<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 SEPTEMBER 30, 1996

                                       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)

                  DELAWARE
        (State or Other Jurisdiction                         74-0608280
      of Incorporation or Organization)                   (I.R.S. Employer
                                                         Identification No.)

           ONE PAUL KAYSER CENTER,
  100 NORTH STANTON STREET, EL PASO, TEXAS                          79901
  (Address of Principal Executive Offices)                        (Zip Code)

     Registrant's Telephone Number, Including Area Code     (915) 541-2600

   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.

                 CLASS                                       OUTSTANDING
                 -----                                       -----------
Common Stock, par value $3.00 per share,
         as of October 31, 1996                           36,256,311 shares

================================================================================
<PAGE>   2
                                    GLOSSARY

The following abbreviations, acronyms, or defined terms used in this Form 10-Q
are defined below:

<TABLE>
<CAPTION>
      ABBREVIATIONS,
ACRONYMS, OR DEFINED TERMS                               TERMS
--------------------------                               -----
<S>                                         <C>
ALJ . . . . . . . . . . . . . . . . . .     Administrative Law Judge
Board . . . . . . . . . . . . . . . . .     Board of Directors of El Paso Natural Gas Company
CAAA  . . . . . . . . . . . . . . . . .     Clean Air Act Amendments of 1990
CFE . . . . . . . . . . . . . . . . . .     Comision Federal de Electricidad
Company . . . . . . . . . . . . . . . .     El Paso Natural Gas Company, now doing business as El Paso Energy
                                            Corporation, and its subsidiaries
Cornerstone . . . . . . . . . . . . . .     Cornerstone Natural Gas, Inc., a wholly owned subsidiary of El Paso
                                            Field Services Company
Court of Appeals  . . . . . . . . . . .     United States Court of Appeals for the District of Columbia Circuit
Edison  . . . . . . . . . . . . . . . .     Southern California Edison Company
EPA . . . . . . . . . . . . . . . . . .     United States Environmental Protection Agency
EPED SAM  . . . . . . . . . . . . . . .     EPED SAM Holdings Company, an indirect wholly owned subsidiary
                                            of El Paso Energy International Company
EPEI  . . . . . . . . . . . . . . . . .     El Paso Energy International Company, a wholly owned subsidiary of
                                            El Paso Natural Gas Company
EPEM  . . . . . . . . . . . . . . . . .     El Paso Energy Marketing Company (formerly Eastex Energy Inc.),
                                            a wholly owned subsidiary of El Paso Natural Gas Company
EPFS  . . . . . . . . . . . . . . . . .     El Paso Field Services Company, a wholly owned subsidiary of
                                            El Paso Natural Gas Company
EPG . . . . . . . . . . . . . . . . . .     El Paso Natural Gas Company, now doing business as El Paso Energy
                                            Corporation, unless the context otherwise requires
EPGM  . . . . . . . . . . . . . . . . .     El Paso Gas Marketing Company, a wholly owned subsidiary of
                                            El Paso Natural Gas Company
EPNC  . . . . . . . . . . . . . . . . .     El Paso New Chaco Company, a wholly owned subsidiary of El Paso
                                            Natural Gas Company
EXIM  . . . . . . . . . . . . . . . . .     United States Export-Import Bank
FERC  . . . . . . . . . . . . . . . . .     Federal Energy Regulatory Commission
IDB . . . . . . . . . . . . . . . . . .     Inter-American Development Bank
Mdth/d  . . . . . . . . . . . . . . . .     Thousand dekatherms per day
MPC   . . . . . . . . . . . . . . . . .     Mojave Pipeline Company, an indirect wholly owned subsidiary of
                                            El Paso Natural Gas Company
NGL . . . . . . . . . . . . . . . . . .     Natural gas liquids
Odd-Lot Holders . . . . . . . . . . . .     Shareholders of El Paso Natural Gas Company owning beneficially
                                            fewer than 100 shares of El Paso Natural Gas Company's common
                                            stock
PCB . . . . . . . . . . . . . . . . . .     Polychlorinated biphenyl
Plan  . . . . . . . . . . . . . . . . .     Dividend Reinvestment and Common Stock Purchase Plan
Program . . . . . . . . . . . . . . . .     Continuous Odd-Lot Stock Sales Program
Sam II  . . . . . . . . . . . . . . . .     Compania Samalayuca II
SEC . . . . . . . . . . . . . . . . . .     Securities and Exchange Commission
SFAS  . . . . . . . . . . . . . . . . .     Statement of Financial Accounting Standards
Tenneco . . . . . . . . . . . . . . . .     Tenneco Inc.
TransAmerican . . . . . . . . . . . . .     TransAmerican Natural Gas Corporation
TransColorado . . . . . . . . . . . . .     TransColorado Gas Transmission Company

</TABLE>




                                       i
<PAGE>   3
                        PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                          EL PASO NATURAL GAS COMPANY

                       CONSOLIDATED STATEMENTS OF  INCOME
                (IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   THIRD QUARTER                     NINE MONTHS
                                                             ------------------------       ----------------------------
                                                               1996           1995              1996             1995
                                                             ---------      ---------       ------------      ----------
 <S>                                                         <C>            <C>               <C>              <C>
 Operating revenues  . . . . . . . . . . . . . . . . . .     $ 744,863      $ 240,191         $1,937,782       $ 629,472
                                                             ---------      ---------       ------------      ----------

 Operating charges 
    Natural gas and liquids  . . . . . . . . . . . . . .       575,296         82,474          1,429,490         156,328 
    Operation and maintenance  . . . . . . . . . . . . .        71,295         77,700            218,318         229,386 
    Employee separation and asset impairment charge  . .             -              -             99,053               -   
    Depreciation, depletion, and amortization  . . . . .        23,320         17,908             65,902          52,157 
    Taxes, other than income taxes   . . . . . . . . . .         9,348          9,419             30,741          29,841 
                                                             ---------      ---------       ------------      ----------
                                                               679,259        187,501          1,843,504         467,712 
                                                             ---------      ---------       ------------      ----------
 Operating income  . . . . . . . . . . . . . . . . . . .        65,604         52,690             94,278         161,760
                                                             ---------      ---------       ------------      ----------
 Other (income) expense
    Interest and debt expense  . . . . . . . . . . . . .        24,660         21,986             72,615          64,150
    Other - net  . . . . . . . . . . . . . . . . . . . .           209         (2,142)            (1,300)         (4,950)
                                                             ---------      ---------       ------------      ----------
                                                                24,869         19,844             71,315          59,200
                                                             ---------      ---------       ------------      ----------

 Income before income taxes  . . . . . . . . . . . . . .        40,735         32,846             22,963         102,560
 Income taxes  . . . . . . . . . . . . . . . . . . . . .        15,928         12,557              8,979          40,101
                                                             ---------      ---------       ------------      ----------
 Net income  . . . . . . . . . . . . . . . . . . . . . .     $  24,807      $  20,289       $     13,984      $   62,459
                                                             =========      =========       ============      ==========

 Earnings per common share   . . . . . . . . . . . . . .     $     .70      $     .60       $        .40      $     1.81
                                                             =========      =========       ============      ==========

 Average common shares outstanding . . . . . . . . . . .        35,295         33,830             34,994          34,590
                                                             =========      =========       ============      ==========

 Dividends declared per common share   . . . . . . . . .     $   .3475      $   .3300       $     1.0425      $    .9900
                                                             =========      =========       ============      ==========

</TABLE>

             The accompanying Notes are an integral part of these
                      Consolidated Financial Statements.





