development and ownership of domestic power generation projects. The El Paso
Energy International segment develops and operates energy infrastructure
facilities worldwide.
 
     The accounting policies of the individual segments are the same as those of
the Company, as a whole, as summarized in Note 1, Basis of Presentation. Certain
business segments' earnings are largely derived from the earnings of equity
investments. Accordingly, the Company evaluates segment performance based on
EBIT. To the extent practicable, results of operations for the six months and
quarter ended June 30, 1997 have been reclassified to conform to the current
business segment presentation, although such results are not necessarily
indicative of the results which would have been achieved had the revised
business segment structure been in effect during that period.
 
                                        5
<PAGE>   8
 
<TABLE>
<CAPTION>
                                                                       SEGMENTS
                                                     AS OF OR FOR THE QUARTER ENDED JUNE 30, 1998
                                          -------------------------------------------------------------------
                                          EL PASO   TENNESSEE   EL PASO     EL PASO       EL PASO
                                          NATURAL      GAS       FIELD      ENERGY        ENERGY
                                            GAS     PIPELINE    SERVICES   MARKETING   INTERNATIONAL   TOTAL
(IN MILLIONS)                             -------   ---------   --------   ---------   -------------   ------
<S>                                       <C>       <C>         <C>        <C>         <C>             <C>
Revenues from external customers........  $  124     $  168       $ 49       $938          $ 16        $1,295
Intersegment revenues...................       1         11         15          4            --            31
Operating income (loss).................      56         66         14         (4)           (6)          126
EBIT....................................      56         73         18         --             9           156
Segment assets..........................   1,732      5,158        957        894           780         9,521
</TABLE>
 
<TABLE>
<CAPTION>
                                                                       SEGMENTS
                                                     AS OF OR FOR THE QUARTER ENDED JUNE 30, 1997
                                          -------------------------------------------------------------------
                                          EL PASO   TENNESSEE   EL PASO     EL PASO       EL PASO
                                          NATURAL      GAS       FIELD      ENERGY        ENERGY
                                            GAS     PIPELINE    SERVICES   MARKETING   INTERNATIONAL   TOTAL
(IN MILLIONS)                             -------   ---------   --------   ---------   -------------   ------
<S>                                       <C>       <C>         <C>        <C>         <C>             <C>
Revenues from external customers........  $  126     $  181       $ 79       $591          $ --        $  977
Intersegment revenues...................      --          8          9          7            --            24
Operating income (loss).................      69         72         11        (16)           (5)          131
EBIT....................................      70         74         13        (15)            6           148
Segment assets..........................   1,840      4,771        650        787           390         8,438
</TABLE>
 
<TABLE>
<CAPTION>
                                                                       SEGMENTS
                                                    AS OF OR FOR THE SIX MONTHS ENDED JUNE 30, 1998
                                          -------------------------------------------------------------------
                                          EL PASO   TENNESSEE   EL PASO     EL PASO       EL PASO
                                          NATURAL      GAS       FIELD      ENERGY        ENERGY
                                            GAS     PIPELINE    SERVICES   MARKETING   INTERNATIONAL   TOTAL
(IN MILLIONS)                             -------   ---------   --------   ---------   -------------   ------
<S>                                       <C>       <C>         <C>        <C>         <C>             <C>
Revenues from external customers........   $238      $  371       $108      $2,165         $ 28        $2,910
Intersegment revenues...................      1          19         24           9           --            53
Operating income (loss).................    108         159         34          (4)         (13)          284
EBIT....................................    109         170         41          --           11           331
Segment assets..........................  1,732       5,158        957         894          780         9,521
</TABLE>
 
<TABLE>
<CAPTION>
                                                                       SEGMENTS
                                                    AS OF OR FOR THE SIX MONTHS ENDED JUNE 30, 1997
                                          -------------------------------------------------------------------
                                          EL PASO   TENNESSEE   EL PASO     EL PASO       EL PASO
                                          NATURAL      GAS       FIELD      ENERGY        ENERGY
                                            GAS     PIPELINE    SERVICES   MARKETING   INTERNATIONAL   TOTAL
(IN MILLIONS)                             -------   ---------   --------   ---------   -------------   ------
<S>                                       <C>       <C>         <C>        <C>         <C>             <C>
Revenues from external customers........   $254      $  385       $201      $1,967         $ --        $2,807
Intersegment revenues...................      1          19         11          12           --            43
Operating income (loss).................    131         152         38         (33)          (9)          279
EBIT....................................    132         156         41         (31)           3           301
Segment assets..........................  1,840       4,771        650         787          390         8,438
</TABLE>
 
     The reconciliations of EBIT to income before income taxes and minority
interest are presented below.
 
<TABLE>
<CAPTION>
                                                                          SIX MONTHS
                                                       QUARTER ENDED         ENDED
                                                          JUNE 30,         JUNE 30,
                                                       --------------    -------------
                                                       1998     1997     1998     1997
                                                       -----    -----    -----    ----
                                                                (IN MILLIONS)
<S>                                                    <C>      <C>      <C>      <C>
Total EBIT for reportable segments...................  $156     $148     $ 331    $301
Corporate expenses, net..............................    (7)      (9)      (19)    (13)
Interest and debt expense............................   (61)     (59)     (125)   (120)
                                                       ----     ----     -----    ----
Income before income taxes and minority interest.....  $ 88     $ 80     $ 187    $168
                                                       ====     ====     =====    ====
</TABLE>
 
                                        6
<PAGE>   9
 
3. COMMITMENTS AND CONTINGENCIES
 
  Indonesian Economic Difficulties
 
     The Company owns a 47.5 percent interest in a power generating plant in
Sengkang, South Sulawesi, Indonesia, with a book value at June 30, 1998, of
approximately $24 million. Current economic events in Indonesia have resulted in
the devaluation of the Indonesian Rupiah and delays or cancellations of certain
infrastructure power projects in that country. The Company has met with PLN and
the Indonesian Minister of Finance to discuss the terms of its power sales
agreement in light of the current Indonesian economic problems. At June 30,
1998, approximately $3.6 million remains as an outstanding balance due to the
Company. PLN has applied to the Minister of Finance for approximately $150
million to help fund PLN's obligations. While the Company cannot predict the
ultimate outcome of Indonesia's financial difficulties or the impact of such
matters on the Company, it believes PLN, with the backing of the Office of the
Minister of Finance, will honor all obligations on the Sengkang project in full.
Furthermore, the Company believes its investment in the Sengkang project is
adequately protected by political risk insurance. The Company believes the
current economic difficulties in Indonesia will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
 
  Rates and Regulatory Matters
 
     TGP -- In February 1997, TGP filed with FERC a settlement of all issues
related to the recovery of its GSR and other transition costs and related
proceedings (the "GSR Stipulation and Agreement"). In April 1997, FERC approved
the settlement and TGP implemented the settlement on May 1, 1997. Under the
terms of the GSR Stipulation and Agreement, TGP is entitled to collect from
customers up to $770 million, of which approximately $719 million has been
collected as of June 30, 1998. TGP is entitled to recover additional transition
costs, up to the remaining $51 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 provide for a rate case moratorium through November 2000
(subject to certain limited exceptions) and an escalating rate cap, indexed to
inflation, through October 2005, for certain of TGP's customers.
 
     In December 1994, TGP filed for a general rate increase with FERC and in
October 1996, FERC approved the settlement resolving that proceeding. The
settlement included a structural rate design change that results in a larger
portion of TGP's transportation revenues being dependent upon throughput. TGP
had provided a reserve for these rate refunds as revenues were collected. One
party, a competitor of TGP, filed with the Court of Appeals a Petition for
Review of the FERC orders. In July 1998, the Court of Appeals issued a decision
remanding the case to FERC to respond to the competitor's argument that TGP's
cost allocation methodology deterred the development of market centers.
 
     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 ALJ 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, as well as several other customers, have filed with the
Court of Appeals a Petition for Review of the FERC orders on this issue. In
December 1997, the ALJ issued his decision on the proper allocation of the New
England lateral costs. The decision adopts a methodology that economically
approximates TGP's current methodology. The ALJ's decision is pending before
FERC.
 
