<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
SUBJECT TO COMPLETION, DATED JANUARY 24, 1997.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 5, 1996)
2,750,000 SHARES
EL PASO NATURAL GAS COMPANY
COMMON STOCK
All of the shares of Common Stock, par value $3.00 per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by El Paso Natural Gas
Company ("El Paso" or the "Company"). On January 23, 1997, the last reported
sale price of the Common Stock, which is listed under the symbol "EPG" on the
New York Stock Exchange ("NYSE"), was $52.25 per share. See "Price Range of
Common Stock and Dividend Information".
SEE "RISK FACTORS" BEGINNING ON PAGE S-10 FOR CERTAIN RISK FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT
IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
PRICE TO THE UNDERWRITING PROCEEDS TO THE
PUBLIC DISCOUNT(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------
Per Share................................. $ $ $
Total(3).................................. $ $ $
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Before deducting expenses estimated at $300,000, which will be payable by
the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 412,500 shares at the price to the public, less the
underwriting discount, solely to cover over-allotments. If such option is
exercised in full, the total price to the public, underwriting discount and
proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting".
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or in
part. It is expected that delivery of the shares will be made in New York, New
York on or about , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1997.
<PAGE> 2
[MAP]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus Supplement
and the accompanying Prospectus or incorporated by reference herein or therein.
Capitalized terms used in this Prospectus Supplement but not defined herein have
the meanings assigned to them in the accompanying Prospectus if defined therein.
Certain capitalized terms relating to the Company's recent acquisition of El
Paso Tennessee Pipeline Co. (which holds the business of Tenneco Energy (as
defined)) and related transactions are defined herein under "Unaudited Pro Forma
Financial Information". References herein to "Bcf" mean billion cubic feet and
"MMcf" mean million cubic feet. Unless otherwise indicated herein, the
information in this Prospectus Supplement assumes that the Underwriters'
over-allotment option is not exercised. See "Underwriting".
THE COMPANY
The Company, which operates under the name El Paso Energy Corporation, owns
and operates one of the nation's largest integrated natural gas systems, with
pipelines extending from coast to coast. The Company's principal operations
include the interstate and intrastate transportation, gathering and processing
of natural gas; the marketing of natural gas, natural gas liquids, electricity,
crude oil and refined products; and the development and operation of energy
infrastructure facilities worldwide. El Paso owns or has interests in over
28,000 miles of interstate and intrastate pipeline and 7,900 miles of gathering
systems connecting the nation's principal natural gas supply regions to the four
largest consuming regions in the United States, namely the Gulf Coast,
California, the Northeast and the Midwest. During the first nine months of 1996,
the average volumes transported, gathered or treated on the Company's interstate
and intrastate pipeline systems totalled approximately 12.3 Bcf per day of
natural gas, or approximately one-fifth of estimated total U.S. natural gas
demand (pro forma for the December 12, 1996 acquisition of El Paso Tennessee
Pipeline Co. ("El Paso Tennessee"); see "-- Recent Events -- Acquisition of
Tenneco Energy"). The Company has segregated its activities into three business
segments: (i) natural gas transmission; (ii) field and merchant services; and
(iii) corporate and other, which includes the Company's international
development activities.
The natural gas transmission segment is comprised of five interstate
pipeline systems: (i) El Paso Natural Gas Company, which connects natural gas
supply regions in New Mexico, Texas, Oklahoma and Colorado to markets in
California, Nevada, Arizona, New Mexico, Texas and northern Mexico (the "EPNG
System"); (ii) Tennessee Gas Pipeline Company, which extends from natural gas
supply regions in Texas and Louisiana, including the Gulf of Mexico, to the
northeastern region of the United States, including the New York City and Boston
metropolitan areas (the "TGP System"); (iii) Midwestern Gas Transmission
Company, which extends from a connection with the TGP System at Portland,
Tennessee to Chicago, Illinois and principally serves the Chicago metropolitan
area (the "Midwestern System"); (iv) East Tennessee Natural Gas Company, which
extends from the TGP System to serve the states of Tennessee, Virginia and
Georgia (the "East Tennessee System"); and (v) Mojave Pipeline Company, which
connects the EPNG System in Arizona to customers in the vicinity of Bakersfield,
California (the "Mojave System", and, collectively with the EPNG System, the TGP
System, the Midwestern System and the East Tennessee System, the "Interstate
System"). The Interstate System totals approximately 26,000 miles of
transmission pipeline.
The field and merchant services segment provides gathering, products
extraction, treating, compression and intrastate transmission services. In
addition, the segment purchases, markets and trades natural gas, natural gas
liquids, electricity, crude oil and refined products, and provides risk
management services associated with these commodities. This segment owns or has
interests in approximately 7,900 miles of gathering systems located in the
country's most prolific and active gas production areas, including the San Juan,
Anadarko and Permian Basins and East Texas, South Texas, Louisiana and the Gulf
of Mexico. In addition, this segment owns or has interests in approximately
1,550 miles of intrastate transmission pipeline, which supply natural gas to the
Interstate System and support the Company's trading and marketing operations.
The field and merchant services segment also owns or has interests in 18 natural
gas processing and treating facilities. This segment gathered, processed or
treated an average of 2.7 Bcf per day and sold
S-3
<PAGE> 4
83 million gallons of natural gas liquids during the three months ended
September 30, 1996 (pro forma for the acquisition of El Paso Tennessee). During
that three-month period (pro forma for the acquisition of El Paso Tennessee),
the Company was among the largest domestic marketers and traders of natural gas,
with volumes averaging 7.2 Bcf per day.
The Company's corporate and other segment includes the Company's
international development activities, as well as certain other corporate
activities. The international development unit builds, owns or operates
international energy infrastructure projects. These operations include ownership
interests in (i) two major existing natural gas transmission systems in
Australia, (ii) natural gas transmission and power generation assets currently
under construction in Indonesia, Mexico and Peru, and (iii) three domestic power
generation plants currently in operation. The international development unit
also has various energy-related infrastructure projects in advanced stages of
development in Bolivia, Brazil, Hungary, Mexico and Pakistan.
BUSINESS STRATEGY
The Company seeks to be a leader in the North American energy industry and
an active participant in the development of energy infrastructure
internationally. To achieve its business and financial objectives, the Company's
strategy is to: (i) generate stable earnings and significant free cash flow from
its Interstate System through long-term customer settlements and cost
reengineering and by maximizing throughput; (ii) reinvest the Company's free
cash flow in projects that complement and expand its non-regulated businesses,
as well as in selected projects in regulated businesses that are capable of
generating incremental returns; and (iii) develop new areas for expansion in the
energy industry, including strategic acquisitions and joint ventures. The
Company is pursuing this strategy to capitalize on emerging trends in the energy
industry, including the growing worldwide demand for energy infrastructure, the
deregulation of the natural gas and electricity industries in the United States,
and the active oil and gas development in those domestic basins where the
Company has significant existing assets and operations.