                                       1
<PAGE>   4
                          EL PASO NATURAL GAS COMPANY

                          CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNT)


<TABLE>
<CAPTION>
                                                           ASSETS

                                                                              SEPTEMBER 30,         DECEMBER 31,
                                                                                  1996                  1995
                                                                              ------------         ------------
                                                                              (UNAUDITED)
      <S>                                                                     <C>                  <C>
       Current assets
        Cash and temporary investments . . . . . . . . . . . . . . . . .      $     52,355         $     39,373
        Accounts and notes receivable, net . . . . . . . . . . . . . . .           317,346              214,796
        Inventories  . . . . . . . . . . . . . . . . . . . . . . . . . .            38,295               37,108
        Take-or-pay buy-outs, buy-downs, and prepayments, net  . . . . .               754               10,477
        Deferred income tax benefit  . . . . . . . . . . . . . . . . . .            59,845               22,631
        Other  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            25,297               44,207
                                                                              ------------         ------------
              Total current assets . . . . . . . . . . . . . . . . . . .           493,892              368,592
                                                                              ------------         ------------
       Property, plant, and equipment, net . . . . . . . . . . . . . . .         1,991,043            1,977,624
       Intangible assets, net  . . . . . . . . . . . . . . . . . . . . .           116,428               47,878
       Investments and advances  . . . . . . . . . . . . . . . . . . . .            49,211                    -
       Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           123,492              140,462
                                                                              ------------         ------------
                                                                                 2,280,174            2,165,964
                                                                              ------------         ------------
           Total assets  . . . . . . . . . . . . . . . . . . . . . . . .      $  2,774,066         $  2,534,556
                                                                              ============         ============

                                           LIABILITIES AND STOCKHOLDERS' EQUITY
       Current liabilities
        Accounts payable . . . . . . . . . . . . . . . . . . . . . . . .      $    385,748         $    275,674
        Short-term borrowings  . . . . . . . . . . . . . . . . . . . . .           289,395              278,200
        Accrual for regulatory issues  . . . . . . . . . . . . . . . . .           100,050                    -
        Current maturities of long-term debt . . . . . . . . . . . . . .           108,686                7,590
        Other  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            98,999               81,178
                                                                              ------------         ------------
             Total current liabilities . . . . . . . . . . . . . . . . .           982,878              642,642
                                                                              ------------         ------------
       Long-term debt, less current maturities . . . . . . . . . . . . .           665,266              771,892
       Deferred income taxes, less current portion . . . . . . . . . . .           296,088              314,143
       Deferred credits  . . . . . . . . . . . . . . . . . . . . . . . .            28,266               39,514
       Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            53,560               54,279
                                                                              ------------         ------------
                                                                                 1,043,180            1,179,828
                                                                              ------------         ------------
                                                                                           
      Minority interest  . . . . . . . . . . . . . . . . . . . . . . . .            39,765                    -
                                                                              ------------         ------------
      Commitments and contingent liabilities (See Note 4)                                  
      Stockholders' equity                                                                 
      Common stock, par value $3 per share; authorized 100,000 shares;                     
         issued 37,782 and 37,351 shares  . . . . . . . . . . . . . . .            113,197              112,054
       Additional paid-in capital . . . . . . . . . . . . . . . . . . .            483,645              454,713
       Retained earnings  . . . . . . . . . . . . . . . . . . . . . . .            216,022              240,101
       Less:  Deferred employee compensation  . . . . . . . . . . . . .             56,384                   69
                 Treasury stock (at cost) 1,570 and 3,127 shares  . . .             48,237               94,713
                                                                              ------------         ------------
            Total stockholders' equity  . . . . . . . . . . . . . . . .            708,243              712,086
                                                                              ------------         ------------
            Total liabilities and stockholders' equity  . . . . . . . .       $  2,774,066         $  2,534,556
                                                                              ============         ============
</TABLE>
             The accompanying Notes are an integral part of these
                      Consolidated Financial Statements.





                                       2
<PAGE>   5
                          EL PASO NATURAL GAS COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                      NINE MONTHS
                                                                                        ------------------------------------
                                                                                           1996                      1995
                                                                                        -----------              -----------
                 <S>                                                                    <C>                      <C>
                 Cash flows from operating activities
                  Net income . . . . . . . . . . . . . . . . . . . . . . . .            $    13,984              $    62,459
                  Adjustments to reconcile net income to net cash provided
                    by operating activities
                    Depreciation, depletion, and amortization  . . . . . . .                 65,902                   52,157
                    Deferred income tax expense (benefit)  . . . . . . . . .                (31,846)                  25,680
                    Net take-or-pay recoveries . . . . . . . . . . . . . . .                  9,723                   27,518
                    Net employee separation and asset impairment charge  . .                 76,836                     -
                    Net (gain) loss on disposition of property . . . . . . .                 (1,336)                      23
                    Other working capital changes
                     Accounts and notes receivable . . . . . . . . . . . . .                (81,514)                  35,646
                     Inventories . . . . . . . . . . . . . . . . . . . . . .                   (761)                  (1,503)
                     Other current assets  . . . . . . . . . . . . . . . . .                 10,792                   (7,403)
                     Accounts payable  . . . . . . . . . . . . . . . . . . .                 37,957                  (62,508)
                     Accrual for regulatory issues . . . . . . . . . . . . .                100,050                     -
                     Other current liabilities . . . . . . . . . . . . . . .                 17,071                   (6,900)
                    Other  . . . . . . . . . . . . . . . . . . . . . . . . .                 (8,379)                  11,078
                                                                                        -----------              -----------
                      Net cash provided by operating activities  . . . . . .                208,479                  136,247
                                                                                        -----------              -----------

                 Cash flows from investing activities
                  Capital expenditures . . . . . . . . . . . . . . . . . . .                (75,023)                (106,200)
                  Net proceeds from disposal of property . . . . . . . . . .                  6,548                    4,023
                  Investments and advances . . . . . . . . . . . . . . . . .                (49,211)                    -
                  Net cash flow impact of acquisitions . . . . . . . . . . .                (98,961)                  (2,864)
                  Other  . . . . . . . . . . . . . . . . . . . . . . . . . .                  6,371                  (12,464)
                                                                                        -----------              -----------
                      Net cash used in investing activities  . . . . . . . .               (210,276)                (117,505)
                                                                                        -----------              -----------

                 Cash flows from financing activities
                  Net commercial paper borrowings (repayments) . . . . . . .                (73,805)                 115,800
                  Revolving credit borrowings  . . . . . . . . . . . . . . .                400,000                     -
                  Revolving credit repayments  . . . . . . . . . . . . . . .               (315,000)                    -
                  Long-term debt retirements . . . . . . . . . . . . . . . .                (23,516)                 (15,543)
                  Repayment of volumetric take-or-pay receivable . . . . . .                   -                     (36,700)
                  Acquisition of treasury stock  . . . . . . . . . . . . . .                   -                     (56,528)
                  Dividends paid . . . . . . . . . . . . . . . . . . . . . .                (35,914)                 (33,847)
                  Contribution from minority interest  . . . . . . . . . . .                 39,765                     -
                  Other  . . . . . . . . . . . . . . . . . . . . . . . . . .                 23,249                    4,974
                                                                                        -----------              -----------
                      Net cash provided by (used in) financing activities  .                 14,779                  (21,844)
                                                                                        -----------              -----------

                 Increase (decrease) in cash and temporary investments . . .                 12,982                   (3,102)
                 Cash and temporary investments
                      Beginning of period  . . . . . . . . . . . . . . . . .                 39,373                   27,636
                                                                                        -----------              -----------
                      End of period  . . . . . . . . . . . . . . . . . . . .            $    52,355              $    24,534
                                                                                        ===========              ===========
</TABLE>

             The accompanying Notes are an integral part of these
                      Consolidated Financial Statements.





                                       3
<PAGE>   6
                          EL PASO NATURAL GAS COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


1.  BASIS OF PRESENTATION

   The 1995 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and should be read in conjunction with this
Form 10-Q.  In addition, investments in corporate joint ventures and certain
other companies over which the Company has influence but not a controlling
interest are accounted for under the equity method.  The condensed consolidated
financial statements at September 30, 1996, and for the nine months and
quarters ended September 30, 1996, and 1995, are unaudited.  The condensed
consolidated balance sheet at December 31, 1995, is derived from audited
financial statements.  These financial statements do not include all
disclosures required by generally accepted accounting principles. In the
opinion of management, all material adjustments necessary to present fairly the
results of operations for such periods have been included.  All such
adjustments are of a normal recurring nature.  Results of operations for any
interim period are not necessarily indicative of the results of operations for
the entire year.  Financial statements for the previous periods include certain
reclassifications which were made to conform to current presentation.  Such
reclassifications have no material effect on reported net income or
stockholders' equity.


2.  ACQUISITIONS

   In June 1996, the Company and Tenneco entered into a definitive merger
agreement which provides for the acquisition of Tenneco by the Company.
Prior to the merger, Tenneco and its subsidiaries will undertake various
intercompany transfers and distributions designed to restructure, divide and
separate their existing businesses, assets and liabilities so that all the
assets, liabilities and operations related to their automotive parts, packaging
and administrative services businesses and their shipbuilding business will be
spun-off to Tenneco's common stockholders. The remaining existing and
discontinued operations of Tenneco, consisting primarily of those operations
related to the transmission and marketing of natural gas will continue to be
owned by Tenneco. The merger is conditioned upon, among other things, the
receipt of tax rulings (which condition has been satisfied), completion of a
debt realignment plan by Tenneco, certain government approvals and approval of
Tenneco's stockholders.