     TGP has filed cashout reports for the period September 1993 through August
1997. TGP's filings showed a cumulative loss of approximately $8 million that
would be rolled forward to the next cashout period pursuant to its tariff. FERC
has requested additional information and justification from TGP as to its
cashout methodology and reports. TGP's cashout methodology and reports are
currently pending before FERC.
 
                                        7
<PAGE>   10
 
     Substantially all of the revenues of TGP are generated under long-term gas
transmission contracts. Contracts representing approximately 70 percent of TGP's
firm transportation capacity will be expiring over the next three years,
principally in November 2000. Although TGP cannot predict how much capacity will
be resubscribed, a majority of the expiring contracts cover service to
northeastern markets, where there is currently little excess capacity. Several
projects, however, have been proposed to deliver incremental volumes to these
markets. Although TGP is actively pursuing the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether TGP will
be able to extend or replace these contracts (or a substantial portion thereof)
or that the terms of any renegotiated contracts will be as favorable to TGP as
the existing contracts.
 
     EPG -- In June 1995, EPG filed with FERC for approval of new system rates
for mainline transportation to be effective January 1, 1996. In March 1996, EPG
filed a comprehensive offer of settlement to resolve that proceeding as well as
issues surrounding certain contract reductions and expirations that were to
occur from January 1, 1996, through December 31, 1997. In April 1997, FERC
approved EPG's settlement as filed and determined that only the contesting
party, Edison, should be severed for separate determination of the rate it
ultimately pays EPG. Hearings to determine Edison's rates were completed in May
1998, and an initial decision was issued by the presiding ALJ in July 1998. The
decision is subject to review by FERC. EPG will file exceptions to the decision,
and it is anticipated that Edison will also do so. If the ALJ's decision is
affirmed by FERC, EPG believes that the resulting rates to Edison would be such
that no significant, if any, refunds in excess of the amounts reserved would be
required. Pending the final outcome, Edison continues to pay the filed rates,
subject to refund, and EPG continues to provide a reserve for such potential
refunds. In July 1997, FERC issued an order denying the requests for rehearing
of the April 1997 order and the settlement was implemented effective July 1,
1997. Edison filed with the Court of Appeals a petition for review of FERC's
April 1997 and July 1997 orders, in which it challenges the propriety of FERC's
approving the settlement over Edison's objections to the settlement as a
customer of Southern California Gas Company. This matter has been briefed and
oral argument is scheduled for October 1998.
 
     The rate settlement establishes, among other things, base rates through
December 31, 2005. Such rates escalate annually beginning in 1998. In addition,
the settlement provides for settling customers to (i) pay $295 million
(including interest) as a risk sharing obligation, which approximates 35 percent
of anticipated revenue shortfalls over an 8 year period, resulting from the
contract reductions and expirations referred to above, (ii) receive 35 percent
of additional revenues received by EPG, above a threshold, for the same
eight-year period, and (iii) have the base rates increase or decrease if certain
changes in laws or regulations result in increased or decreased costs in excess
of $10 million a year. In accordance with the terms of the rate settlement,
EPG's refund obligation (including interest) was approximately $194 million. EPG
refunded $61 million to customers in August 1997 and, in accordance with certain
customers elections, the remaining $133 million of refund obligation was applied
towards their $295 million risk sharing obligation. Through June 30, 1998, an
additional $87 million of the risk sharing obligation was paid and the $75
million balance, including interest, will be collected by the end of 2003. At
June 30, 1998 the remaining unearned balance of the risk sharing amount
collected was $173 million, which will be recognized in earnings ratably through
2003.
 
     The contract reductions and expirations referred to above resulted in EPG's
having, as of June 30, 1998, approximately 1.6 Bcf/d (or 34 percent) of its
total capacity committed under contracts requiring the payment of less than full
tariff reservation rates. As of June 30, 1998, this capacity had an annual
value, at full tariff reservation rates, of approximately $172 million.
 
     EPG has substantially offset the effects of these reductions in firm
capacity commitments referred to above by implementing cost control programs and
by actively seeking new markets and pursuing attractive opportunities to
increase traditional market share. The new markets EPG has targeted include
various natural gas users in California which were served indirectly through
Southern California Gas Company and Pacific Gas & Electric Company, as well as
new markets in northern Mexico and off the east end of its system. In addition
to other arrangements, in October 1997, EPG entered into three contracts with
Dynegy for the sale of substantially all of its turned back firm capacity
available as of January 1, 1998, to California (approximately 1.3 Bcf) for a
two-year period beginning January 1, 1998, at rates negotiated pursuant to EPG's
tariff provisions and FERC policies. EPG anticipates realizing at least $70
million in revenues
                                        8
<PAGE>   11
 
(which will be subject to the revenue sharing provisions of the rate settlement)
under these contracts over the two-year period. The contracts have a
transport-or-pay provision requiring Dynegy to pay a minimum charge equal to the
reservation component of the contractual charge on at least 50 percent of the
contracted volumes in each month in 1998 and on at least 72 percent of the
contracted volumes each month in 1999. In December 1997, EPG filed to implement
several negotiated rate contracts, including those with Dynegy. In a protest to
this filing made in January 1998, three shippers (producers/marketers) requested
FERC to require EPG to eliminate certain provisions from the Dynegy contracts,
to publicly disclose and repost the contracts for competitive bidding, and to
suspend their effectiveness. In an order issued in January 1998, FERC rejected
several of the arguments made in the protest and allowed the contracts to become
effective as of January 1, 1998, subject to refund, and to the outcome of a
technical conference, which was held in March 1998. In June 1998, FERC issued an
order rejecting the protests to the Dynegy contracts, but requiring EPG to file
with FERC modifications to the contracts clarifying the credits under the
reservation reduction mechanism and recall of Block II capacity. In addition,
capacity covered by the Dynegy contracts which becomes available in the future
must be separately posted. Several parties have protested EPG's compliance
filing and/or requested rehearing of FERC's June 1998 order.
 
     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 an 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 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. In October 1997, FERC issued an order denying the
challenging parties' request for rehearing of the March 1997 order in most
respects, but determined that the costs incurred pursuant to two additional EPG
contracts were ineligible for recovery. These costs, including interest, totaled
approximately $9 million, and were refunded to customers in February 1998. The
challenging parties, which claim that EPG should be required to refund up to an
additional $31 million, excluding interest, have filed a petition for review of
the FERC order in the Court of Appeals.
 
     In an order issued in April 1997 in the proceeding involving the spin down
of EPG's gathering facilities to EPFS, FERC found that EPG acted appropriately
in not including its Chaco Compressor Station in the facilities to be
transferred to EPFS, and that the Chaco Station had been correctly
functionalized by EPG as a transmission facility. Requests for rehearing of this
order were filed by Williams Field Services and GPM Corporation. In a November
1997 order, FERC reversed its previous decision and found that the Chaco Station
is a gathering facility and should be transferred to EPFS. EPG and others sought
rehearing of this order, challenging FERC's jurisdictional determination and
certain other rulings regarding the treatment of the costs related to the Chaco
Station in light of the provisions in the 1996 rate settlement dealing with the
Chaco Station. FERC denied all requests for rehearing and reaffirmed that the
Chaco Station is a non-jurisdictional facility and should be transferred to
EPFS. Further requests for rehearing were also denied. EPG and two other parties
have filed petition for review with the Court of Appeals. In accordance with the
FERC orders, the Chaco Station was transferred to EPFS in April 1998.
 
     Separately, in November 1996, GPM Corporation filed a complaint, as
amended, with FERC alleging that EPG's South Carlsbad compression facilities
were gathering facilities and were improperly functionalized by EPG as
transmission facilities. In a November 1997 order, FERC concluded that the South
Carlsbad compressor facilities performed a gathering function and directed EPG
to transfer the facility to EPFS. EPG and others sought rehearing of this order
which FERC denied in March 1998. No parties have sought judicial review and
FERC's orders have become final. In accordance with the FERC orders, the South
Carlsbad compressor facilities were transferred to EPFS in April 1998.
 