The Company believes that its recent acquisition of El Paso Tennessee
enhances the Company's ability to achieve its objectives. El Paso has begun to
apply its strategy to El Paso Tennessee by resolving take-or-pay and other
contractual issues with gas suppliers; negotiating and reaching a preliminary
settlement with customers regarding the recovery of take-or-pay and other
disputed transition costs; integrating the operations of El Paso Tennessee with
those of El Paso; and making commitments to invest in certain international
opportunities arising from the acquisition of El Paso Tennessee. The
complementary operational and geographical fit of the assets of El Paso and El
Paso Tennessee is expected to provide the critical mass necessary to allow the
Company to compete more effectively in the deregulating energy environment.
RECENT EVENTS
ACQUISITION OF TENNECO ENERGY
On December 12, 1996, El Paso Merger Company, an indirect subsidiary of El
Paso ("El Paso Merger Sub"), and Tenneco Inc. ("Old Tenneco") completed a merger
(the "Merger") in which El Paso Merger Sub merged with and into Old Tenneco,
which became an indirect subsidiary of El Paso. In the Merger, Old Tenneco
changed its name to "El Paso Tennessee Pipeline Co." (referred to herein as "El
Paso Tennessee"). Prior to the Merger, Old Tenneco and its subsidiaries,
including Tennessee Gas Pipeline Company ("TGP"), effected various intercompany
transfers and distributions which restructured, divided and separated their
businesses, assets and liabilities so that all the assets, liabilities and
operations related to their automotive parts, packaging and administrative
services businesses (collectively, the "Industrial Business") and their
shipbuilding business (the "Shipbuilding Business") were spun-off to Old
Tenneco's then existing common stockholders (the "Distributions"). The entity
consisting of the Shipbuilding Business is named Newport News Shipbuilding Inc.
("Newport News") and the entity consisting of the Industrial Business has been
subsequently renamed "Tenneco Inc." ("New Tenneco"). Following the
Distributions, the remaining existing and discontinued operations of Old Tenneco
consisted primarily of those operations related to the transmission and
marketing of natural gas ("Tenneco Energy"). As a result of the Merger, El Paso
indirectly owns 100% of the common stock of El Paso Tennessee, representing at
the effective time of the Merger approximately 75% of the equity value of El
Paso Tennessee; the balance of the equity value of El Paso Tennessee is held by
the
S-4
<PAGE> 5
holders of its 8 1/4% Cumulative Preferred Stock, Series A (the "Series A
Preferred Stock"), which was originally issued in a registered public offering
in November 1996 and remains outstanding.
The consideration paid by El Paso in the Merger consisted of:
(i) the retention after the Merger of approximately $2.6 billion of debt
and preferred stock obligations of Old Tenneco, subject to certain
adjustments (which obligations included (1) approximately $200 million
of public debt of Old Tenneco outstanding at the effective time of the
Merger, (2) approximately $2.1 billion of debt of Old Tenneco
outstanding at the effective time of the Merger under a $3.0 billion
Revolving Credit and Competitive Advance Facility Agreement dated as
of November 4, 1996 (the "El Paso Tennessee Credit Agreement"), among
Old Tenneco, the banks and other financial institutions party thereto
and The Chase Manhattan Bank, as agent, which is guaranteed by the
Company, and (3) $300 million of the Series A Preferred Stock);
(ii) the issuance of 18.8 million shares of Common Stock of El Paso valued
at approximately $914 million, based on a closing price per share of
Common Stock on the NYSE of $48.625 on December 9, 1996, to the
holders of Old Tenneco's common stock and two series of its preferred
stock; and
(iii) the retention of liabilities related to certain discontinued
businesses of Old Tenneco which El Paso has estimated to be
approximately $600 million.
In December 1996, the Company (i) received approximately $400 million from
the sale by El Paso Tennessee of a 70% interest in two Australian pipelines and
a related project financing, and (ii) completed the sale of El Paso Tennessee's
oil and gas exploration, production and financing units, formerly known as
Tenneco Ventures Corporation and Tenneco Gas Production Corporation
(collectively, "Tenneco Ventures"), for approximately $105 million (the
foregoing transactions are referred to herein as the "Monetization
Transactions"). The net cash proceeds from the Monetization Transactions were
used to repay outstanding borrowings under the El Paso Tennessee Credit
Agreement. In addition, as market conditions may allow, El Paso may refinance
outstanding indebtedness under the El Paso Tennessee Credit Agreement through a
sale of senior debt securities of TGP.
TAKE-OR-PAY AND CUSTOMER SETTLEMENTS
For a description of recent take-or-pay and customer settlements, including
those involving the TGP System, see "The Company -- FERC Proceedings".
S-5
<PAGE> 6
PRELIMINARY RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
The following table presents certain unaudited preliminary results of
operations data for the year ended December 31, 1996, which included the
operating results of El Paso Tennessee for the 20-day period following the
Merger. The Company's consolidated financial statements for the year ended
December 31, 1996 have not yet been audited and are not currently available. The
results of operations data set forth below with respect to the year ended
December 31, 1995 are derived from, and are qualified by reference to, the
audited consolidated financial statements and notes thereto contained in El
Paso's Annual Report on Form 10-K for the year ended December 31, 1995 (the
"1995 Form 10-K"), which is incorporated by reference into the accompanying
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1996 1995
----------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C>
Operating revenues.................................... $3,010 $1,038
Operating expenses:
Employee separation and asset impairment charge..... 99 --
Other operating expenses............................ 2,741 826
------ -----
Operating income...................................... 170 212
Interest expense...................................... 110 86
Other (income) expense, net........................... (5) (7)
Minority interest..................................... 2 --
------ -----
Income before income taxes............................ 63 133
Provision for income taxes............................ 25 48
------ -----
Net income available to Common Stock.................. $ 38 $ 85
====== =====
Net income per share of Common Stock.................. $ 1.06 $2.47
====== =====
</TABLE>
On January 22, 1997, the Company reported net income available to Common
Stock of $38 million, or $1.06 per share of Common Stock, for the year ended
December 31, 1996, which included the operating results of El Paso Tennessee for
the 20-day period following the Merger. Before the $99 million pre-tax charge
taken in the first quarter of 1996 for employee separation and asset impairment
and the $8 million pre-tax charge taken in the fourth quarter for relocating the
corporate headquarters from El Paso to Houston in connection with the Merger,
earnings rose by 15% to $103 million, or $2.85 per share of Common Stock. In
1995, the Company reported net income available to Common Stock of $85 million,
or $2.47 per share of Common Stock.