   Consideration to be paid by the Company in the merger will consist of:

        o   the retention after the merger of approximately $2.65 billion of
            debt and preferred stock obligations of Tenneco, subject to certain
            adjustments;

        o   the issuance of EPG equity securities valued at $904 million, based
            on a closing price per share on the New York Stock Exchange Inc. 
            of $48.00 for EPG's common stock on November 12, 1996, to 
            Tenneco's existing common and preferred stockholders, subject to 
            the formulas set forth in the merger agreement; and

        o   the retention of approximately $600 million of estimated assumed
            liabilities related to certain discontinued businesses of Tenneco.

   The proposed issuance by EPG of up to 23.9 million shares of common stock
(or such greater number of shares of common stock as may be required under the
merger agreement under certain circumstances) to Tenneco stockholders in
connection with the transactions contemplated by the merger agreement is being
submitted for approval of EPG's stockholders at a special meeting presently
scheduled to be held on December 9, 1996. If the stock issuance is not
approved, the merger is still expected to be consummated, but EPG will issue to
Tenneco stockholders 7 million shares of common stock, with the balance of the
equity consideration to consist of depositary shares, each representing a one
twenty-fifth fractional interest in a whole share of a new series of EPG voting
preferred stock. Tenneco's stockholders are being asked to vote on a
significant reorganization of Tenneco (including the merger) at a special 
meeting presently scheduled to be held on December 10, 1996. The acquisition 
will be accounted for as a purchase.

   Effective June 1996, the Company acquired Cornerstone. The purchase price of
approximately $94 million, exclusive of acquisition costs, was financed through
internally generated funds and short-term borrowings.  Acquisition costs of
approximately $5 million have been capitalized.  The cost of the acquisition
has been allocated on the basis of the estimated fair value of the assets
acquired and the liabilities assumed, resulting in goodwill of approximately
$59 million which is being amortized over 40 years using the straight-line
method.  The acquisition has been accounted for as a purchase utilizing the
"push down" method of accounting.

   Effective September 1995, the Company acquired Eastex Energy Inc., and in
December 1995, the Company acquired all of the issued and outstanding capital
stock of Premier Gas Company.  Effective July 1996, the name Eastex Energy Inc.
was changed to, and its subsidiaries were merged into, EPEM.





                                       4
<PAGE>   7
                          EL PASO NATURAL GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


3.  EMPLOYEE SEPARATION AND ASSET IMPAIRMENT CHARGE

   In response to changes in the natural gas industry, increased competition,
and recent and future firm capacity contract step-downs and terminations, the
Company initiated an extensive review of its business processes.  In the first
quarter of 1996, the Company adopted a program to restructure its business
activities into three business segments:  (i) natural gas transmission, (ii)
field and merchant services, and (iii) corporate and other.  For a further
discussion of the business segments, see Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, Operating
Environment.  Also during the first quarter of 1996, the Company adopted a
program to reduce operating costs through work force reductions and improved
work processes and adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.  As a result of
the workforce reduction program and the adoption of SFAS No. 121, the Company
recorded a special charge of $99 million ($47 million for employee separation
costs and $52 million for asset impairments).

   The employee separation charge included approximately $26 million for
expected severance-related costs and $21 million for pension costs related to
special termination benefits and work force reductions. As of September 30,
1996, payments of approximately $22 million had been recorded as a reduction of
the provision for severance-related costs.  The Company anticipates that the
remaining provision for severance-related costs will be expended by the end of
1996.  The special charge for pension-related costs will have no additional
cash impact outside of the normal funding of the Company's pension plan.

   In accordance with SFAS No. 121, the Company determined the fair value of
certain assets based on discounted future cash flows.  The resultant non-cash
charge for asset impairments included approximately $44 million for the
impairment of certain natural gas gathering, processing, and production
facilities and $8 million for the write-off of a regulatory asset established
upon the adoption of SFAS No. 112, Employers' Accounting for Postemployment
Benefits, but not recoverable through the Company's rate settlement filed with
FERC in March 1996.


4.  COMMITMENTS AND CONTINGENCIES

Rates and Regulatory Matters

    In June l995, EPG made a filing with FERC for approval of new system rates
for mainline transportation to be effective January l, 1996.  In July 1995,
FERC accepted and suspended EPG's filing to be effective January 1, 1996,
subject to refund and certain other conditions.  FERC also set EPG's rates for
hearing.

   In March 1996, EPG filed a comprehensive offer of settlement which, if
approved by FERC, would resolve issues related to the above-mentioned rate
filing and issues surrounding certain contract reductions and expirations
scheduled to occur from January 1, 1996, through December 31, 1997.  The
settlement provides for, among other things: (i) a long-term rate stability
plan which establishes base rates for a 10-year period from January 1, 1996,
through December 31, 2005, subject to annual escalation after 1997; (ii)
payments within 8 years to EPG by its customers totaling $255 million (prior to
interest) representing recovery of approximately 35 percent of the revenues
(for the period 1996 to 2003) associated with the contract reductions and
expirations; (iii) the sharing between EPG (65 percent) and its customers (35
percent) of revenues, in excess of a threshold, which are attributable to
unsubscribed capacity sales during the period 1996 through 2003; and (iv) a
mechanism to adjust the base rate for increases or decreases resulting from
laws or regulations to the extent that costs are impacted at a level in excess
of $10 million a year.  The settlement contains a provision which permits any
party desiring not to be bound by the settlement to have its rates determined
pursuant to procedures established by FERC.





                                       5
<PAGE>   8
                          EL PASO NATURAL GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


   In March 1996, Edison, a firm shipper on EPG's system, filed its own offer of
settlement.  While Edison's offer is similar in many respects to EPG's, it
contains provisions that EPG believes would be adverse to its interests if
Edison's offer is approved and EPG's offer is  rejected.  In October 1996, the
Chief ALJ ruled that limited discovery would be allowed in connection with
comments on the two offers of settlement filed by the parties and established a
schedule for completing such discovery and for the filing of remaining comments
in December 1996.  The ALJ will then determine whether to certify EPG's
settlement to FERC and will make a similar determination concerning the Edison
offer.  Comments supporting EPG's settlement have already been filed by FERC
staff, the regulatory agencies of California, Arizona, and Nevada, the state of
New Mexico, and customers representing 95 percent of the firm throughput on
EPG's mainline transmission system.  Comments opposing Edison's offer have been
filed by EPG, FERC staff, and the customer coalition supporting EPG's
settlement.

   Since 1987, EPG has made buy-out and buy-down payments and recoupable
prepayments to resolve past and future take-or-pay exposure, to terminate and
reform gas purchase contracts, to amend pricing and take provisions of gas
purchase contracts, and to settle related litigation.  EPG collected its
buy-out and buy-down costs under FERC cost recovery procedures.  The collection
period for EPG's buy-out and buy-down costs ended March 1996.

   Under FERC procedures, take-or-pay cost recovery filings may be challenged by
pipeline customers on prudence and certain other grounds.  In October 1992, FERC
issued an order resolving all but one of the outstanding issues regarding EPG's
take-or-pay proceedings.  The issue unresolved by FERC involved the claim by
several customers that EPG sought to recover an excessive amount for the value
of certain production properties which were transferred to a producer as part of
a 1989 take-or-pay settlement.  Following a hearing on this issue, in June 1994,
FERC affirmed a decision of an ALJ which found that the valuation proposed by
EPG was excessive and required EPG to refund to its customers the costs found to
be ineligible for take-or-pay recovery.  In accordance with the FERC decision,
EPG refunded $34 million, inclusive of interest, to its customers in September
1994.  In October 1996, the Court of Appeals affirmed FERC's June 1994 ruling.
EPG intends to seek rehearing on this issue.

   In addition, certain of EPG's customers sought review in the Court of
Appeals of FERC's determination in the  October 1992 order that certain
buy-down/buy-out costs were eligible for recovery.  In January 1996, the Court
of Appeals remanded the order to FERC with direction to clarify the basis for
its decision that the take-or-pay buy-down/buy-out costs were eligible for
recovery.  In March 1996, FERC issued an order to the effect that categories of
costs which had been determined to be eligible for recovery might in fact be
ineligible for recovery and established a technical conference which was held
in May 1996. Management believes that the costs at issue were eligible for
recovery from EPG's customers pursuant to the equitable sharing mechanism.  If
FERC should rule that the costs at issue were not eligible for recovery,
refunds by EPG of between $34 and $42 million, plus interest, may be required.
A FERC decision is expected in late 1996 or early 1997.