     Management believes the ultimate resolution of the aforementioned rate and
regulatory matters, which are in various stages of finalization, will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
                                        9
<PAGE>   12
 
  Environmental Matters
 
     As of June 30, 1998, the Company had a reserve of approximately $267
million to cover 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 of concern, including
substances on the EPA List of Hazardous Substances, at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting this project, TGP has been in frequent
contact with federal and state regulatory agencies, both through informal
negotiation and formal entry of consent orders, to assure that its efforts meet
regulatory requirements.
 
     In May 1995, following negotiations with its customers, TGP filed with FERC
a separate Stipulation and Agreement (the "Environmental Stipulation") that
establishes 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. The
Environmental Stipulation was effective July 1, 1995. As of June 30, 1998, a
balance of $13 million remains to be collected under this stipulation.
 
     The Company and certain of its subsidiaries have been designated, have
received notice that they may 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
or state equivalents. The Company has sought to resolve its liability as a PRP
with respect to these sites through indemnification by third parties and/or
settlements which provide for payment of the Company's allocable share of
remediation costs. Since the clean-up costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required, and because in some cases the Company has asserted a defense to any
liability, 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. 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 costs associated with the current status of such
entities as PRPs at the sites referenced above will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
 
     The Company has initiated proceedings against its historic liability
insurers seeking payment or reimbursement of costs and liabilities associated
with environmental matters. In these proceedings, the Company contends that
certain environmental costs and liabilities associated with various entities or
sites, including costs associated with former operating sites, must be paid or
reimbursed by certain of its historic insurers. The proceedings are in their
initial stages and, accordingly, it is not possible to predict the outcome.
 
     It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
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, regulations and
enforcement policies 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. As
such information becomes available, or developments occur, related accrual
amounts will be adjusted accordingly. 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 the recorded reserve 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, negligent
misrepresentation, 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 actual damages of $1.5
billion and exemplary damages of $6 billion. EPG is defending the matter in the
State District Court of
 
                                       10
<PAGE>   13
 
Dallas County, Texas. In April 1996, a former employee of TransAmerican filed a
related case in Harris County, Texas, Vickroy E. 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. EPG filed
a Motion for Summary Judgment in the TransAmerican case arguing that plaintiff's
claims are barred by a prior release executed by TransAmerican, by statutes of
limitations, and by the final court judgment ending the original litigation in
1990. Following a hearing in January 1998, the court granted summary judgment in
EPG's favor on TransAmerican's claims based on economic duress and negligent
misrepresentation, but denied the motion as to the remaining claims. In February
1998, EPG filed a Motion for Summary Judgment in the Stone litigation arguing
that all claims are baseless, barred by statutes of limitations, subject to
executed releases, or have been assigned to TransAmerican. In June 1998, the
court granted EPG's motion in its entirety and dismissed all the remaining
claims in the Stone litigation. Stone has filed a Motion for a New Trial,
seeking reconsideration of that ruling. The TransAmerican trial is set to
commence in March 1999. 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
material adverse effect on the Company's financial position, results of
operations, or cash flows.
 
     On February 12, 1998, the United States and the State of Texas filed in a
United States District Court a Comprehensive Environmental Response,
Compensation and Liability Act cost recovery action, United States v. Atlantic
Richfield Co., et al., against fourteen companies including the following
affiliates of EPG: TGP, EPTPC, EPEC Corporation, EPEC Polymers, Inc. and the
dissolved Petro-Tex Chemical Corporation, relating to the Sikes Disposal Pits
Superfund Site ("Sikes") located in Harris County, Texas. Sikes was an
unpermitted waste disposal site during the 1960s that accepted waste hauled from
numerous Houston Ship Channel industries. The suit alleges that the former
Tenneco Chemicals, Inc. and Petro-Tex Chemical Corporation arranged for disposal
of hazardous substances at Sikes. TGP, EPTPC, EPEC Corporation and EPEC
Polymers, Inc. are alleged to be derivatively liable as successors or as parent
corporations. The suit claims that the United States and the State of Texas have
expended over $125 million in remediating the site, and seeks to recover that
amount plus interest. Other companies named as defendants include Atlantic
Richfield Company, Crown Central Petroleum Corporation, Occidental Chemical
Corporation, Exxon Corporation, Goodyear Tire & Rubber Company, Rohm & Haas
Company, Shell Oil Company and Vacuum Tanks, Inc. These defendants have filed
their answers and third-party complaints seeking contribution from twelve other
entities believed to be PRPs at Sikes. Although factual investigation relating
to Sikes is in very preliminary stages, the Company believes that the amount of
material, if any, disposed at Sikes from the Tenneco Chemicals, Inc. or
Petro-Tex Chemical Corporation facilities was small, possibly de minimis.
However, the government plaintiffs have alleged that the defendants are each
jointly and severally liable for the entire remediation costs and have also
sought a declaration of liability for future response costs such as groundwater
monitoring. While the outcome of this matter cannot be predicted with certainty,
management does not expect this matter to have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
 
     TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting air
systems. TGP has executed a consent order with the EPA governing the remediation
of certain of its compressor stations and is working with the relevant states
regarding those remediation activities. TGP is also working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are complete with the exception of some long-term groundwater
monitoring requirements. Remediation and characterization work at the compressor
stations under its consent order with the EPA and the jurisdiction of the New
York Department of Environmental Conservation is ongoing. Management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
 
     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
 
                                       11
<PAGE>   14
 
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. The relevant Kentucky compressor
stations are scheduled to be characterized and remediated under the consent
order with the EPA. Management believes that the resolution of this issue will
not have a material adverse effect on the Company's financial position, results
of operations, or cash flows.
 
     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 material adverse effect on the Company's financial position,
results of operations, or cash flows.
 
  Year 2000
 
     The Company has established an executive steering committee and a project
team to coordinate the five phases of its Year 2000 project to assure that the
Company's key automated systems and related processes will remain functional
through year 2000. Those phases include: (i) awareness, (ii) assessment, (iii)
remediation, (iv) testing, and (v) implementation of the necessary
modifications. The key automated systems of the Company consist of (a)
internally developed computer applications, (b) hardware and equipment, (c)
embedded chip systems, and (d) third-party-developed software.
 
     The Company has conducted a corporate-wide awareness program, which is
substantially completed. Nonetheless, the Company will continually update
awareness efforts throughout the Year 2000 project.
 
     The portion of the assessment phase related to internally developed
computer applications has been substantially completed. The recent upgrade of
various systems, particularly the financial systems, to a client/server platform
has reduced or eliminated concerns for such systems. The portion of the
assessment phase to determine the nature and impact of the year 2000 date change
for hardware and equipment, embedded chip systems, and third-party-developed
software is continuing. The assessment phase of the project, among other things,
involves efforts to obtain representations and assurances from third parties,
including third party vendors, that their hardware and equipment products,
embedded chip systems, and software products being used by or impacting the
Company are or will be modified to be Year 2000 compliant. To date, the
responses from such third parties are inconclusive. As a result, the Company
cannot predict the potential consequences if these or other third parties are
not Year 2000 compliant. The Company is currently evaluating the exposure
associated with such business partner relationships.
 
     The Company expects that the remediation, testing and implementation phases
will be substantially completed by mid-1999.
 
     While the total cost of the Company's Year 2000 project is still being
evaluated, the Company estimates that the costs to be incurred in 1998, 1999 and
2000 associated with assessing, testing, modifying or replacing internally
developed computer applications, hardware and equipment, embedded chip systems,
and third-party-developed software, is between $17 million and $36 million. Of
these estimated costs, the Company expects $4 million to $15 million to be
capitalized and the remainder to be expensed.
 