On January 22, 1997, the Company declared a quarterly dividend of $0.365
per share on the Company's outstanding Common Stock, payable on April 1, 1997 to
stockholders of record on March 14, 1997. This represents a five percent
increase from the former quarterly dividend of $0.3475 per share of Common Stock
and an eight percent average annual dividend growth rate since the Company's
initial public offering in March 1992.
S-6
<PAGE> 7
THE OFFERING
Common Stock offered hereby........... 2,750,000 shares(1)
Common Stock to be outstanding after
the
Offering............................ 58,171,622 shares(1)(2)
Use of proceeds....................... To purchase a subordinated series of
preferred stock (the "Subordinated
El Paso Tennessee Preferred Stock")
from El Paso Tennessee. El Paso
Tennessee will use the proceeds
from the sale of the Subordinated
El Paso Tennessee Preferred Stock
to repay a portion of its long-term
debt outstanding under the El Paso
Tennessee Credit Agreement. See
"Use of Proceeds".
NYSE symbol........................... EPG
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised. If such
over-allotment option is exercised, up to an additional 412,500 shares of
Common Stock will be issued and sold by the Company. See "Underwriting".
(2) Based on the number of shares of Common Stock outstanding on January 21,
1997. Excludes 4,276,785 shares of Common Stock issuable upon exercise of
outstanding stock options granted to certain directors and employees of the
Company pursuant to the Company's stock option plans.
RISK FACTORS
Prospective investors should carefully consider certain matters relating to
an investment in the Common Stock. See "Risk Factors".
S-7
<PAGE> 8
SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL DATA
The summary historical consolidated financial data set forth below for each
of the five fiscal years ended December 31, 1995 have been derived from the
Company's financial statements. The financial statements for each of the five
fiscal years for the period ended December 31, 1995 have been audited by Coopers
& Lybrand L.L.P., independent public accountants. The summary historical
consolidated financial data set forth below as of and for each of the interim
nine month periods ended September 30, 1996 and 1995 were derived from the
unaudited interim financial statements of El Paso and its consolidated
subsidiaries for those periods. In the opinion of the Company's management, the
Company's summary historical consolidated financial data as of and for the
unaudited interim nine months ended September 30, 1996 and 1995 include all
adjusting entries (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The results of operations for
the unaudited interim nine months ended September 30, 1996 should not be
regarded as indicative of the results that may be expected for the full year.
The summary unaudited pro forma combined financial data as of and for the
nine months ended September 30, 1996 and for the year ended December 31, 1995
have been prepared to reflect: (i) certain El Paso Tennessee restructuring and
realignment transactions effected prior to the Merger; (ii) the Merger; and
(iii) the Refinancing Transactions (as defined) (including the Offering and the
application of the proceeds therefrom as described in "Use of Proceeds"). The
unaudited pro forma combined financial position data have been prepared as if
such transactions occurred on September 30, 1996; the unaudited pro forma
combined operating results data have been prepared as if such transactions
occurred as of January 1, 1995. The summary unaudited pro forma combined
financial data are not necessarily indicative of actual operating results or
financial position had the transactions occurred as of the dates indicated
above, nor do they purport to indicate future operating results or financial
position.
The information presented below should be read in conjunction with the
historical financial statements and notes thereto contained in the 1995 Form
10-K and the Company's Quarterly Report on Form 10-Q for the nine months ended
September 30, 1996, which are incorporated by reference in the accompanying
Prospectus, and in conjunction with the Unaudited Pro Forma Combined Financial
Statements of El Paso and El Paso Tennessee and notes thereto included elsewhere
in this Prospectus Supplement. See "Unaudited Pro Forma Financial Information".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
(UNAUDITED)
----------- HISTORICAL
PRO FORMA --------------------------------------------
1995 1995(A) 1994 1993(B) 1992 1991
----------- ------- ------ ------- ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA
Operating revenues........................................ $2,912 $1,038 $ 870 $ 909 $ 803 $ 735
Depreciation, depletion and amortization.................. 284 72 65 54 73 61
Litigation special charge................................. -- -- 15 -- -- --
Operating income.......................................... 326 212 222 229 185 185
Income from continuing operations before income taxes and
minority interest....................................... 199 133 148 151 123 141
Income taxes.............................................. 7 48 58 59 47 52
Minority interest......................................... 25 -- -- -- -- --
Income from continuing operations......................... 167 85 90 92 76 89
Net income available to Common Stock...................... 167 85 90 92 76 89
Net income per share of Common Stock from continuing
operations.............................................. 2.98 2.47 2.45 2.46 2.12 2.82
Cash dividends declared per share of Common Stock(c)...... 1.32 1.32 1.21 1.10 0.75 --
Average shares of Common Stock outstanding (in
thousands).............................................. 56,038 34,495 36,632 37,212 36,049 31,422
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1995(A) 1994 1993(B) 1992 1991
------- ------ ------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION DATA
Total assets.............................................. $2,535 $2,332 $2,270 $2,051 $2,302
Short-term debt........................................... 286 114 7 -- 251
Long-term debt(d)......................................... 772 779 796 637 875
Stockholders' equity...................................... 712 710 708 669 815
</TABLE>
S-8
<PAGE> 9
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
(UNAUDITED)
-------------------------------------
HISTORICAL
PRO FORMA ---------------------
1996 1996(A) 1995(A)
--------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
OPERATING RESULTS DATA
Operating revenues........................................ $3,899 $1,938 $ 629
Depreciation, depletion and amortization.................. 190 66 52
Employee separation and asset impairment charge(e)........ 99 99 --
Operating income.......................................... 235 94 162
Income from continuing operations before income taxes and
minority interest....................................... 177 23 103
Income taxes.............................................. 45 9 40
Minority interest......................................... 19 -- --
Income from continuing operations......................... 113 14 62
Net income available to Common Stock...................... 113 14 62
Net income per share of Common Stock from continuing
operations.............................................. 2.00 0.40 1.81
Cash dividends declared per share of Common Stock......... 1.04 1.04 0.99
Average shares of Common Stock outstanding (in
thousands).............................................. 56,537 34,994 34,590
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------
(UNAUDITED)
-----------------------------------
HISTORICAL
PRO FORMA ---------------------
1996 1996(A) 1995(A)
--------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
FINANCIAL POSITION DATA
Total assets.............................................. $8,366 $2,774 $2,413
Short-term debt........................................... 671 398 234
Long-term debt(d)......................................... 2,125 665 768
Minority interest......................................... 335 -- --
Stockholders' equity...................................... 1,760 708 700
</TABLE>
- ---------------
(a) Reflects the consolidation in September 1995 of Eastex Energy Inc., in
December 1995 of Premier Gas Company, and in June 1996 of Cornerstone
Natural Gas Company.