   Beginning in April 1992, FERC issued Orders No. 636 and 636-A, commonly
known as the restructuring rules.  These rules mandated significant changes to
the structure of the services provided by interstate natural gas pipelines and
were intended principally to assure "comparability" between  pipeline and
non-pipeline gas merchants, to provide a mechanism for the allocation of
pipeline capacity, and to eliminate competitive distortions arising from rate
design differences between U. S. and Canadian pipelines. In July 1996, the
Court of Appeals issued its opinion on petitions for review of FERC's Order No.
636.  The opinion upheld the "broad contours" and most "specifics" of Order No.
636, remanding only certain aspects to FERC for reconsideration or further
explanation.  Management does not expect the opinion of the Court of Appeals,
the action of FERC on the issues recommended to it, or the outcome of the
restructuring appeals involving EPG or MPC to have a significant impact on the
Company's financial condition or results of operations.





                                       6
<PAGE>   9
                          EL PASO NATURAL GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


   In February 1995, MPC made a filing with FERC seeking authorization to
maintain its existing rates.  In March 1995, FERC accepted the filing and
allowed the rates to become effective as of March 30, 1995, subject to refund.
In September 1995, MPC filed a settlement agreement supported by FERC and the
majority of MPC's firm shippers which would continue rates at existing levels
for a 5-year period.  In December 1995, FERC approved the settlement agreement
as it relates to the supporting parties.  Contested issues applicable solely to
the minority customer group not supporting the settlement were the subject of a
hearing  held in April 1996.  A ruling by the assigned ALJ is expected in 1997.

   The Company is accruing a provision for revenues collected subject to
refund, and the balance of this provision at September 30, 1996, was
approximately $100 million, excluding interest.  Management believes the amount
being reserved will be sufficient to cover any anticipated refunds.


Environmental Matters

   The Company is subject to extensive federal, state, and local laws and
regulations governing environmental quality and pollution control.  These laws
and regulations require the Company to remove or remedy the effect on the
environment of the disposal or release of specified substances at ongoing and
former operating sites.  As of September 30, 1996, the Company had a reserve of
approximately $40 million for the following environmental contingencies:  (i)
PCB remediation costs estimated to be $3 million over the next 4 years and (ii)
remediation of groundwater and soil contamination costs estimated to range
between $33 million and $46 million over a 30-year period.  Management believes
the amount reserved as of September 30, 1996, is sufficient to cover these and
other small environmental assessments and remediation activities.

   The State of Tennessee has asserted a claim that EPG is a liable party under
state environmental laws for cleanup costs associated with a site in
Elizabethton, Tennessee.  The State of Tennessee and EPA are investigating the
nature and extent of contamination.  Since the investigation is in the initial
stages, EPG is unable to estimate its potential share of any remediation costs.

   The Company initially estimated the CAAA would require modification of
exhaust stacks at numerous locations.  Based upon the latest analysis of CAAA
regulations and developments, the Company believes the modifications will not
be required, and the impact to the Company will be limited to the following:
(i) installation of emissions control equipment, (ii) the requirement to obtain
permits for air emissions of existing facilities, and (iii) compliance
assurance monitoring of emissions.  The Company anticipates capitalizing the
equipment costs associated with complying with CAAA and estimates that
approximately $5 million will be spent from 1997 through 2005.  When finalized,
EPA's proposed compliance assurance monitoring rules could potentially impose
greater costs on the Company.

Guarantees

   In February 1995, EPNC entered into a 7.75 year operating lease agreement
for a NGL extraction plant being constructed in the San Juan Basin.  The lease
is an unconditional "triple net" lease with the trustee of a special purpose
entity.  The total amount financed via the operating lease will not exceed $80
million, and the annual lease obligation will be a function of the amount
financed, a variable interest rate, and commitment and other fees.  EPNC has
the option at the end of the lease term, and has an obligation upon the
occurrence of certain events, to purchase the plant for a price sufficient to
pay the entire amount financed, interest, and certain expenses.  If EPNC does
not purchase the plant at the end of the lease term, it has an obligation to
pay a residual guarantee amount equal to approximately 87 percent of the amount
financed, plus interest.   EPG has unconditionally guaranteed all obligations
of EPNC under the lease.





                                       7
<PAGE>   10

                          EL PASO NATURAL GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


   EPG has also unconditionally guaranteed all obligations of EPED SAM, which
are not expected to exceed $51 million, in connection with its share of the
financing for the Samalayuca II Power Plant project.  For a further discussion,
see Note 11.  In addition, EPG has unconditionally guaranteed the obligations
of certain subsidiaries, which are not expected to exceed $16 million, in
connection with the TransColorado Pipeline Phase I project and the Coyote Gulch
Treating and Compression Facility project.  For a further discussion of these
two projects, see Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Project Investments.


Legal Proceedings

   In November 1993, TransAmerican filed a complaint in a Texas state court,
TransAmerican Natural Gas Corporation v. El Paso Natural Gas Company, et al.,
alleging fraud, tortious interference with contractual relationships, economic
duress, civil conspiracy, and violation of state antitrust laws arising from a
settlement agreement entered into by EPG, TransAmerican, and others in 1990 to
settle litigation then pending and other potential claims.  The complaint, as
amended, seeks unspecified actual and exemplary damages.  EPG is defending the
matter in the State District Court of Dallas County, Texas.  In April 1996, a
former employee of TransAmerican filed a related case in Harris County, Texas,
Vickroy 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.  Based on information available at this time,
management believes that the claims asserted against it in both cases have no
factual or legal basis and that the ultimate resolution of these matters will
not have a materially adverse effect on the Company's financial condition.

   In July 1996, EPG was served with a complaint in the matter of Jack J.
Grynberg v. Alaska Pipeline Co.,et al., filed in the U.S. District Court for
the District of Columbia.  Plaintiff brings this action under the False Claims
Act against several interstate pipelines and others alleging that the defendants
mismeasured natural gas produced from federal and Indian lands, which deprived
the U.S. of royalties otherwise due it. Plaintiff seeks, among other things, to
recover, on behalf of the U.S., unspecified treble damages, his finder's fee
and attorneys fees.  All defendants have been granted an extension until
November 1996 to respond to the complaint. It is believed that there are valid
jurisdictional, procedural, and substantive defenses to Plaintiff's complaint;
however, even if Plaintiff is ultimately entitled to pursue his claims, EPG
believes that its measurement practices are consistent with industry practice
and all applicable standards, regulations, contracts, and tariffs and that EPG
should not be liable in any event.  Accordingly, based on information available
at this time, EPG does not believe that the ultimate resolution of this matter
will have a materially adverse effect on the Company's financial condition.

   The Company is a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against the Company
cannot be predicted with certainty, management currently does not expect these
matters to have a materially adverse effect on the Company's financial
condition.





                                       8
<PAGE>   11
                          EL PASO NATURAL GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



5.  FINANCING TRANSACTIONS

   In January 1996, the Board authorized an increase in the Company's
short-term borrowing limits from $400 million to $500 million.  In May 1996,
EPG established with a group of banks a revolving credit facility of $400
million that expires May 2001 and a 364-day renewable $100 million revolving
credit facility with an initial expiration of May 1997.  These facilities
replaced EPG's previous revolving credit facility of $400 million and were
established primarily to provide a liquidity facility for the Company's
commercial paper program.  Revolving credit facility borrowings as of September
30, 1996, and December 31, 1995, were approximately $160 million and $75
million, respectively.  As of September 30, 1996, and December 31, 1995,
approximately $129 million and $203 million, respectively, of commercial paper
was outstanding.

   In November 1996, the Company closed on a new $750 million five-year
revolving credit agreement and a new $250 million 364-day renewable revolving
credit agreement, both of which become effective upon the acquisition of
Tenneco. The $750 million and $250 million revolving credit agreements will
replace the existing $400 million five-year revolving credit agreement and the
$100 million 364-day revolving credit agreement. 

   In June 1996, EPG retired Cornerstone long-term debt in the amount of $16
million.  In January 1997, EPG's 6.90 percent notes for $100 million will
mature.

   On November 5, 1996, EPG's shelf registration statement on Form S-3 filed
with the SEC covering an aggregate of $800 million of unsecured debt
securities, preferred stock and common stock was declared effective (the "Shelf
Registration Statement"). On November 13, 1996, EPG closed the sale of $200
million aggregate principal amount of its 6-3/4% Notes Due 2003 and the sale of
$200 million aggregate principal amount of its 7-1/2% Debentures Due 2026. The
6-3/4% Notes Due 2003 and the 7-1/2% Debentures Due 2026 were covered by the
Shelf Registration Statement. The proceeds of the offering will be used for
repayment of short-term bank debt and commercial paper and for general
corporate purposes. 