     The Company's goal is to ensure that all of the critical systems and
processes which are under its direct control remain functional. However, because
certain systems and processes may be interrelated with systems outside the
control of the Company, there can be no assurance that all implementations will
be successful. Accordingly, the Company is developing a contingency and business
resumption plan to respond to any failures as they may occur. The cost estimates
associated with the contingency plan effort are currently being developed.
Management does not expect the costs of the Company's Year 2000 project to have
a material adverse effect on the Company's financial position, results of
operations, or cash flows. Based on information available at this time, however,
the Company cannot conclude that any failure of the Company or third-party
entities to achieve Year 2000 compliance will not adversely effect the Company.
 
                                       12
<PAGE>   15
 
4. TRUST PREFERRED SECURITIES
 
     In March 1998, El Paso Energy Capital Trust I (the "Trust"), issued 6.5
million of 4 3/4% trust convertible preferred securities (the "Trust Preferred
Securities") for $325 million ($317 million, net of issuance costs). The Trust,
a Delaware business trust, is a wholly owned consolidated subsidiary of EPG.
Concurrent with the issuance of the Trust Preferred Securities, the Trust issued
trust convertible common securities in the amount of $10 million to EPG. The
Trust exists for the sole purpose of issuing Trust Preferred Securities and
investing the proceeds from the issuance thereof in 4 3/4% convertible
subordinated debentures due 2028 (the "Trust Debentures") of EPG, the Trust's
sole asset. The results of the Trust are consolidated with those of the Company
and, therefore, the Trust Debentures are eliminated and the Trust Preferred
Securities are reflected as company-obligated mandatorily redeemable convertible
preferred securities of El Paso Energy Capital Trust I in the Condensed
Consolidated Balance Sheets. Distributions on the Trust Preferred Securities are
included in interest and debt expense in the Condensed Consolidated Statements
of Income. The net proceeds to EPG were used to pay down commercial paper.
 
     The Trust Preferred Securities are non-voting (except in limited
circumstances), pay quarterly distributions at an annual rate of 4 3/4%
commencing on June 30, 1998, carry a liquidation value of $50 per share plus
accrued and unpaid distributions and are convertible into the Company's common
shares at any time prior to the close of business on March 31, 2028, at the
option of the holder. The Trust Preferred Securities are convertible into the
Company's common stock at the rate of 1.2022 common shares for each preferred
security (equivalent to a conversion price of $41.59 per common share), subject
to adjustment in certain circumstances. The Company has executed a guarantee
with regard to the Trust Preferred Securities. The guarantee, when taken
together with the Company's obligations under the Trust Debentures, the
indenture pursuant to which the Trust Debentures were issued, and the applicable
trust document, provides a full and unconditional guarantee of the Trust's
obligations under the Trust Preferred Securities.
 
     See Note 1 Basis of Presentation, Holding Company Reorganization, for a
discussion of the impact of the holding company reorganization on the Trust
Preferred Securities.
 
5. FINANCING TRANSACTIONS
 
     The Company had short-term borrowings, including current maturities of
long-term debt, at June 30, 1998 and December 31, 1997, as follows:
 
<TABLE>
<CAPTION>
                                                              1998     1997
                                                              -----    -----
                                                              (IN MILLIONS)
<S>                                                           <C>      <C>
EPG Revolving Credit Facility...............................  $ --     $ 45
EPG Revolving Credit Facility with TGP designated as
  borrower..................................................   300      417
Commercial paper............................................   345      326
Other credit facilities.....................................    45       25
Current maturities of long-term debt........................    56       72
                                                              ----     ----
                                                              $746     $885
                                                              ====     ====
</TABLE>
 
     In March 1998, EPG retired its outstanding 8 5/8% debentures due 2012 in
the amount of $17 million.
 
     In August 1998, EPTPC retired its outstanding 10% debentures due August 1,
1998 in the amount of $38 million.
 
     After issuing the Trust Debentures, EPG has approximately $565 million of
capacity remaining under its shelf registrations to issue public securities
registered thereunder. In addition, TGP has approximately $100 million remaining
under its February 1997 shelf registration.
 
                                       13
<PAGE>   16
 
6. ACQUISITIONS
 
     As previously reported, in March 1998, the Company and DeepTech
International, Inc. ("DeepTech") entered into a definitive agreement whereby the
Company will acquire DeepTech as well as DeepTech's combined ownership interest
in Leviathan Gas Pipeline Partners, L.P. The Company expects to complete the
transaction in August 1998. The Federal Trade Commission and the Securities and
Exchange Commission (the "SEC") have completed their reviews of the transaction,
and other necessary approvals have been received. As a result of certain
elections by DeepTech stockholders, DeepTech will merge with a subsidiary of
EPEC, and the acquisition will be accounted for as a purchase with a total
purchase price of approximately $462 million, exclusive of acquisition costs.
 
7. PROPERTY, PLANT, AND EQUIPMENT
 
     Property, plant, and equipment at June 30, 1998, and December 31, 1997,
consisted of the following:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
                                                               (IN MILLIONS)
<S>                                                           <C>       <C>
Property, plant, and equipment, at cost.....................  $6,228    $6,004
Less accumulated depreciation and depletion.................   1,549     1,395
                                                              ------    ------
                                                               4,679     4,609
Additional acquisition cost assigned to utility plant, net
  of accumulated amortization...............................   2,493     2,507
                                                              ------    ------
          Total property, plant, and equipment, net.........  $7,172    $7,116
                                                              ======    ======
</TABLE>
 
8. INVENTORIES
 
     Inventories at June 30, 1998, and December 31, 1997, consisted of the
following:
 
<TABLE>
<CAPTION>
                                                              1998        1997
                                                              ----        ----
                                                               (IN MILLIONS)
<S>                                                           <C>         <C>
Materials and supplies......................................  $43         $42
Gas in storage..............................................    3          26
                                                              ---         ---
                                                              $46         $68
                                                              ===         ===
</TABLE>
 
     Materials and supplies and gas in storage are valued at the lower of cost
or market, with cost determined using the average cost method.
 
                                       14
<PAGE>   17
 
9. EARNINGS PER SHARE
 
     Basic and diluted earnings per share amounts are presented below.
 
<TABLE>
<CAPTION>
                                                              QUARTER ENDED JUNE 30,
                                     -------------------------------------------------------------------------
                                                    1998                                  1997
                                     -----------------------------------   -----------------------------------
                                      NET     AVERAGE SHARES   EARNINGS     NET     AVERAGE SHARES   EARNINGS
                                     INCOME    OUTSTANDING     PER SHARE   INCOME    OUTSTANDING     PER SHARE
                                     ------   --------------   ---------   ------   --------------   ---------
<S>                                  <C>      <C>              <C>         <C>      <C>              <C>
(IN MILLIONS, EXCEPT PER COMMON
  SHARE AMOUNTS)
Basic..............................   $55         116.0          $0.47      $43         114.6          $0.38
                                                                 =====                                 =====
Effect of dilutive securities:
  Stock options....................    --           2.7                                   2.1
  Trust Preferred Securities.......     3           7.8                                    --
  Restricted stock.................    --           2.5                                   0.8
                                      ---         -----                     ---         -----
Diluted............................   $58         129.0          $0.45      $43         117.5          $0.37
                                      ===         =====          =====      ===         =====          =====
</TABLE>
 
<TABLE>
<CAPTION>
                                                             SIX MONTHS ENDED JUNE 30,
                                     -------------------------------------------------------------------------
                                                    1998                                  1997
                                     -----------------------------------   -----------------------------------
                                      NET     AVERAGE SHARES   EARNINGS     NET     AVERAGE SHARES   EARNINGS
                                     INCOME    OUTSTANDING     PER SHARE   INCOME    OUTSTANDING     PER SHARE
                                     ------   --------------   ---------   ------   --------------   ---------
<S>                                  <C>      <C>              <C>         <C>      <C>              <C>
(IN MILLIONS, EXCEPT PER COMMON
  SHARE AMOUNTS)
Basic..............................   $113        116.0          $0.97      $91         112.9          $0.80
                                                                 =====                                 =====
Effect of dilutive securities:
  Stock options....................     --          2.6                                   2.0
  Trust Preferred Securities.......      3          4.5                                    --
  Restricted stock.................     --          2.4                                   0.8
                                      ----        -----                     ---         -----
Diluted............................   $116        125.5          $0.92      $91         115.7          $0.78
                                      ====        =====          =====      ===         =====          =====
</TABLE>
 
10. RECENT PRONOUNCEMENTS
 
  Pensions and Other Postretirement Benefits Disclosures
 
     In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits, was issued by the Financial Accounting Standards
Board to standardize related disclosure requirements. SFAS No. 132 requires that
additional information be disclosed regarding changes in the benefit obligation
and fair values of plan assets, and eliminates certain disclosures no longer
considered useful, including general descriptions of the plans. Aggregation of
information about certain plans is also permitted. This statement does not
change the requirements for the measurement and recognition of obligations under
those plans. The standard is effective for fiscal years beginning after December
15, 1997. The Company is currently evaluating the effects of this pronouncement.
 
  Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
 
     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance for
accounting of such costs, and also defines internal-use computer software. It is
effective for fiscal years beginning after December 15, 1998. The Company is
currently evaluating the effects of this pronouncement.
 
  Reporting on the Costs of Start-Up Activities
 
     In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. The statement defines start-up activities and requires start-up and
organization costs to be expensed as incurred. It is effective for fiscal years
beginning after December 15, 1998. The Company is currently evaluating the
effects of this pronouncement.
 
                                       15
<PAGE>   18
 
  Accounting for Derivative Instruments and Hedging Activities
 
     In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the Financial Accounting Standards Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity classify all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivativemay be specifically designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The standard is effective for all
fiscal quarters beginning after June 15, 1999. The Company is currently
evaluating the effects of this pronouncement.
 
  Disclosure of Year 2000 Issues and Consequences by Public Companies,
Investment Advisors, Investment Companies, and Municipal Securities Issuers
 
     In August 1998, the SEC issued the Interpretive Release: Disclosure of Year
2000 Issues and Consequences by Public Companies, Investment Advisers,
Investment Companies, and Municipal Securities Issuers, which will be effective
for the Company's future SEC filings. The release provides guidance for Year
2000 disclosure primarily focusing on Management's Discussion and Analysis of
Financial Condition and Results of Operations, and supersedes Staff Legal
Bulletin No. 5. The Company is currently evaluating the effect of the release on
its current disclosure, which is set forth under Note 3, Commitments and
Contingencies.
 
                                       16
<PAGE>   19
 
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, 7A, and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, in
addition to the interim consolidated financial statements and accompanying notes
presented in Item 1 of this Form 10-Q.
 
                         HOLDING COMPANY REORGANIZATION
 
     Effective on August 1, 1998, the Company reorganized into a holding company
form of organizational structure, whereby EPEC, a Delaware corporation, became
the holding company (see Note 1, Basis of Presentation, Holding Company
Reorganization, for further discussion of the holding company
reorganization). The change has no impact on the presentation herein.
 
                             RESULTS OF OPERATIONS
 
GENERAL
 
     Diluted earnings per share for the quarter ended June 30, 1998, rose 22
percent to $0.45 compared to $0.37 in the second quarter of 1997. Consolidated
EBIT for the second quarter increased to $149 million compared to $139 million
in the year ago period. For the first six months of 1998, diluted earnings per
share increased 18 percent to $0.92 from $0.78 in 1997. Consolidated EBIT for
the six months increased to $312 million compared to $288 million in 1997.
 
     The Company has elected to adopt the standards outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, effective
January 1, 1998. Accordingly, the Company has segregated its business activities
into five segments: El Paso Natural Gas segment, Tennessee Gas Pipeline segment,
El Paso Field Services segment, El Paso Energy Marketing segment, and El Paso
Energy International segment. These segments are strategic business units that
offer a variety of different energy products and services. They are managed
separately as each business requires different technology and marketing
strategies. Certain business segments' earnings are largely derived from the
earnings of equity investments. Accordingly, the Company evaluates segment
performance based on EBIT. To the extent practicable, results of operations for
1997 have been reclassified to conform to the current business segment
presentation, although such results are not necessarily indicative of the
results which would have been achieved had the revised business segment
structure been in effect during that period. Operating revenues and expenses by
segment include intersegment sales and expenses which are eliminated in
consolidation. For a further discussion of the individual segments, See Note 2
of Item 1, Financial Statements.
 
                                       17
<PAGE>   20
 
SEGMENT RESULTS
 
<TABLE>
<CAPTION>
                                                                QUARTER        SIX MONTHS
                                                                 ENDED           ENDED
                                                                JUNE 30,        JUNE 30,
                                                              ------------    ------------
                                                              1998    1997    1998    1997
                                                              ----    ----    ----    ----
                                                                     (IN MILLIONS)
<S>                                                           <C>     <C>     <C>     <C>
            EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
El Paso Natural Gas.........................................  $ 56    $ 70    $109    $132
Tennessee Gas Pipeline......................................    73      74     170     156
                                                              ----    ----    ----    ----
  Regulated segments........................................   129     144     279     288
                                                              ----    ----    ----    ----
El Paso Field Services......................................    18      13      41      41
El Paso Energy Marketing....................................    --     (15)     --     (31)
El Paso Energy International................................     9       6      11       3
                                                              ----    ----    ----    ----
  Non-regulated segments....................................    27       4      52      13
                                                              ----    ----    ----    ----
Corporate expenses, net.....................................    (7)     (9)    (19)    (13)
                                                              ----    ----    ----    ----
  Total EBIT................................................  $149    $139    $312    $288
                                                              ====    ====    ====    ====
</TABLE>
 
     Consolidated EBIT for the quarter and six months ended June 30, 1998, was
$10 million higher and $24 million higher, respectively, than for the same
periods of 1997. Variances by segment are presented below.
 
  EL PASO NATURAL GAS
 
<TABLE>
<CAPTION>
                                                        QUARTER         SIX MONTHS
                                                         ENDED            ENDED
                                                       JUNE 30,          JUNE 30,
                                                     -------------    --------------
                                                     1998     1997    1998     1997
                                                     ----     ----    -----    -----
                                                              (IN MILLIONS)
<S>                                                  <C>      <C>     <C>      <C>
Operating revenues.................................  $125     $126    $ 239    $ 255
Operating expenses.................................   (69)     (57)    (131)    (124)
Other -- net.......................................    --        1        1        1
                                                     ----     ----    -----    -----
  EBIT.............................................  $ 56     $ 70    $ 109    $ 132
                                                     ====     ====    =====    =====
</TABLE>
 
Second Quarter 1998 Compared to Second Quarter 1997
 
     Operating revenues for the quarter ended June 30, 1998, were $1 million
lower than for the same period of 1997 primarily due to lower net revenues
resulting from the currently effective rate structure including the Pacific Gas
& Electric Company contract expiration which was effective December 31, 1997.
The decrease was significantly offset by risk sharing revenue and revenue from
the sale of excess capacity to Dynegy and the favorable resolution of a
contested rate matter resulting in an $8 million one time benefit. (See Part I,
Financial Information, Note 3, for a discussion of the Dynegy contracts).
 
     Operating expenses for the quarter ended June 30, 1998, were $12 million
higher than for the same period of 1997 primarily due to a favorable gas
imbalance settlement in the second quarter of 1997, lower 1998 fuel recovery
rates, and lower other taxes in 1997.
 
Six Months Ended 1998 Compared to Six Months Ended 1997
 
     Operating revenues for the six months ended June 30, 1998, were $16 million
lower than for the same period of 1997 primarily due to lower net revenues
resulting from the currently effective rate structure including the Pacific Gas
& Electric Company contract expiration which was effective December 31, 1997.
The decrease was partially offset by risk sharing revenue and revenue from the
sale of excess capacity to Dynegy and the favorable resolution of a contested
rate matter resulting in an $8 million one time benefit. (See Part I, Financial
Information, Note 3, for a discussion of the Dynegy contracts).
 