(b) Reflects the consolidation in May 1993 of Mojave Pipeline Company.
(c) Represents dividends declared subsequent to El Paso's March 1992 initial
public offering.
(d) Excludes current maturities of long-term debt which are included in
"Short-term debt".
(e) Charge of $99 million pre-tax ($60 million after tax) to reflect costs
associated with the implementation of a workforce reduction plan and the
impairment of certain long-lived assets. Net income per share of Common
Stock from continuing operations for the nine months ended September 30,
1996 before giving effect to this charge would have been $2.11 (compared to
$0.40) and $3.06 (compared to $2.00) on a historical and pro forma basis,
respectively.
S-9
<PAGE> 10
RISK FACTORS
In addition to the other information included in this Prospectus Supplement
and the accompanying Prospectus, the following risk factors should be considered
by prospective purchasers of the Common Stock.
REGULATED INDUSTRY; PENDING REGULATORY PROCEEDINGS
The Interstate System is regulated by the Federal Energy Regulatory
Commission (the "FERC") in accordance with the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978. The FERC regulates the interstate transportation
of natural gas, including, among other things, rates and charges allowed natural
gas companies, construction, extensions and abandonments of facilities and
service, rates of depreciation and amortization and accounting systems. El Paso
and TGP are currently parties to various regulatory and rate proceedings
relating to disputes over recovery of costs associated with contract
expirations, gas supply realignment and other transition issues. The EPNG System
and the TGP System have entered into comprehensive settlements with their
respective customers that, if approved by the FERC, would resolve many of the
contract expiration, transportation rate, gas supply realignment and other
transition issues in which such systems are involved. While negotiated
settlement of such disputes is encouraged by the FERC, such settlements remain
subject to FERC review and approval. Whether the FERC will approve such
settlements in the form filed or whether these regulatory proceedings will be
otherwise resolved in a manner satisfactory to the Company cannot be predicted
with certainty, and the business of the Company could be adversely affected
thereby. For a description of certain regulatory proceedings in which the
Company is currently involved, see "The Company -- FERC Proceedings."
HIGHLY COMPETITIVE INDUSTRY
The regulated natural gas pipeline industry is experiencing increasing
competition as a result of actions taken by the FERC to strengthen market forces
throughout the industry. In a number of key markets, interstate pipelines face
competitive pressure from other major pipeline systems, enabling local
distribution companies and end users to choose a supplier or switch suppliers
based on the short-term price of gas and the cost of transportation. The Company
also faces varying degrees of competition from alternative energy sources, such
as electricity, hydroelectric power, coal and oil.
The EPNG System faces significant competition from three companies that
transport natural gas to the California market, which market contributes the
largest share of reservation charge revenues of that system. Competition
generally occurs on the basis of delivered price. The combined capacity of the
four pipelines transporting natural gas to the California market is 6.9 Bcf per
day, of which the EPNG System has a capacity of 3.3 Bcf per day. In 1996, the
demand for interstate pipeline capacity to California averaged 4.3 Bcf per day.
Currently, the EPNG System has firm transportation contracts covering
approximately 89% of its current capacity to California. Commencing in 1998,
that figure could be reduced to approximately 53% due to scheduled contract
capacity reductions and expirations. In March 1996, the EPNG System filed with
the FERC a comprehensive offer of settlement with its customers which, if
approved by the FERC, and in combination with the results of a comprehensive
cost reduction program substantially completed in 1996, would largely offset the
Company's financial exposure to these scheduled contract capacity reductions and
expirations. However, there can be no assurance that the settlement will be
approved by the FERC in the form filed. See "-- Regulated Industry; Pending
Regulatory Proceedings" and "The Company -- FERC Proceedings".
Competition between pipelines is also intense in the Louisiana and Texas
supply areas of the TGP System, as well as certain customer markets served by
the East Tennessee System and the Midwestern System. In some instances, the TGP
System, the Midwestern System and the East Tennessee System have been required
to discount their transportation rates in order to maintain their respective
market shares. Additionally, transportation contracts representing approximately
70% of firm interstate transportation capacity of the TGP System will be
expiring over the next five years, principally in the year 2000. Future
renegotiations of TGP's existing transportation contracts and negotiations with
potential new customers could be adversely affected by the foregoing or other
competitive factors. There can be no assurance that TGP's
S-10
<PAGE> 11
existing contracts (or a substantial portion thereof) will be renegotiated or
replaced or that the terms of any renegotiated or replacement contracts will be
as favorable to TGP as the existing contracts. Accordingly, the Company
presently is unable to ascertain whether or not the expiration and renegotiation
or replacement of these transportation contracts will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
UNCERTAINTY SURROUNDING INTEGRATION OF OPERATIONS
El Paso is engaged in a comprehensive review of the business and operations
of El Paso Tennessee and its subsidiaries and has begun to integrate the
operations of El Paso Tennessee to increase operating and administrative
efficiency through consolidation and reengineering of facilities, workforce
reductions and coordination of purchasing, sales and marketing activities. El
Paso anticipates that the complementary interstate and intrastate pipeline
operations and energy marketing activities of El Paso and El Paso Tennessee
should provide the combined company with increased operating flexibility and
access to additional customers and markets, although the amount and timing of
the realization of such benefits will depend upon the ability of El Paso to
integrate successfully the business and operations of the companies, and the
time period over which such integration is effected.
POTENTIAL ENVIRONMENTAL LIABILITIES
The current and discontinued operations and activities of the Company,
including those of El Paso Tennessee, are subject to various federal, state,
local and foreign laws and regulations covering the discharge of material into
the environment or otherwise relating to protection of the environment. In
particular, the Company's pipeline facilities and its use of facilities for
treating, processing, recovering or otherwise handling natural gas are subject
to stringent environmental regulation by governmental authorities in the United
States and in foreign jurisdictions. Such regulations have increased the costs
of planning, designing, constructing, operating and abandoning facilities.
El Paso and El Paso Tennessee have historically expended significant
resources, both financial and managerial, to comply with environmental
regulations and permitting requirements, and the Company anticipates that they
will continue to do so in the future. Although the Company believes that its
respective operations and facilities, including those of El Paso Tennessee, are
in general compliance with applicable environmental laws and regulations, risks
of substantial costs and liabilities are inherent in natural gas operations, and
there can be no assurance that significant costs and liabilities will not be
incurred in the future. Moreover, it is possible that other developments, such
as increasingly strict environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property, employees, other persons and the
environment resulting from current or discontinued operations, could result in
substantial costs and liabilities in the future.