6.  PROPERTY, PLANT, AND EQUIPMENT

   Property, plant, and equipment at September 30, 1996, and December 31, 1995,
consisted of the following:

<TABLE>
<CAPTION>
                                                            1996              1995                                             
                                                         ----------        ----------                                  
                                                                (IN THOUSANDS)                                              
 <S>                                                     <C>               <C>                                            
 Property, plant, and equipment, at cost . . . . . . .   $3,136,683        $3,042,516                                     
 Less accumulated depreciation and depletion . . . . .    1,235,175         1,158,486                                    
                                                         ----------        ----------                                  
                                                          1,901,508         1,884,030                                    
 Additional acquisition cost assigned to utility . . .                                                                    
      plant, net of accumulated amortization . . . . .       89,535            93,594                                  
                                                         ----------        ----------                                  
      Total property, plant, and equipment, net  . . .   $1,991,043        $1,977,624                                     
                                                         ==========        ==========                                     
</TABLE>


7.  INTANGIBLE ASSETS

   Intangible assets at September 30, 1996, and December 31, 1995, consisted of
the following:

<TABLE>
<CAPTION>
                                                                                                                         
                                                        1996                 1995                          
                                                      --------              -------                       
                                                              (IN THOUSANDS)                                
 <S>                                                  <C>                   <C>                              
 Goodwill  . . . . . . . . . . . . . . . .            $109,703              $42,261                       
 Other intangibles . . . . . . . . . . . .              18,935               14,890                       
                                                      --------              -------                       
                                                       128,638               57,151                       
 Less accumulated amortization . . . . . .              12,210                9,273                       
                                                      --------              -------                       
      Total intangible assets, net . . . .            $116,428              $47,878                       
                                                      =========             ======= 
</TABLE>




                                       9
<PAGE>   12
                          EL PASO NATURAL GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)




8.  INVENTORIES

   Inventories at September 30, 1996, and December 31, 1995, consisted of the
following:

<TABLE>
<CAPTION>
                                                  1996               1995   
                                                --------          --------- 
                                                       (IN THOUSANDS)       
   <S>                                          <C>               <C>       
   Materials and supplies  . . . . . . .        $ 30,829          $  30,354 
   Gas in storage  . . . . . . . . . . .           7,466              6,754 
                                                --------          --------- 
                                                                            
                                                $ 38,295          $  37,108 
                                                ========          ========= 
                                         
</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.


9.  DEFERRED EMPLOYEE COMPENSATION

   The Company maintains restricted stock performance plans whereby awards,
expressed as shares of common stock of the Company, are issued to certain key
salaried employees.  Employees earn a given percent of these shares as the
Company meets specific performance targets over a specific time period and vest
in the earned shares if certain service requirements are met.  These shares
carry voting and dividend rights; however, sale or transfer of the shares is
restricted in accordance with the vesting procedures.  Shares issued under the
Company's restricted stock performance plans are recorded as deferred employee
compensation based on their fair market value and shown as a separate component
of stockholders' equity.  As of September 30, 1996, a total of 1.5 million
shares have been issued in connection with the Company's restricted stock
performance plans.

   The total award is amortized as compensation expense on a straight-line
basis based on the number of shares earned over the vesting period.
Compensation expense totaled $2.2 million and $4.1 million for the quarter and
nine months ended September 30, 1996, respectively, and $0.1 million and $0.2
million for the quarter and nine months ended September 30, 1995, respectively.


10.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES


<TABLE>
<CAPTION>
                                                    NINE MONTHS           
                                            1996                 1995     
                                           -------              -------
                                                  (IN THOUSANDS)          
 <S>                                       <C>                  <C>       
 Net cash payments                                                        
      Interest . . . . . . . . . . .       $73,587              $73,895   
      Income taxes . . . . . . . . .        40,518                8,913   

</TABLE>




                                       10
<PAGE>   13

                          EL PASO NATURAL GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



11.  INVESTMENTS AND ADVANCES

   EPED SAM formed a limited liability company with members of the consortium
building the Samalayuca II Power Plant, in which the Company has an economic
interest of approximately 30 percent.  The limited liability company obtained a
$66 million loan, of which approximately $40 million was used to purchase 99
percent of the Class B, non-voting units of certain indirect subsidiaries of
the Company. The $40 million is reflected as a minority interest in the
indirect subsidiaries in the consolidated balance sheet.

   In May 1996, these indirect subsidiaries advanced $27 million to an
affiliated partnership and, in addition, acquired an interest in Sam II for
approximately $13 million.  These amounts are reflected in Investments and
Advances in the consolidated balance sheet.  These funds are being used to
finance initial construction of the power plant.  Construction of the plant,
which began in June 1996, is expected to take 35 months to complete, and the
cost is estimated to be $660 million. The consortium has received non-recourse
senior debt construction financing of up to 80 percent of the capital
requirements from a syndicate of commercial banks and the IDB.  EXIM is
providing political risk insurance for the syndicated loans.  Construction
phase loans are convertible to IDB and EXIM term loans which are repayable over
10 years beginning with the commencement of lease payments from CFE.  After its
completion, the plant will be operated by CFE under a 20-year lease.  Ownership
will be transferred to CFE after termination of the 20-year lease.

   The Company is a member of the consortium building the $250 million Aguaytia
Energy Project, in which it has an economic interest of approximately 25
percent.   Upon completion, the Company's total equity investment in the
Aguaytia Energy Project is expected to be $42 million.  As of September 30,
1996, the Company had an investment of approximately $9 million.  The remainder
of its equity investment will be funded over the construction period, which is
approximately 2 years. The project will be funded 60 percent with equity.  The
consortium has received non-recourse debt financing for the balance of the
project cost which is repayable over 10 years following the completion of
construction.  The Company's equity in the project is protected by political
risk insurance from the Overseas Private Investment Corporation.


12.   RECENT PRONOUNCEMENTS

   In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.  SFAS No. 125 covers transactions that include:
securitizations, sales of partial interests in financial assets, repurchase
agreements, securities lending, pledges of collateral, loan syndications and
participations, sales of receivables with recourse, servicing of mortgages and
other loans, and in-substance defeasances.  SFAS No. 125 uses a "financial
components" approach for financial asset transfers.  Under that approach, after
financial assets are transferred, an entity would recognize on the balance
sheet all assets it controls and liabilities it has incurred.  It would remove
from the balance sheet those assets it no longer controls and liabilities it
has satisfied.  SFAS No. 125 becomes effective at the beginning of 1997.  The
Company is evaluating the implications of SFAS No. 125.





                                       11
<PAGE>   14
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

   The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, in
addition to the interim consolidated financial statements and accompanying
notes presented in Item 1 of this Form 10-Q.


OPERATING ENVIRONMENT

   In recognition of changes in the natural gas industry and the manner in
which the Company manages its businesses, and in order to facilitate a more
detailed understanding of the various activities in which it engages, the
Company began doing business under the name El Paso Energy Corporation
(effective April 22, 1996) and has segregated its business activities into
three business segments: (i) natural gas transmission, (ii) field and merchant
services, and (iii) corporate and other.  The natural gas transmission segment
is involved in the interstate transportation of natural gas.  The field and
merchant services segment is involved in the purchasing, gathering, processing,
marketing, and trading of natural gas, NGL, and power, as well as the storage
of natural gas.  The corporate and other segment includes the Company's
international activities and miscellaneous subsidiaries.


NATURAL GAS TRANSMISSION

   EPG owns and operates one of the nation's largest mainline natural gas
transmission systems, connecting natural gas supply regions in New Mexico,
Texas, Oklahoma, and Colorado to markets in California, Nevada, Arizona, New
Mexico, Texas, and northern Mexico.  EPG's natural gas transmission system
consists of approximately 10,000 miles of pipeline and is connected to one of
the most prolific supply basins in the nation, the San Juan Basin of northern
New Mexico and southern Colorado.  MPC serves the enhanced oil recovery
operations and associated cogeneration projects in the heavy oil fields in
central California.  EPG's and MPC's pipeline facilities, services, and rates
are regulated by FERC in accordance with the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978.  The Company also has a one-third interest in
TransColorado.