                                       18
<PAGE>   21
 
     Operating expenses for the six months ended June 30, 1998, were $7 million
higher than for the same period of 1997 primarily due to increased purchase gas
costs resulting from lower 1998 fuel recovery rates and favorable measurement
adjustments in 1997 offset by a favorable imbalance revaluation in the first
quarter 1998.
 
  TENNESSEE GAS PIPELINE
 
<TABLE>
<CAPTION>
                                                       QUARTER          SIX MONTHS
                                                        ENDED             ENDED
                                                      JUNE 30,           JUNE 30,
                                                   ---------------    --------------
                                                   1998      1997     1998     1997
                                                   -----     -----    -----    -----
                                                             (IN MILLIONS)
<S>                                                <C>       <C>      <C>      <C>
Operating revenues...............................  $ 179     $ 189    $ 390    $ 404
Operating expenses...............................   (113)     (117)    (231)    (252)
Other -- net.....................................      7         2       11        4
                                                   -----     -----    -----    -----
  EBIT...........................................  $  73     $  74    $ 170    $ 156
                                                   =====     =====    =====    =====
</TABLE>
 
Second Quarter 1998 Compared to Second Quarter 1997
 
     Operating revenues for the quarter ended June 30, 1998, were $10 million
lower than for the same period of 1997 primarily because of a downward revision
in the amount of recoverable interest on GSR costs and lower throughput
resulting from milder temperatures in the northeastern and midwestern markets.
 
     Operating expenses for the quarter ended June 30, 1998, were $4 million
lower than for the same period of 1997 primarily due to lower system fuel usage
associated with the decrease in throughput.
 
     Other -- net for the quarter ended June 30, 1998, was $5 million higher
than for the same period of 1997 primarily due to a gain on the sale of assets
and an increase in allowance for funds used during construction.
 
Six Months Ended 1998 Compared to Six Months Ended 1997
 
     Operating revenues for six months ended June 30, 1998, were $14 million
lower than for the same period of 1997 primarily because of lower throughput
resulting from warmer average temperatures in the
northeastern and midwestern markets and a downward revision in the amount of
recoverable interest on GSR costs.
 
     Operating expenses for the six months ended June 30, 1998, were $21 million
lower than for the same period of 1997 primarily due to lower system fuel usage
associated with the decrease in throughput attributable to milder temperatures
in the northeast and midwest in the first four months of 1998. Lower labor and
related costs in the first quarter of 1998 also contributed to the decrease in
expenses.
 
     Other -- net for the six months ended June 30, 1998, was $7 million higher
than for same period of 1997 primarily as a result of a gain on the sale of
assets in the second quarter of 1998 and an increase in allowance for funds used
during construction.
 
                                       19
<PAGE>   22
 
  EL PASO FIELD SERVICES
 
<TABLE>
<CAPTION>
                                                        QUARTER         SIX MONTHS
                                                         ENDED             ENDED
                                                       JUNE 30,          JUNE 30,
                                                     -------------     -------------
                                                     1998     1997     1998     1997
                                                     ----     ----     ----     ----
                                                              (IN MILLIONS)
<S>                                                  <C>      <C>      <C>      <C>
Gathering and treating margin......................  $ 38     $ 23     $ 77     $ 58
Processing margin..................................    13       13       26       32
Other margin.......................................    --        3        2        4
                                                     ----     ----     ----     ----
          Total gross margin.......................    51       39      105       94
Operating expenses.................................   (37)     (28)     (71)     (56)
Other -- net.......................................     4        2        7        3
                                                     ----     ----     ----     ----
  EBIT.............................................  $ 18     $ 13     $ 41     $ 41
                                                     ====     ====     ====     ====
</TABLE>
 
Second Quarter 1998 Compared to Second Quarter 1997
 
     Total gross margin (revenue less cost of sales) for the quarter ended June
30, 1998, was $12 million higher than for the same period of 1997. The increase
in the gathering and treating margin was primarily from higher San Juan Basin
gathering and treating rates and an increase in gathering and treating volumes
largely attributable to the acquisition in December 1997, of Pacificorp's Gulf
Coast gathering and processing subsidiaries ("TPC").
 
     Operating expenses for the quarter ended June 30, 1998, were $9 million
higher than for the same period of 1997 primarily related to additional expense
associated with TPC and Gulf States Gas Pipeline Company.
 
     Other -- net for the quarter ended June 30, 1998, was $2 million higher
than for the same period of 1997 primarily from additional earnings from equity
investments.
 
Six Months Ended 1998 Compared to Six Months Ended 1997
 
     Total gross margin (revenue less cost of sales) for the six months ended
June 30, 1998, was $11 million higher than for the same period of 1997. The
increase in the gathering and treating margin primarily resulted from an
increase in gathering and treating volumes largely attributable to the
acquisition of TPC in December 1997. The decrease in the processing margin was
largely attributable to lower liquids prices during 1998 compared to the same
period of 1997. Liquids prices directly impact a substantial portion of EPFS's
processing revenues. During 1998, liquids prices have been at their lowest level
since 1990, and the Company expects this trend to continue for the remainder of
the year. The Company attempts to mitigate the impact of lower liquids prices by
utilizing hedging strategies where possible.
 
     Operating expenses for the six months ended June 30, 1998, were $15 million
higher than for the same period of 1997 primarily related to additional expense
associated with TPC and Gulf States Gas Pipeline Company and higher
administrative costs.
 
     Other -- net for the six months ended June 30, 1998, was $4 million higher
than for the same period of 1997 reflecting higher earnings from equity
investments.
 
                                       20
<PAGE>   23
 
  EL PASO ENERGY MARKETING
 
<TABLE>
<CAPTION>
                                                        QUARTER         SIX MONTHS
                                                         ENDED             ENDED
                                                       JUNE 30,          JUNE 30,
                                                     -------------     -------------
                                                     1998     1997     1998     1997
                                                     ----     ----     ----     ----
                                                              (IN MILLIONS)
<S>                                                  <C>      <C>      <C>      <C>
Natural gas margin.................................  $(7)     $ (1)    $ (2)    $ (5)
Power margin.......................................   12        --       19       --
Petroleum products margin..........................   (1)       (1)      --       (2)
                                                     ---      ----     ----     ----
          Total gross margin.......................    4        (2)      17       (7)
Operating expenses.................................   (8)      (14)     (21)     (26)
Other -- net.......................................    4         1        4        2
                                                     ---      ----     ----     ----
  EBIT.............................................  $--      $(15)    $ --     $(31)
                                                     ===      ====     ====     ====
</TABLE>
 
Second Quarter 1998 Compared to Second Quarter 1997
 
     Total gross margin (revenue less cost of sales) for the quarter ended June
30, 1998, was $6 million higher than for the same period of 1997. The increase
in the power margin was primarily attributable to the net increase in the market
value of open power contracts due to price volatility (significant swings in
power prices upward or downward) in the last half of June. Power price
volatility is expected to continue during the third quarter of 1998. The
decrease in the natural gas margin was primarily attributable to the net losses
on open natural gas contracts. Low natural gas margins may continue to have a
negative impact on the Company's natural gas results.
 
     Operating expenses were $6 million lower than for the same period of 1997
primarily due to the restructuring of the marketing organization in 1997.
 
     Other -- net was $3 million higher than for the same period of 1997
resulting from a gain on the sale of assets.
 
Six Months Ended 1998 Compared to Six Months Ended 1997
 
     Total gross margin (revenue less cost of sales) for the six months ended
June 30, 1998, was $24 million higher than for the same period of 1997. The
increase in the power margin was primarily attributable to the income
recognition from a long-term power contract closed during the first quarter and
the net increase in the market value of open power contracts due to price
volatility in the last half of June. Power price volatility is expected to
continue during the third quarter of 1998. The decrease in the natural gas
margin was primarily attributable to the net losses on open natural gas
contracts. Low natural gas margins may continue to have a negative impact on the
Company's natural gas results.
 
     Operating expenses were $5 million lower than for the same period of 1997.
The decrease is attributable to the restructuring of the marketing organization
in 1997.
 