OPERATING HAZARDS AND UNINSURED RISKS
The operations of the Company are subject to the inherent risks normally
associated with the transportation, gathering and processing of natural gas,
including explosions, pollution and fires, each of which could result in damage
to or destruction of gas transportation, gathering and processing facilities or
damage to persons and property. While the Company maintains insurance against
certain of such risks and in amounts that it believes to be reasonable, the
occurrence of a significant event that is not fully insured against could have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
REFINANCING AND INTEREST RATE EXPOSURE RISKS
The business and operating results of the Company can be adversely affected
by changes in the economic environment, including changes in interest rates,
market perceptions of the natural gas industry or El Paso, or security ratings.
As of December 31, 1996, the Company had approximately $1.6 billion of floating
rate bank debt, a substantial portion of which it intends to refinance into
long-term fixed rate debt. The Company's ability to refinance this debt on
favorable terms will be impacted by prevailing interest rates at the time such
S-11
<PAGE> 12
debt is refinanced and no assurance can be made that such terms will be
available. The Company's inability to refinance this debt could have a negative
impact on its consolidated financial condition or results of operations.
USE OF DERIVATIVE FINANCIAL INSTRUMENTS
In the ordinary course and conduct of its business, some of the Company's
non-regulated subsidiaries that are engaged in the gathering, processing and
marketing of natural gas and other energy commodities (collectively, "Energy
Marketing") utilize futures and option contracts traded on the New York
Mercantile Exchange ("NYMEX") and over-the-counter ("OTC") options and price and
basis swaps with other gas merchants and financial institutions to hedge their
price risk exposure related to inventories and fixed price commitments to
purchase and sell natural gas, natural gas liquids, electricity and other energy
commodities. Energy Marketing operates under a policy to seek to maintain a
balanced portfolio of supply and demand contracts, utilizing the NYMEX and OTC
financial markets to hedge against price volatility which may affect those
obligations. In addition to its hedging activities, Energy Marketing also
engages from time to time in selective trading of these financial instruments.
Losses incurred as a result of derivatives transactions could have an adverse
effect on the consolidated financial condition or results of operations of El
Paso.
RISKS ASSOCIATED WITH FLUCTUATING NATURAL GAS AND NATURAL GAS LIQUIDS PRICES
The revenues generated by the Company from its gathering and processing
contracts are dependent upon volumes and rates, both of which can be affected by
the prices of natural gas and natural gas liquids. Fluctuations in energy prices
are caused by a number of factors, including regional, domestic and
international demand, availability and adequacy of transportation facilities,
energy legislation, federal or state taxes, if any, on the sale or
transportation of natural gas and natural gas liquids and the price and
abundance of supplies of alternative energy sources. Natural gas and natural gas
liquids prices can also be adversely affected by weather conditions, which may
result in lower energy usage or in increased availability of alternative energy
sources, thereby reducing demand for these commodities.
POTENTIAL FEDERAL INCOME TAX LIABILITIES
On October 30, 1996, the Internal Revenue Service (the "IRS") issued a
private letter ruling (the "IRS Letter Ruling") to Old Tenneco, in which the IRS
ruled that for U.S. federal income tax purposes (i) the Distributions would be
tax-free to Old Tenneco and, except to the extent cash is received in lieu of
fractional shares, to its then existing stockholders under Section 355 of the
Internal Revenue Code of 1986, as amended (the "Code"), (ii) that the Merger
would constitute a tax-free reorganization under Section 368(a)(1)(B) of the
Code, and (iii) that certain other transactions effected in connection with the
Merger and Distributions would be tax-free. Such an IRS private letter ruling,
while generally binding upon the IRS, is based upon certain factual
representations and assumptions. If such factual representations and assumptions
were incomplete or inaccurate in a material respect, or the facts upon which the
IRS Letter Ruling was based are materially different from the facts at the time
of the Distributions, the IRS could modify or revoke the IRS Letter Ruling
retroactively. Each of El Paso, Old Tenneco, New Tenneco and Newport News has
agreed to certain restrictions on its future actions to provide further
assurances that the Distributions will be tax-free for federal income tax
purposes.
If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then, in general, a corporate level federal income tax
would be payable by the consolidated group of which Old Tenneco was the common
parent, which tax (assuming the internal spin-off transactions effected
immediately prior to the Distributions also failed to qualify under Section 355
of the Code) would be based upon the gain (computed as the difference between
the fair market value of the stock distributed and the distributing
corporation's adjusted basis in such stock) realized by each of the distributing
corporations upon its distribution of the stock of one or more controlled
corporations to its stockholders. The corporate level federal income tax would
be payable by El Paso Tennessee. Under certain limited circumstances, however,
New Tenneco and Newport News have agreed to indemnify El Paso Tennessee for a
defined portion of such tax liabilities. In addition, if the Merger does not
qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(B)
of the Code, the Distributions may not qualify as tax-free distributions under
S-12
<PAGE> 13
Section 355 of the Code, in which case Old Tenneco and the Distributions would
be treated in the manner described above.
The Administration's Budget Proposal issued March 19, 1996 contains a
provision that would require a distributing corporation in a transaction
otherwise qualifying as a tax-free distribution under Section 355 of the Code to
recognize gain on the distribution of the stock of one or more controlled
corporations under certain circumstances. If such legislation were enacted, the
Distributions, if ultimately subject to such legislation, may result in
significant taxable gain to El Paso Tennessee under Section 355(c) of the Code.
POTENTIAL LIABILITIES RELATING TO THE MERGER
Old Tenneco had certain actual and contingent liabilities which remained
the liabilities of El Paso Tennessee after the Merger. These liabilities relate
to, among other things, retiree medical and other retiree costs of former
employees of Old Tenneco and its subsidiaries, litigation, environmental
matters, and liabilities (including environmental liabilities) relating to
discontinued businesses and operations of Old Tenneco and its subsidiaries
(other than the discontinued businesses of New Tenneco and Newport News). El
Paso has estimated that the aggregate amount of these liabilities is
approximately $600 million. However, the actual amount of such liabilities could
vary materially from such estimate.
In connection with the Merger, each of El Paso Tennessee, New Tenneco and
Newport News has agreed to indemnify the other parties (and certain related
persons) with respect to certain debts, liabilities and obligations. There can
be no assurance that future obligations arising under these agreements will not
have an adverse effect on the consolidated financial condition of the Company.
In connection with the Distributions and the Merger, responsibility for
various debts, liabilities and obligations was allocated among Old Tenneco, New
Tenneco, Newport News and their respective subsidiaries. It is possible that a
court would disregard this contractual allocation of debts, liabilities and
obligations among the parties and require El Paso Tennessee or its subsidiaries
to assume responsibility for obligations allocated to another party,
particularly if such other party were to refuse or was unable to pay or perform
any of its allocated obligations.