FIELD AND MERCHANT SERVICES

   As part of the Company's strategy to increase its market position in the
unregulated energy business, the Company acquired Eastex in September 1995,
Premier in December 1995 (collectively, now EPEM), and Cornerstone in June 1996.
EPFS, including Cornerstone, provides gathering, processing, treating, and
compression services.  EPFS has approximately 7,200 miles of gathering lines and
64,000 horsepower of compression in its gathering operations located in the San
Juan, Anadarko, and Permian Basins.  Cornerstone's assets consist of
approximately 700 miles of gathering and transportation systems and seven
natural gas processing and treating facilities principally located in East Texas
and Louisiana.  Additionally, Cornerstone markets natural gas and NGL. EPEM and
EPGM purchase, market, and trade natural gas, NGL, power, and other energy
commodities and provide risk management activities associated with those
commodities.  EPEM and EPGM transport gas supplies for customers on 45 pipelines
serving 37 states in the U. S. and Canada and currently trade and market over
5,300 Mdth/d.


CORPORATE AND OTHER

     Corporate and other includes EPEI, through which the Company conducts its
international activities, and other corporate activities.





                                       12
<PAGE>   15
RESULTS OF OPERATIONS

OPERATING REVENUES (1)

<TABLE>
<CAPTION>
                                                           THIRD QUARTER                         NINE MONTHS            
                                                   ---------------------------           --------------------------
                                                     1996               1995                1996            1995       
                                                   --------           --------           ----------       ---------
                                                          (IN THOUSANDS)                        (IN THOUSANDS)          
 <S>                                               <C>                 <C>               <C>              <C>                
 Natural gas transmission. . . . . . . . . .       $130,075           $134,059            $ 384,393       $ 410,471          
 Field and merchant services . . . . . . . .        614,971            106,682            1,554,061         220,489          
 Corporateand other and eliminations . . . .           (183)              (550)                (672)         (1,488)         
                                                   --------           --------           ----------       ---------
     Consolidated  . . . . . . . . . . . . .       $744,863           $240,191           $1,937,782       $ 629,472          
                                                   ========           ========           ==========       =========
</TABLE>


OPERATING INCOME   (1)

<TABLE>
<CAPTION>
                                                           THIRD QUARTER                         NINE MONTHS            
                                                   -----------------------------         -------------------------
                                                     1996               1995                1996            1995       
                                                   ---------           ----------        ----------       --------
                                                            (IN THOUSANDS)                      (IN THOUSANDS)          
 <S>                                               <C>                 <C>               <C>              <C>                
 Natural gas transmission . . . . . . . . .        $  57,003           $  52,578         $  154,152       $157,517
 Field and merchant services. . . . . . . .           11,376                 482             43,040          5,446
 Corporate and other  . . . . . . . . . . .           (2,775)               (370)          (102,914)        (1,203)
                                                   ---------           ---------         ----------       --------
     Consolidated   . . . . . . . . . . . .        $  65,604           $  52,690         $   94,278       $161,760
                                                   =========           =========         ==========       ========
</TABLE>

(1) To the extent practicable, prior year results of operations 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.  In general, transactions among business
    segments are recorded at market prices and material affiliate transactions
    within business segments have been eliminated.



NATURAL GAS TRANSMISSION

<TABLE>
<CAPTION>
                                                  THIRD QUARTER                            NINE MONTHS
                                          ----------------------------             ---------------------------
                                            1996               1995                  1996               1995
                                          --------          ----------             ---------          --------
                                                 (IN THOUSANDS)                           (IN THOUSANDS)
 <S>                                      <C>               <C>                    <C>                <C>
 Reservation revenue   . . . . . . . .    $119,110          $  124,279             $ 350,812          $374,660
 Transportation revenue  . . . . . . .       5,949               3,348                17,442            10,442
 Other revenue . . . . . . . . . . . .       5,016               6,432                16,139            25,369
                                          --------          ----------             ---------          --------
     Operating revenues  . . . . . . .     130,075             134,059               384,393           410,471
 Operating expenses  . . . . . . . . .      73,072              81,481               230,241           252,954
                                          --------          ----------             ---------          --------
     Operating income  . . . . . . . .    $ 57,003          $   52,578             $ 154,152          $157,517
                                          ========          ==========             =========          ========
</TABLE>

Third Quarter 1996 Compared to Third Quarter 1995

   Operating revenues for the quarter ended September 30, 1996, were $4 million
lower than for the same period of 1995 primarily due to a decline in
reservation revenue. The decrease in reservation revenue was primarily due to
transportation contract reductions during 1996, partially offset by the resale
of the released capacity attributable to the contract reductions.

   Operating expenses for the quarter ended September 30, 1996, were $8 million
lower than for the same period of 1995 primarily due to lower operation and
maintenance expense resulting from lower headcount.





                                       13
<PAGE>   16

Nine Months Ended 1996 Compared to Nine Months Ended 1995

   Operating revenues for the nine months ended September 30, 1996, were $26
million lower than for the same period of 1995 primarily due to a decline in
reservation revenue. The decrease in reservation revenue was primarily due to
transportation contract reductions during 1996 and adjustments to capacity and
fuel credits, partially offset by the resale of the released capacity
attributable to the contract reductions.


  Operating expenses for the nine months ended September 30, 1996, were $23
million lower than for the same period of 1995.  The decrease was primarily due
to lower operation and maintenance expense resulting from lower headcount and
an adjustment to the take-or-pay undercollections accrual.  These decreases
were partially offset by higher depreciation expense.


FIELD AND MERCHANT SERVICES

<TABLE>
<CAPTION>
                                                                    THIRD QUARTER                            NINE MONTHS         
                                                              -------------------------              --------------------------
                                                                1996             1995                   1996             1995   
                                                              --------         --------              -----------       --------
                                                                    (IN THOUSANDS)                         (IN THOUSANDS)        
   <S>                                                        <C>              <C>                   <C>               <C>     
   Merchant services revenue . . . . . . . . . . .            $557,533         $ 84,247              $ 1,437,156       $151,161
   Gathering, processing and treating revenue  . .              41,841           22,433                   98,865         69,313
   Other revenue . . . . . . . . . . . . . . . . .              15,597                2                   18,040             15
                                                              --------         --------              -----------       --------
          Operating revenues . . . . . . . . . . .             614,971          106,682                1,554,061        220,489
   Operating expenses  . . . . . . . . . . . . . .             603,595          106,200                1,511,021        215,043
          Operating income . . . . . . . . . . . .            --------         --------              -----------       -------- 
                                                              $ 11,376         $    482              $    43,040       $  5,446 
                                                              ========         ========              ===========       ======== 
                                                                                                                                
</TABLE>


Third Quarter 1996 Compared to Third Quarter 1995

   Operating revenues for the quarter ended September 30, 1996, were $508
million higher than for the same period of 1995.  The increase is primarily due
to an increase in gas and NGL sales attributable to strategic acquisitions and
the new cryogenic extraction plant which became operational in the second 
quarter 1996.  An increase in electricity sales also contributed to higher
revenues in 1996.

   Natural gas marketed for the quarter ended September 30, 1996, averaged 5,374
Mdth/d compared to 610 Mdth/d for the same period of 1995.  This increase was
primarily due to strategic acquisitions.  NGL volumes for the quarter ended
September 30, 1996, increased to 206 million gallons primarily due to strategic
acquisitions and the new cryogenic processing plant becoming fully operational.
Natural gas gathered volumes also increased by 208 Mdth/d in 1996.

   Operating expenses for the quarter ended September 30, 1996, were $497
million higher than for the same period of 1995.  The increase was primarily due
to strategic acquisitions.

Nine Months Ended 1996 Compared to Nine Months Ended 1995

   Operating revenues for the nine months ended September 30, 1996, were $1.3
billion higher than for the same period of 1995. The increase is primarily due
to an increase in gas and NGL sales attributable to strategic acquisitions and
the new cryogenic extraction plant which became operational in the second 
quarter 1996.  An increase in electricity sales also contributed to higher
revenues in 1996.

   Natural gas marketed for the nine months ended September 30, 1996, averaged
4,276 Mdth/d compared to 385 Mdth/d for the same period of 1995.  This increase
was primarily due to strategic acquisitions.  NGL volumes for the nine months
ended September 30, 1996, increased to 365 million gallons primarily due to
strategic acquisitions and the new cryogenic processing plant becoming fully
operational. Natural gas gathered volumes also increased by 222 Mdth/d in 1996.





                                       14
<PAGE>   17
   Operating expenses for the nine months ended September 30, 1996, were $1.2
billion higher than for the same period of 1995.  The increase was primarily
due to the acquisition of EPEM and Cornerstone.


CORPORATE AND OTHER

   The operating loss for the nine months ended September 30, 1996, reflects a
one time special charge of $99 million for the employee separation and asset
impairment recorded in March 1996.  For a further discussion of the special
charge, see Part I, Financial Information, Note 3, which is incorporated herein
by reference.