     Other -- net was $2 million higher than for the same period of 1997
resulting from a gain on the sale of assets.
 
                                       21
<PAGE>   24
 
  EL PASO ENERGY INTERNATIONAL
 
<TABLE>
<CAPTION>
                                                          QUARTER         SIX MONTHS
                                                           ENDED             ENDED
                                                         JUNE 30,          JUNE 30,
                                                       -------------     -------------
                                                       1998     1997     1998     1997
                                                       ----     ----     ----     ----
                                                                (IN MILLIONS)
<S>                                                    <C>      <C>      <C>      <C>
Operating revenues...................................  $ 16     $--      $ 28     $--
Operating expenses...................................   (22)     (5)      (41)     (9)
Other -- net.........................................    15      11        24      12
                                                       ----     ---      ----     ---
  EBIT...............................................  $  9     $ 6      $ 11     $ 3
                                                       ====     ===      ====     ===
</TABLE>
 
Second Quarter 1998 Compared to Second Quarter 1997
 
     Operating revenues for the quarter ended June 30, 1998, were $16 million
higher than for the same period of 1997 due to consolidation for financial
reporting purposes of the EMA Power project in July 1997 and the Manaus project
in May 1998 after acquiring additional interests.
 
     Operating expenses for the quarter ended June 30, 1998, were $17 million
higher than for the same period of 1997 primarily due to costs related to the
EMA Power and Manaus projects and higher project development costs in the second
quarter of 1998 reflecting an increase in project-related activities.
 
     Other -- net for the second quarter ended June 30, 1998, was $4 million
higher than for the same period of 1997 primarily from increased equity
earnings.
 
Six Months Ended 1998 Compared to Six Months Ended 1997
 
     Operating revenues for the six months ended June 30, 1998, were $28 million
higher than for the same period of 1997 due to consolidation for financial
reporting purposes of the EMA Power project in July 1997 and the Manaus project
in May 1998 after acquiring additional interests.
 
     Operating expenses for the six months ended June 30, 1998, were $32 million
higher than for the same period of 1997 primarily due to costs related to the
EMA Power and Manaus projects and higher project development costs in 1998
reflecting an increase in project-related activities.
 
     Other -- net for the six months ended June 30, 1998, was $12 million higher
than for the same period of 1997 primarily from increased equity earnings and
the recognition of certain gains from project-related activities. As EPEI's
projects move from the developmental stage to the operational stage, it is
common to recognize one-time gains and fees which may include management fees,
development fees, financing fees and gains on the sell-down of partnership
interests. The Company anticipates additional one-time events may result in the
recognition of income or expense in the future.
 
CORPORATE EXPENSES, NET
 
Second Quarter 1998 Compared to Second Quarter 1997
 
     Net corporate expenses for the quarter ended June 30, 1998, were $2 million
lower than for the same period of 1997 primarily due to a gain on the sale of
assets and decreased benefit costs, partially offset by an increase in costs
related to the Company's employee incentive plans and other administrative costs
associated with the formation and startup of El Paso Power Services, a power
services organization formed in the first quarter of 1998.
 
Six Months Ended 1998 Compared to Six Months Ended 1997
 
     Net corporate expenses for the six months ended June 30, 1998, were $6
million higher than for the same period of 1997 primarily due to an increase in
costs related to the Company's employee incentive plans and other administrative
costs associated with the formation and startup of El Paso Power Services, a
power
 
                                       22
<PAGE>   25
 
services organization formed in the first quarter of 1998. These increases were
partially offset by a gain on the sale of assets and decreased benefit costs.
 
INTEREST AND DEBT EXPENSE
 
Second Quarter 1998 Compared to Second Quarter 1997
 
     Interest and debt expense for the quarter ended June 30, 1998, was $2
million higher than for the same period of 1997 primarily because of increased
borrowings to fund capital expenditures, acquisitions, and other investing
expenditures, partially offset by interest accruals on the 1997 rate refund to
EPG's customers.
 
Six Months Ended 1998 Compared to Six Months Ended 1997
 
     Interest and debt expense for the six months ended June 30, 1998, was $5
million higher than for the same period of 1997 primarily because of increased
borrowings to fund capital expenditures, acquisitions, and other investing
expenditures and a higher average effective interest rate during the first half
of 1998 resulting from the higher rates associated with the March 1997 issuance
of TGP long-term debt of approximately $883 million. These increases are
partially offset by interest accruals on the 1997 rate refund to EPG's
customers.
 
INCOME TAX EXPENSE
 
Second Quarter 1998 Compared to Second Quarter 1997
 
     The effective tax rate for the quarter ended June 30, 1998, was lower than
the rate for the same period of 1997 primarily as a result of foreign income
taxed at different rates, equity income from unconsolidated foreign affiliates
recorded net of income taxes in pre-tax income, and lower state income taxes.
 
Six Months Ended 1998 Compared to Six Months 1997
 
     The effective tax rate for the six months ended June 30, 1998, was lower
than the rate for the same period of 1997 primarily as a result of foreign
income taxed at different rates, equity income from unconsolidated foreign
affiliates recorded net of income taxes in pre-tax income, and lower state
income taxes.
 
                        LIQUIDITY AND CAPITAL RESOURCES
 
  CASH FROM OPERATING ACTIVITIES
 
     Net cash provided by operating activities was $39 million higher for the
six months ended June 30, 1998, compared to the same period of 1997. The
increase was primarily attributable to a higher net tax refund in 1998 and a
rate refund to TGP's customers in March 1997. The increase was partially offset
by working capital changes, a take-or-pay refund to EPG's customers in February
1998, and lower GSR collections in 1998.
 
  CASH FROM INVESTING ACTIVITIES
 
     Net cash used in investing activities was $267 million higher for the six
months ended June 30, 1998, compared to the same period of 1997. The increase
was primarily due to higher expenditures for joint ventures, equity investments,
and capital expenditures in the first six months of 1998 compared to the first
six months of 1997. Expenditures related to joint ventures and equity
investments were primarily attributable to the El Paso Energy International
segment. Internally generated funds, supplemented by other financing activities,
were used to fund these expenditures. Additionally, the first quarter of 1997
included the collection of a $53 million note receivable from the Company's
partnership in a cogeneration plant in Florida.
 
     Future funding for capital expenditures, acquisitions, and other investing
expenditures is expected to be provided by internally generated funds,
commercial paper issuances, available capacity under existing credit facilities,
and/or the issuance of other long-term debt, trust securities, or equity.
 
                                       23
<PAGE>   26
 
  CASH FROM FINANCING ACTIVITIES
 
     Net cash provided by financing activities was $106 million for the six
months ended June 30, 1998, compared to net cash used in financing activities of
$217 million for the same period of 1997. In March 1998, the Trust issued Trust
Preferred Securities (see Item 1, Financial Statements, Note 4) for net proceeds
of $317 million which, supplemented by internally generated funds, were used to
pay down short-term debt, retire long-term debt, pay dividends, acquire treasury
stock, and for other corporate purposes. The first six months of 1997 use of
cash was due in large part to the Company's efforts to realign its debt and
capital structure following the EPTPC acquisition.
 
     In March 1998, EPG retired its outstanding 8 5/8% debentures due 2012 in
the amount of $17 million.
 
     In August 1998, EPTPC retired its outstanding 10% debentures due August 1,
1998, in the amount of $38 million.
 
     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 22, 1997.......................    $0.18250       January 2, 1998         $  22
January 22, 1998.......................    $0.19125        April 1, 1998          $  23
April 22, 1998.........................    $0.19125        July 1, 1998           $  23
</TABLE>
 
     In July 1998, the Board declared a quarterly dividend of $0.19125 per share
on EPG's common stock, payable on October 1, 1998, to stockholders of record on
September 4, 1998. Also during the first six months of 1998, quarterly dividends
totaling $12 million were paid on EPTPC's Series A Preferred Stock.
 