POTENTIAL LIABILITIES DUE TO FRAUDULENT TRANSFER CONSIDERATIONS AND LEGAL
DIVIDEND REQUIREMENTS
Certain aspects of the Merger, the Distributions and related transactions
(including the Corporate Restructuring Transactions (as defined) and the Debt
Realignment (as defined)) are subject to review under federal and state
fraudulent conveyance laws. Under these laws, if a court in a lawsuit by an
unpaid creditor or a representative of creditors (such as a trustee in
bankruptcy of El Paso Tennessee, New Tenneco or Newport News as a
debtor-in-possession) were to determine that Old Tenneco, New Tenneco, Newport
News or any of their subsidiaries did not receive fair consideration or
reasonably equivalent value for incurring indebtedness or transferring assets in
connection with the Distributions, the Merger and related transactions and that,
at the time of the Distributions or such incurrence of indebtedness or transfer
of assets, Old Tenneco, New Tenneco, Newport News or any of their subsidiaries
(i) was insolvent or would be rendered insolvent, (ii) had unreasonably small
capital with which to carry on its business and all businesses in which it
intended to engage, or (iii) intended to incur, or believed it would incur,
debts beyond its ability to repay such debts as they would mature, then such
court could order, among other things, El Paso Tennessee to return to New
Tenneco or Newport News the value of any distributions made by them to El Paso
Tennessee, restrict future dividend and redemption payments on El Paso
Tennessee's capital stock, and invalidate, in whole or in part, the transactions
in question, as fraudulent conveyances.
The measure of insolvency for purposes of the fraudulent conveyance laws
will vary depending on which jurisdiction's law is applied. Generally, however,
an entity would be considered insolvent if the present fair saleable value of
its assets is less than (i) the amount of its liabilities (including contingent
liabilities), or (ii) the amount that will be required to pay its probable
liabilities on its existing debts as they become absolute and mature. No
assurance can be given as to what standard a court would apply in determining
insolvency or that a court would not determine that Old Tenneco, New Tenneco,
Newport News or any of their subsidiaries was "insolvent" at the time of or
after giving effect to the Distributions, the Merger and related transactions.
S-13
<PAGE> 14
ACQUISITIONS AND INVESTMENTS
Opportunities for growth through acquisitions and investments in joint
ventures, and future operating results and the success of acquisitions and joint
ventures within and outside the United States may be subject to the effects of,
and changes in, United States and foreign trade and monetary policies, laws and
regulations, political and economic developments, inflation rates, and the
effects of taxes and operating conditions. Activities in areas outside the
United States also are subject to the risks inherent in foreign operations,
including loss of revenue, property and equipment as a result of hazards such as
expropriation, nationalization, war, insurrection and other political risks, and
the effects of currency fluctuations and exchange controls.
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus contain or
incorporate by reference forward-looking statements. The factors identified
under "Risk Factors" 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
(or its subsidiaries).
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. Where, in any forward-looking
statement, the Company (or its subsidiaries), or its management, express an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and is believed to have a reasonable basis, but there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished. The words "believe", "expect", "estimate",
"project" and "anticipate" and similar expressions identify forward-looking
statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock in the
Offering (assuming a price to the public of $52.25 per share) are estimated to
be approximately $138 million (or approximately $158.3 million if the
Underwriters' over-allotment option is exercised), after deducting estimated
underwriting discounts and commissions and estimated expenses of the Offering.
The Company will use such net proceeds for the purchase from El Paso Tennessee
of the Subordinated El Paso Tennessee Preferred Stock. The Subordinated El Paso
Tennessee Preferred Stock will have an aggregate liquidation preference of
approximately $138 million (or approximately $158.3 million if the Underwriters'
over-allotment option is exercised), will be subordinated as to payment of
dividends and amounts payable on liquidation to the Series A Preferred Stock,
and will not have any voting rights. El Paso Tennessee will use the proceeds
from the sale of the Subordinated El Paso Tennessee Preferred Stock to reduce
the $1.6 billion outstanding at December 31, 1996 under the El Paso Tennessee
Credit Agreement. Borrowings under the El Paso Tennessee Credit Agreement mature
in November 1999 and bear interest at a floating rate, which averaged 5.94% at
December 31, 1996. The amounts outstanding under the El Paso Tennessee Credit
Agreement were used to finance the Debt Realignment in connection with the
Distributions and the Merger. Pending the application of the net proceeds of the
Offering as described above, such net proceeds will be invested temporarily in
short-term securities by the Company. See "Capitalization".
S-14
<PAGE> 15
PRICE RANGE OF COMMON STOCK AND DIVIDEND INFORMATION
As of January 21, 1997, there were 55,421,622 shares of Common Stock
outstanding held by 108,437 holders of record. The Common Stock is traded on the
NYSE under the symbol "EPG". The following table sets forth, for the periods
indicated, the high and low sales prices for the Common Stock, as reported on
the NYSE Composite Transactions Tape, and quarterly cash dividends declared on
shares of Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK PRICES
-------------------- CASH
HIGH LOW DIVIDENDS
-------- -------- -----------
(PER SHARE)
<S> <C> <C> <C>
1994
First Quarter.................................... $ 41.875 $ 35.250 $0.3025
Second Quarter................................... $ 39.000 $ 31.500 $0.3025
Third Quarter.................................... $ 35.375 $ 31.625 $0.3025
Fourth Quarter................................... $ 34.750 $ 29.875 $0.3025
1995
First Quarter.................................... $ 32.500 $ 28.000 $0.3300
Second Quarter................................... $ 29.875 $ 26.875 $0.3300
Third Quarter.................................... $ 29.500 $ 24.750 $0.3300
Fourth Quarter................................... $ 31.625 $ 26.500 $0.3300
1996
First Quarter.................................... $ 38.125 $ 28.625 $0.3475
Second Quarter................................... $ 39.000 $ 34.250 $0.3475
Third Quarter.................................... $ 45.875 $ 37.750 $0.3475
Fourth Quarter................................... $ 53.250 $ 44.000 $0.3475
1997
First Quarter (through January 23, 1997)......... $ 54.375 $ 48.875 $0.3650(a)
</TABLE>
- ---------------
(a) On January 22, 1997, the Company announced an increase in its quarterly
dividend to $0.365 per share of Common Stock (an annual rate of $1.46 per
share of Common Stock), and declared a dividend of $0.365 per share of
Common Stock payable on April 1, 1997 to the stockholders of record on March
14, 1997.
Since the Company's initial public offering in the second quarter of 1992,
El Paso has paid quarterly cash dividends to the holders of Common Stock. The
timing and amount of future dividends will be (i) dependent on El Paso's results
of operations, financial condition, cash requirements and other relevant
factors, (ii) subject to the discretion of the Board of Directors of El Paso,
and (iii) subject to restrictions, if any, contained in debt instruments of El
Paso in effect from time to time and under the Delaware General Corporation Law.