OTHER INCOME AND EXPENSE

Third Quarter 1996 Compared to Third Quarter 1995

   Interest and debt expense for the quarter ended September 30, 1996, was $3
million higher than for the same period of 1995 due primarily to interest
accruals for a provision for revenues collected subject to refund.

   Other expense for the quarter ended September 30, 1996, was $2 million
higher than for the same period of 1995 due primarily to costs associated with
the Samalayuca Power Plant project and a 1995 gain on the disposition of
property.


Nine Months Ended 1996 Compared to Nine Months Ended 1995

   Interest and debt expense for the nine months ended September 30, 1996, was
$9 million higher than for the same period of 1995 due primarily to an increase
in interest expense resulting from an increase in short-term borrowings  and
interest accruals for a provision for revenues collected subject to refund.

   Other income for the nine months ended September 30, 1996, was $4 million
lower than for the same period of 1995 due primarily to a loss on donations and
lower income related to the recovery of certain regulatory assets, partially
offset by a gain on the disposition of property.


LIQUIDITY, FINANCIAL CONDITION, AND CAPITAL RESOURCES

OPERATING CASH FLOW

   Net cash provided by operating activities was $208 million for the nine
months ended September 30, 1996, compared with $136 million for the same period
of 1995.  The increase from the previous year was primarily due to the
collection of revenues subject to refund (expected to be repaid in early 1997)
and the Amoco Production Company litigation payment made in the first quarter of
1995.  These increases were partially offset by higher severance payments,
higher tax payments, lower take-or-pay collections, and timing differences in
other working capital accounts.





                                       15
<PAGE>   18
ACQUISITIONS

    See Part I, Financial Information, Note 2, which is incorporated herein by
reference. 


EMPLOYEE SEPARATION AND ASSET IMPAIRMENT CHARGE

    See Part I, Financial Information, Note 3, which is incorporated herein by
reference. 


RATES AND REGULATORY MATTERS

    See Part I, Financial Information, Note 4, which is incorporated herein by
reference. 


LEGAL PROCEEDINGS

    See Part I, Financial Information, Note 4, which is incorporated herein by
reference. 


ENVIRONMENTAL MATTERS

    See Part I, Financial Information, Note 4, which is incorporated herein by
reference. 


FINANCING FACILITIES

    For a discussion of current financing facilities, see Part I, Financial
Information, Note 5, which is incorporated herein by reference.

    In connection with the merger with Tenneco and related transactions,
Tenneco entered into a $3 billion credit facility of which EPG will assume the
balance upon the effective time of the merger.

COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY

   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 THOUSANDS)                   
   <S>                          <C>                  <C>                       <C>                           
   January 19, 1996             $0.3475              April 1, 1996             $12,258                       
   April 12, 1996               $0.3475              July 1, 1996              $12,278                       
   July 12, 1996                $0.3475              October 7, 1996           $12,377                       
</TABLE>

   On October 11, 1996, the Board declared a quarterly dividend of $.3475 per
share on EPG's common stock, payable on January 2, 1997, to shareholders of
record on November 22, 1996.





                                       16
<PAGE>   19
    In connection with the merger with Tenneco, EPG will issue to Tenneco
stockholders approximately 23.9 million shares of common stock (if the stock
issuance is approved by EPG stockholders) or 7 million shares of common stock
(if the stock issuance is not approved by EPG stockholders). For a further
discussion of the Tenneco acquisition, see Part I, Financial Information, 
Note 2, which is incorporated herein by reference.

    The Company maintains restricted stock performance plans whereby awards,
expressed as shares of common stock of the Company, are issued to certain key
salaried employees.  For additional information, see Part I, Financial
Information, Note 9, which is incorporated herein by reference.

   In November 1994, the Board authorized the repurchase of up to 3.5 million
shares of EPG's outstanding common stock from time to time in the open market.
This authorization was in addition to a 2 million share authorization received
in October 1992.  Shares repurchased are held in EPG's treasury and are
expected to be used in connection with EPG stock compensation plans and for
other corporate purposes.  Pursuant to the foregoing authorizations, the
Company has purchased 4.7 million shares, cumulatively, as of  September 30,
1996.


PROJECT INVESTMENTS

   International Projects

   The Company is a member of a consortium that is building the $660 million
Samalayuca II Power Plant near Ciudad Juarez, Chihuahua, Mexico  For additional
information, see Part I, Financial Information, Note 4 and 11.   In addition,
the Company is a member of a consortium that is developing a $250 million
integrated gas and power project near Pucallpa, in central Peru, called the
Aguaytia Energy Project.  For additional information, see Part I, Financial
Information, Note 11, which is incorporated herein by reference.


   TransColorado Pipeline Project

   In the third quarter of 1995, the Company purchased a one-third interest in
TransColorado from Public Service Company of Colorado for approximately $4
million.  TransColorado, which received FERC authorization in November 1994, is
a 311 mile pipeline project that is expected to provide an alternative outlet
for natural gas produced in the northern San Juan Basin and the Rocky Mountain
region.  The Company paid approximately $2 million in cash.  The balance of
approximately $2 million is due upon commencement of the pipeline project.  KN
Energy, Inc. and Questar Pipeline Company also each own a one-third interest in
TransColorado.

   In October 1996, FERC approved a phased-in approach for construction of the
pipeline system. Phase I will consist of 25 miles of pipeline beginning at the
outlet of the Coyote Gulch Treating and Compression Facility in La Plata
County, Colorado and extending to Blanco, New Mexico. Phase II will consist of
the remainder of the project up to northwest Colorado. The Phase I facilities
are expected to be in service during the fourth quarter of 1996.  The plant
cost is estimated to be $15 million, of which the Company's share is estimated
to be approximately $8 million since Questar Pipeline Company has elected not
to participate in the Phase I facilities at this time.  Phase II is scheduled
for completion in 1998.


   Coyote Gulch Treating and Compression Facility

   The Company and KN Gas Gathering, Inc. have entered into an agreement to
construct, own, and operate Coyote Gulch Treating and Compression Facility, a
110 Mdth/d facility in La Plata County, Colorado.  Construction of the facility
is expected to be completed by December 31, 1996.  The plant cost is estimated
to be $16 million, of which the Company's share is estimated to be
approximately $8 million.  Upon completion, the facility will receive and treat
gas for Red Cedar Gathering Company.


CAPITAL EXPENDITURES

   The Company's consolidated planned capital expenditures for 1996 of $115
million are primarily for maintenance of business, system expansion, and system
enhancement. Capital expenditures, exclusive of acquisitions, for the nine
months ended September 30, 1996, were $75 million compared to $106 million for
the same period of 1995.  Data for the nine months ended September 30, 1995,
has been restated in order to provide a discussion of capital expenditures by
business segment.





                                       17
<PAGE>   20

   Natural Gas Transmission

   The segment's planned capital expenditures for 1996 of $45 million are
primarily for maintenance of business, system expansion, and system
enhancement.  Capital expenditures for the nine months ended September 30,
1996, were $22 million compared to $52 million for the same period of 1995.
Capital expenditures were lower during the first six months of 1996 primarily
due to lower maintenance capital requirements in 1996 and a system expansion in
the San Juan Basin completed in 1995.

   In November 1996, FERC approved EPG's April 1996 application to add
compression on its Havasu Crossover Line.  This project will permit an
additional 185 Mdth/d to move on the Havasu Crossover Line from the San Juan
Basin in northern New Mexico to points of delivery off EPG's southern system.
EPG has executed transportation service agreements with shippers to fully
subscribe this additional capacity.  This $20 million expansion is expected to
be in service by the second quarter of 1997.


   Field and Merchant Services

   The segment's planned capital expenditures for 1996 of $70 million
(excluding the Cornerstone acquisition) are primarily for system enhancement,
facility purchases, joint ventures, and maintenance of business.  Capital
expenditures for the nine months ended September 30, 1996, were $53 million
compared to $54 million for the same period of 1995.

   In February 1996, EPFS, through its wholly owned subsidiary El Paso
Intrastate Company, acquired the Linc gathering system and the Pandale
gathering system from Tejas Power Corporation for approximately $12 million.
The combined throughput of the two systems is expected to contribute 46 Mdth/d
on an annual basis to EPFS's total throughput.  The Linc gathering system is
located in the Waha area of the Permian Basin and should increase EPFS's market
share in that area.  The Pandale gathering system is located in the Texas
counties of Crockett and Val Verde, and should give EPFS a base from which to
grow in this active drilling area.  In addition, in 1996, EPFS installed new
compression, upgraded systems for improved data collection, and continued to
expand its system at a total cost of $22 million.