     Future funding for long-term debt retirements, dividends, and other
financing expenditures are expected to be provided by internally generated
funds, commercial paper issuances, or available capacity under existing credit
facilities, and/or the issuance of other long-term debt, trust securities, or
equity.
 
     At June 30, 1998, the Company had approximately $1.2 billion available
under its revolving credit facilities established in October 1997. The
availability of borrowings under the Company's credit agreements is subject to
certain specified conditions, which management believes it currently meets.
 
     After issuing the Trust Debentures described in Part I, Financial
Information, Note 4, EPG has approximately $565 million of capacity remaining
under its shelf registrations to issue public securities registered thereunder.
In addition, TGP has approximately $100 million remaining on its February 1997
shelf registration. In connection with the reorganization to form a holding
company structure under EPEC (see Part I, Financial Information, Note 1, Basis
of Presentation), the $565 million of capacity under EPG's shelf registration
will be transferred to EPEC.
 
                         COMMITMENTS AND CONTINGENCIES
 
     See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
 
                                     OTHER
 
     The Company intends to continue pursuing strategic acquisition and
investment opportunities. The timing, size, or success of any acquisition
effort, and the associated potential capital commitments, cannot be predicted.
The Company may fund future acquisitions and investments with internally
generated funds, available capacity under existing credit facilities, and/or the
issuance of other long-term debt or equity.
 
  DEEPTECH ACQUISITION
 
     As previously reported, in March 1998, the Company and DeepTech entered
into a definitive agreement whereby the Company will acquire DeepTech as well as
DeepTech's combined ownership interest in
                                       24
<PAGE>   27
 
Leviathan Gas Pipeline Partners, L.P. The Company expects to complete the
transaction in August 1998. The Federal Trade Commission and the SEC have
completed their reviews of the transaction, and other necessary approvals have
been received. As a result of certain elections by DeepTech stockholders,
DeepTech will merge with a subsidiary of EPEC, and the acquisition will be
accounted for as a purchase with a total purchase price of approximately $462
million, exclusive of acquisition costs.
 
  ONGOING AND FUTURE INVESTMENT AND CAPITAL PROJECTS
 
     Significant events impacting the Company's development projects are
discussed below.
 
  Latin America
 
     In April 1998, the Company purchased the remaining 50 percent interest in
the 250 MW power project in Manaus, Brazil from CAPEX, a publicly traded company
on the Argentine and Luxembourg stock exchanges. The contract for the power
project provides for delay damages to be paid to the power purchaser in the
event of a failure to meet the specified construction schedule, except for
delays caused by events of force majeure. The completion of the project has been
delayed beyond the originally scheduled completion dates provided in the
contract and such delays have resulted in a claim for delay damages from the
power purchaser. The Company is in discussions with the power purchaser
regarding such claim. In any event, the Company has a right to assert claims
against the construction contractor for such delay damages and does not believe
that any such damages will have a material adverse effect on the Company.
 
  Portland
 
     The Company increased its ownership interest in the Portland Natural Gas
Transmission ("Portland") system from 17.8 percent to approximately 19 percent
in April 1998. Portland is developing a 292-mile interstate natural gas pipeline
with a projected capacity of 178 million cubic feet per day extending from the
Canadian border near Pittsburg, New Hampshire to Dracut, Massachusetts. In April
1998, Portland secured $256 million in non-recourse project financing.
Construction started in June 1998 and targeted completion for the project is
year-end 1998.
 
  STOCK SPLIT
 
     On January 21, 1998, the Board approved the Stock Split, subject to
stockholder approval of the Amendment. The stockholders approved the Amendment
on March 2, 1998. The Stock Split was effected in the form of a stock dividend
of an aggregate of 60,944,417 shares of EPG's common stock, which was paid on
April 1, 1998, to stockholders of record on March 13, 1998.
 
  RECENT PRONOUNCEMENTS
 
     See Part I, Financial Information, Note 10, which is incorporated herein by
reference.
 
                                       25
<PAGE>   28
 
      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.
 
     Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include increasing competition
within the Company's industry, the timing and extent of changes in commodity
prices for natural gas and power, uncertainties associated with acquisitions and
joint ventures, potential environmental liabilities, potential contingent
liabilities and tax liabilities related to the Company's acquisitions, including
EPTPC, political and economic risks associated with current and future
operations in foreign countries, conditions of the equity and other capital
markets during the periods covered by the forward-looking statements, and other
risks, uncertainties and factors, including the effect of the year 2000 date
change, discussed more completely in the Company's other filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 1997.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, in addition to
the interim consolidated financial statements and accompanying notes presented
in Items 1 and 2 of this Form 10-Q.
 
     There are no material changes in market risks faced by the Company from
those reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
 
                                       26
<PAGE>   29
 
                          PART II -- OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
     See Part I, Financial Information, Note 3, which is incorporated herein by
reference.
 
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
 
     See Part I, Financial Information, Note 1, which is incorporated herein by
reference.
 
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 May 12, 1998. 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 1998.
 
     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....................................  51,824,195      212,293
Juan Carlos Braniff.................................  51,802,905      233,583
Peter T. Flawn......................................  51,749,431      287,056
James F. Gibbons....................................  51,824,395      212,092
Ben F. Love.........................................  51,803,429      233,059
Kenneth L. Smalley..................................  51,825,788      210,699
Malcolm Wallop......................................  51,812,378      224,110
William A. Wise.....................................  51,582,375      454,113
</TABLE>
 
     The appointment of PricewaterhouseCoopers LLP as the Company's independent
certified public accountants for the fiscal year 1998 was ratified with the
following voting results:
 
<TABLE>
<CAPTION>
                                                 FOR        AGAINST    ABSTAIN
                                              ----------    -------    -------
<S>                                           <C>           <C>        <C>
Ratification of appointment of
  PricewaterhouseCoopers LLP................  51,809,680    116,781    110,027
</TABLE>
 
     There were no broker non-votes for the election of directors or for the
ratification of PricewaterhouseCoopers LLP.
 
ITEM 5. OTHER INFORMATION
 
     None.
 
                                       27
<PAGE>   30
 
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
 
     a. Exhibits
 
     Each exhibit identified below not designated by an asterisk is incorporated
by reference to a prior filing as indicated.
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           2.1           -- Amendment No. 1 to the Merger Agreement, dated June 16,
                            1998, by and among El Paso Natural Gas Company, El Paso
                            Acquisition Company and DeepTech International Inc.
                            (Exhibit 2.3 to EPG's Form S-4 filed July 14, 1998).
           3.A           -- Restated Certificate of Incorporation, dated August 3,
                            1998 (Exhibit 3.1 to EPG's Form 8-K filed August 3,
                            1998).
         *27             -- Financial Data Schedule.
</TABLE>
 
---------------
 
* Indicates documents filed as part of this report.
 
     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
 
          No reports on Form 8-K were filed during the quarter ended June 30,
     1998, however on August 3, 1998, EPG filed a report under Item 5 and Item 7
     on Form 8-K with respect to the merger of EPG with Merger Sub to create a
     holding company structure.
 
                                       28
<PAGE>   31
 
                                   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, 1998                              /s/ H. BRENT AUSTIN
 
                                            ------------------------------------
                                                      H. Brent Austin
                                                Executive Vice President and
                                                  Chief Financial Officer
 
Date: August 13, 1998                             /s/ JEFFREY I. BEASON
 
                                            ------------------------------------
                                                     Jeffrey I. Beason
                                               Vice President and Controller
                                                 (Chief Accounting Officer)
 
                                       29
<PAGE>   32
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           2.1           -- Amendment No. 1 to the Merger Agreement, dated June 16,
                            1998, by and among El Paso Natural Gas Company, El Paso
                            Acquisition Company and DeepTech International Inc.
                            (Exhibit 2.3 to EPG's Form S-4 filed July 14, 1998).
           3.A           -- Restated Certificate of Incorporation, dated August 3,
                            1998 (Exhibit 3.1 to EPG's Form 8-K filed August 3,
                            1998).
         *27             -- Financial Data Schedule.
</TABLE>
 
---------------
 
* Indicates documents filed as part of this report.