S-15
<PAGE> 16
CAPITALIZATION
The following table sets forth the unaudited historical cash and
capitalization of the Company at September 30, 1996 and such capitalization (i)
as adjusted to reflect the Corporate Restructuring Transactions, the Cash
Realignment (as defined), the Debt Realignment, the issuance of the Series A
Preferred Stock, the Distributions, the Merger, the Refinancing Transactions
(other than the Offering) and the El Paso Debt Offering (as defined), and (ii)
as further adjusted to give effect to the Offering and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Consolidated Financial Statements of the Company and related notes thereto
contained in the 1995 Form 10-K incorporated by reference in the accompanying
Prospectus and "Unaudited Pro Forma Financial Information" included herein.
<TABLE>
<CAPTION>
PRO FORMA EL PASO/
PRO FORMA EL PASO/ TENNECO ENERGY
TENNECO ENERGY COMBINED
EL PASO COMBINED AS FURTHER
HISTORICAL AS ADJUSTED(A) ADJUSTED(B)
---------- ------------------ ------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Cash............................................ $ 52 $ 139 $ 139
====== ======= =======
Short-term debt:
Current maturities of long-term debt.......... $ 109 $ 109 $ 109
Commercial paper and bank debt................ 289 671 671
------ ------- -------
Total short-term debt................. 398 780 780
------ ------- -------
Long-term debt:
6 3/4% Notes Due 2003......................... -- 200 200
7 1/2% Debentures Due 2026.................... -- 200 200
9.45% Notes Due September 1999................ 47 47 47
7 3/4% Notes Due January 2002................. 215 215 215
8 5/8% Debentures Due March 2012.............. 17 17 17
8 5/8% Debentures Due January 2022............ 259 259 259
Other debt.................................... 127 1,325(c) 1,187
------ ------- -------
Total long-term debt.................. 665 2,263 2,125
------ ------- -------
Minority interest............................... 40 335(d) 335
------ ------- -------
Stockholders' equity:
Common Stock, par value $3.00 per share;
100,000,000 shares authorized; 36,212,000
shares outstanding; 55,005,000 shares as
adjusted; and 57,755,000 shares as further
adjusted(e)................................ 113 169 177
Additional paid in capital.................... 484 1,342 1,472
Accumulated earnings.......................... 111 111 111
------ ------- -------
Total stockholders' equity............ 708 1,622 1,760
------ ------- -------
Total capitalization............................ $1,811 $5,000 $5,000
====== ======= =======
</TABLE>
- ---------------
(a) Adjusted to give effect to the Corporate Restructuring Transactions, the
Cash Realignment, the Debt Realignment, the issuance of the Series A
Preferred Stock, the Distributions, the Merger and the Refinancing
Transactions (other than the Offering). See "Unaudited Pro Forma Financial
Information". Also adjusted to reflect the sale by El Paso on November 1,
1996 of $200 million of its 6 3/4% Notes Due 2003 and $200 million of its
7 1/2% Debentures Due 2026 (collectively, the "El Paso Debt Offering").
(b) Adjusted to reflect the Offering and the application of $138 million of the
estimated net proceeds thereof to purchase the Subordinated El Paso
Tennessee Preferred Stock from El Paso Tennessee, with the proceeds from the
sale of the Subordinated El Paso Tennessee Preferred Stock to be used by El
Paso Tennessee to reduce the amount outstanding under the El Paso Tennessee
Credit Agreement.
(c) Consists primarily of the bank borrowings of El Paso Tennessee under the El
Paso Tennessee Credit Agreement.
(d) The Series A Preferred Stock issued is reflected in "Minority interest" in
the Unaudited Pro Forma Combined Balance Sheet. See "Unaudited Pro Forma
Financial Information".
(e) Includes approximately 18,793,000 shares of Common Stock issued in the
Merger. Does not include 4,356,629 shares of Common Stock issuable upon the
exercise of outstanding stock options granted to certain directors and
employees of the Company pursuant to the Company's stock option plans.
S-16
<PAGE> 17
THE COMPANY
GENERAL
The Company, which operates under the name El Paso Energy Corporation, owns
and operates one of the nation's largest integrated natural gas systems, with
pipelines extending from coast to coast. The Company's principal operations
include the interstate and intrastate transportation, gathering and processing
of natural gas; the marketing of natural gas, natural gas liquids, electricity,
crude oil and refined products; and the development and operation of energy
infrastructure facilities worldwide. El Paso owns or has interests in over
28,000 miles of interstate and intrastate pipeline and 7,900 miles of gathering
systems connecting the nation's principal natural gas supply regions to the four
largest consuming regions in the United States, namely the Gulf Coast,
California, the Northeast and the Midwest. During the first nine months of 1996,
the average volumes transported, gathered or treated on the Company's interstate
and intrastate pipeline systems totalled approximately 12.3 Bcf per day of
natural gas, or approximately one-fifth of estimated total U.S. natural gas
demand (pro forma for the December 12, 1996 acquisition of El Paso Tennessee;
see "Prospectus Supplement Summary -- Recent Events -- Acquisition of Tenneco
Energy"). The Company has segregated its activities into three business
segments: (i) natural gas transmission; (ii) field and merchant services; and
(iii) corporate and other, which includes the Company's international
development activities.
The Company's principal executive offices are located at 1001 Louisiana,
Houston, Texas 77002, and its telephone number at that address is (713)
757-2131.
OVERVIEW OF BUSINESS SEGMENTS
Natural Gas Transmission
The EPNG System. The EPNG System consists of approximately 9,520 miles of
pipeline, which transported an average of 3.53 Bcf per day of natural gas during
the nine months ended September 30, 1996. California is the single largest
market served by the EPNG System, which also serves markets in Nevada, Arizona,
New Mexico, Texas and northern Mexico. The EPNG System is connected to one of
the most prolific supply basins in the nation, the San Juan Basin of northern
New Mexico and southern Colorado and also accesses natural gas supplies in the
Permian and Anadarko basins.
The TGP System. The TGP System consists of approximately 14,800 miles of
pipeline, which transported an average of 5.4 Bcf per day of natural gas during
the nine months ended September 30, 1996. The TGP System serves the northeast
section of the United States, including the New York City and Boston
metropolitan areas. The multiple-line system begins in the gas-producing regions
of Texas and Louisiana, including the Gulf of Mexico.
The Midwestern System. The Midwestern System consists of approximately 400
miles of pipeline, which transported an average of 300 MMcf per day of natural
gas during the nine months ended September 30, 1996. The Midwestern System
extends from a connection with the TGP System at Portland, Tennessee, to
Chicago, and principally serves the Chicago metropolitan area.