FINANCING REQUIREMENTS

   Internally generated funds and available credit facilities are expected to
be sufficient to fund capital expenditures, acquisitions, long-term debt
retirements, dividends, and other expenditures. In addition, the Company 
believes internally generated funds and available credit facilities will 
provide sufficient liquidity after the merger occurs.

OTHER

   Recent Pronouncements

   In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.  For a further discussion of SFAS No. 125, see Part I,
Financial Information, Note 12, which is incorporated herein by reference.


   Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
   Private Securities Litigation Reform Act of 1995

   The Company is including the following cautionary statement in this Form
10-Q to make applicable and take advantage of the new "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company.  The factors identified in
this cautionary statement are important factors (but not necessarily all
important factors) that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company.

   Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable





                                       18
<PAGE>   21
and makes them in good faith, assumed facts or basis almost always vary from
actual results, and the differences between assumed facts or basis 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 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" and "anticipate" and
similar expressions identify forward-looking statements.

   Taking into account the foregoing, the following are identified as important
factors that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company:

    1--The ability to increase transmission, gathering, processing, and sales
       volumes can be subject to the impact of future weather conditions,
       including those that favor hydroelectric generation; price; drilling
       activity; and service competition, especially due to excess pipeline
       capacity into California.

    2--Growth strategies through acquisitions and investments in joint ventures
       may face legal and regulatory delays and other unforeseeable obstacles
       beyond the Company's control.

    3--Future profitability will be affected by the Company's ability to
       compete with the services offered by other energy enterprises which
       may be larger, offer more services, and possess greater resources.

    4--Cost control efforts may be affected by the timing of related work force
       reductions and might be further offset by unusual and unexpected items
       resulting from such events as, but not limited to, litigation
       settlements, adverse rulings or judgments, and unexpected
       environmental remediation costs in excess of reserves.

    5--Rates for certain services are related to natural gas prices such that
       variations in natural gas prices may result in corresponding variances
       in operating revenues.

    6--Future operating results and success of business ventures in the United
       States, Canada, Mexico, and Latin America may be subject to the
       effects of, and changes in, United States and foreign trade and
       monetary policies, laws and regulations, political and governmental
       changes, inflation and exchange rates, taxes, and operating
       conditions.

    7--Factors affecting the availability or cost of capital such as changes in
       interest rates, market perceptions of the natural gas industry, the
       Company, or security ratings.

    8--Authoritative generally accepted accounting principle or policy changes
       from such standard setting bodies as the Financial Accounting
       Standards Board and the SEC.





                                       19
<PAGE>   22
                           PART II--OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

   See Part I, Financial Information, Note 4.

ITEM 2.  CHANGES IN SECURITIES

   None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

   None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

   None.

ITEM 5.  OTHER INFORMATION

    Continuous Odd-Lot Stock Sales Program

         EPG has made available a Program, in which Odd-Lot Holders are offered
    a convenient method of disposing of all their shares without incurring the
    customary brokerage costs associated with the sale of an odd-lot.  Only
    Odd-Lot Holders are eligible to participate in the Program.  The Program is
    strictly voluntary, and no Odd-Lot Holder is obligated to sell pursuant to
    the Program.  A brochure and related materials describing the Program were
    sent to Odd-Lot Holders in February 1994.  The Program currently does not
    have a termination date, but EPG may suspend the Program at any time.
    Inquiries regarding the Program should be directed to The First National
    Bank of Boston.


    Dividend Reinvestment and Common Stock Purchase Plan

         EPG has made available a Plan, which provides all shareholders of
    record a convenient and economical means of increasing their holdings in
    EPG's common stock.  A shareholder who owns shares of common stock in
    street name or broker name and who wishes to participate in the Plan will
    need to have his or her broker or nominee transfer the shares into the
    shareholder's name.  The Plan is strictly voluntary, and no shareholder of
    record is obligated to participate in the Plan.  A brochure and related
    materials describing the Plan were sent to shareholders of record in
    November 1994.  The Plan currently does not have a termination date, but
    EPG may suspend the Plan at any time.  Inquiries regarding the Plan should
    be directed to The First National Bank of Boston.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

    4.1  -   Indenture, dated as of November 13, 1996, between EPG and The
             Chase Manhattan Bank, as Trustee (incorporated by reference to
             Exhibit 4.1 of EPG's Current Report on Form 8-K dated November
             13, 1996, file No. 1-2700, filed November 13, 1996).

    4.2  -   Form of 6-3/4% Note due 2003 (incorporated by reference to
             Exhibit 4.2 of EPG's Current Report on Form 8-K dated November
             13, 1996, file No. 1-2700, filed November 13, 1996).

    4.3  -   Form of 7-1/2% Debenture Due 2026 (incorporated by reference to
             Exhibit 4.3 of EPG's Current Report on Form 8-K dated November
             13, 1996, file No. 1-2700, filed November 13, 1996).

   10.1  -   $750,000,000 Revolving Credit and Competitive Advance Facility
             Agreement, dated as of November 4, 1996, among EPG, the several
             banks and other financial institutions from time to time parties
             to the Agreement (the "Lenders") and The Chase Manhattan Bank,
             agent, and as CAF Advance Agent for the Lenders thereunder.

   10.2  -   $250,000,000 Revolving Credit and Competitive Advance Facility
             Agreement, dated as of November 4, 1996, among EPG, the several
             banks and other financial institutions from time to time parties
             to the Agreement (the "Lenders"), and The Chase Manhattan Bank,
             as administrative agent and as CAF Advance Agent for the
             Lenders thereunder.

   11    -   Computation of Earnings Per Common Share

   27    -   Financial Data Schedule

(b) Reports on Form 8-K

    On October 22, 1996, the Company filed a report under Item 5 on Form 8-K,
dated October 22, 1996, as amended pursuant to Form 8-K/A filed November 5,
1996, with respect to the filing of Amendments No. 1 and No. 2, respectively, 
to the Registration Statement on Form S-4 with the SEC.


    On November 13, 1996, the Company filed a report under Item 5 on Form 8-K,
dated November 13, 1996, with respect to the issuance by the Company of
$200,000,000 of 6-3/4% Notes due 2003 and $200,000,000 of 7-1/2% Debentures 
due 2026, under an Indenture dated as of November 13, 1996, between EPG and 
The Chase Manhattan Bank, as Trustee.


                                       20
<PAGE>   23
                                   SIGNATURES

   Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                        EL PASO NATURAL GAS COMPANY
                                        ---------------------------
                                                (Registrant)



    Date:  November 14, 1996            /s/  H. BRENT AUSTIN  
                                        ---------------------------------
                                                  H. Brent Austin
                                           Executive Vice President and
                                              Chief Financial Officer



    Date:  November 14, 1996            /s/  JEFFREY I. BEASON 
                                        -----------------------------------
                                                Jeffrey I. Beason
                                         Vice President, Controller, and
                                                   Treasurer





                                       21
<PAGE>   24
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  EXHIBIT
    NO.                   DESCRIPTION
  -------                 -----------
    <S>          <C>

    4.1  -   Indenture, dated as of November 13, 1996, between EPG and The
             Chase Manhattan Bank, as Trustee (incorporated by reference to
             Exhibit 4.1 of EPG's Current Report on Form 8-K dated November
             13, 1996, file No. 1-2700, filed November 13, 1996).

    4.2  -   Form of 6-3/4% Note due 2003 (incorporated by reference to
             Exhibit 4.2 of EPG's Current Report on Form 8-K dated November
             13, 1996, file No. 1-2700, filed November 13, 1996).

    4.3  -   Form of 7-1/2% Debenture Due 2026 (incorporated by reference to
             Exhibit 4.3 of EPG's Current Report on Form 8-K dated November
             13, 1996, file No. 1-2700, filed November 13, 1996).

   10.1  -   $750,000,000 Revolving Credit and Competitive Advance Facility
             Agreement, dated as of November 4, 1996, among EPG, the several
             banks and other financial institutions from time to time parties
             to the Agreement (the "Lenders") and The Chase Manhattan Bank,
             agent, and as CAF Advance Agent for the Lenders thereunder.

   10.2  -   $250,000,000 Revolving Credit and Competitive Advance Facility
             Agreement, dated as of November 4, 1996, among EPG, the several
             banks and other financial institutions from time to time parties
             to the Agreement (the "Lenders"), and The Chase Manhattan Bank,
             as administrative agent and as CAF Advance Agent for the
             Lenders thereunder.

   11    -   Computation of Earnings Per Common Share

   27    -   Financial Data Schedule
</TABLE>





                                       22