The East Tennessee System. The East Tennessee System consists of
approximately 1,100 miles of pipeline, which transported an average of 600 MMcf
per day of natural gas during the nine months ended September 30, 1996. The East
Tennessee System serves the states of Tennessee, Virginia and Georgia and
connects with the TGP System.
The Mojave System. The Mojave System consists of approximately 362 miles of
pipeline, which transported an average of 304 MMcf per day of natural gas during
the nine months ended September 30, 1996. The Mojave System is connected with
the EPNG System at Topock, Arizona and extends to customers in the vicinity of
Bakersfield, California.
Other. The Company has a one-third interest in TransColorado Gas
Transmission Company ("TGTC"). TGTC was formed for the purpose of constructing
and operating a 292-mile pipeline with a capacity of 300 MMcf per day, from
northwest Colorado to the San Juan Basin. The Company also owns a 17.8% interest
in Portland Natural Gas Transmission System, L.P., which is developing a
224-mile pipeline
S-17
<PAGE> 18
with a projected capacity of 178 MMcf per day running from the Canadian border
near Pittsburg, New Hampshire to Dracut, Massachusetts.
Field and Merchant Services
El Paso Energy Resources. El Paso Energy Resources ("EPER") was formed in
1996 to serve as a sub-holding company to coordinate the non-regulated
activities of the Company. EPER provides strategic direction, corporate
development and common support services.
El Paso Field Services Company. El Paso Field Services Company ("EPFS") was
formed in 1993 for the purpose of owning, operating, acquiring and constructing
natural gas gathering and processing and other related field facilities. EPFS
owns or has interests in approximately 9,450 miles of gathering and
transportation systems and 18 active processing or treating plants located in
the gas producing regions of Louisiana, New Mexico, Pennsylvania, Tennessee,
Texas and the Gulf of Mexico, including the San Juan, Anadarko and Permian
basins. During the nine months ended September 30, 1996 (pro forma for the
acquisition of El Paso Tennessee), an average of 2.45 Bcf per day were gathered
or treated and 141 million gallons of natural gas liquids were sold, reflecting
the start-up of the new Chaco cryogenic natural gas liquids extraction plant in
the San Juan Basin, as well as the acquisition of Cornerstone Natural Gas, which
added 700 miles of gathering systems and seven plants.
El Paso Energy Marketing. The Company significantly increased its
nonregulated gas business through the acquisition in 1995 of Eastex Energy Inc.
and Premier Gas Company, and the consolidation of these companies with El Paso's
then existing marketing operations to form El Paso Energy Marketing ("EPEM").
EPEM provides a broad range of energy products and services to its customers,
including supply aggregation, transportation management, sales services and
integrated price risk management. EPEM, with headquarters in Houston, Texas and
14 sales offices throughout the United States and Canada, is one of the
industry's leading natural gas services providers with average natural gas sales
levels of 6.2 Bcf per day in the nine months ended September 30, 1996 (pro forma
for the acquisition of El Paso Tennessee).
Corporate and Other
El Paso's remaining operations, including its international unit and the
discontinued operations of Old Tenneco acquired pursuant to the Merger, are
administered in its corporate and other segment. El Paso's international
operations were consolidated under El Paso Energy International ("EPEI"), which
was incorporated in June 1995 for the purpose of investing in energy projects
with an emphasis on projects involving the development of infrastructure to
gather, transport and use natural gas in northern Mexico and Latin America. With
the combination of El Paso Tennessee's international activities with EPEI, the
focus of international project pursuit has expanded to encompass Australia,
Asia, Europe and other Latin American countries.
S-18
<PAGE> 19
The following table sets forth information concerning energy infrastructure
projects in which El Paso has or will soon have a significant interest:
<TABLE>
<CAPTION>
TOTAL
SIZE/ PROJECT
LOCATION TYPE OF PROJECT INTEREST COST STATUS PARTNERS
-------- --------------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
-------------
Springfield, MA...... Natural Gas Cogen 240 MW $ 210 Completed; financed Bay State, General
17.5% Electric, US Generating
Bartow, FL........... Natural Gas Cogen 118 MW $ 145 Completed; financed CSW Energy
50%
Bartow, FL........... Natural Gas Cogen 102 MW $ 110 Completed; financing CSW Energy
50% pending
Queensland, Aus. .... Natural Gas Pipeline 470 miles $ 170 Completed; financed CNG International,
30% Australian investors
South Australia...... Natural Gas Pipeline 488 miles $ 251 Completed; financed CNG International,
30% Australian investors
Sulawesi, Natural Gas Power Plant 135 MW $ 225 Under construction; Energy Equity, PT
Indonesia.......... 47.5% financed Trihasra
Samalayuca, Mexico... Natural Gas Power Plant 700 MW $ 650 Under construction; General Electric,
30% financed Bechtel, PG&E, ICA
Pucallpa, Peru....... Natural Gas Power Plant 155 MW $ 254 Under construction; PanEnergy, Illinova,
24% financed PP&L, Scudder, Maple Gas
Hungary.............. Natural Gas Power Plant 70 MW $ 50 Contracts signed Dunaferr, Transelektro
50%
Kabirwala, Pakistan.. Natural Gas Power Plant 151 MW $ 170 Contracts signed Fauji Foundation, Asian
42% Development Bank
Bolivia/Brazil....... Natural Gas Pipeline 2,000 miles $1,800 In development Petrobras, British Gas,
7% Broken Hill Pty
Chihuahua, Mexico.... Natural Gas Pipeline 54 miles $ 34 Contract awarded PEMEX
50%
</TABLE>
The international unit also provides technical assistance to third parties
in the development and operation of energy infrastructure projects. The
international unit recently was selected by the Beijing Natural Gas
Transportation Company to serve as a paid technical advisor for the construction
of China's first major onshore natural gas pipeline.
FERC PROCEEDINGS
Order 636 Transaction Matters
On April 8, 1992, the FERC issued Order No. 636 ("Order 636") which
restructured the natural gas industry by requiring mandatory unbundling of
pipeline sales and transportation services. Numerous parties appealed to the
U.S. Court of Appeals for the D.C. Circuit, challenging the legality of Order
636 generally, as well as the legality of specific provisions of Order 636. On
July 16, 1996, the court issued its decision upholding, in large part, Order
636. The court remanded to the FERC several issues for further explanation,
including further explanation of the FERC's decision to allow pipelines to
recover 100% of their gas supply realignment ("GSR") costs.
TGP implemented revisions to its tariff, effective on September 1, 1993,
which restructured its transportation, storage and sales services to convert TGP
from primarily a merchant to primarily a transporter of gas as required by Order
636. As a result of this restructuring, TGP's gas sales declined while certain
obligations to producers under long-term gas supply contracts continued, causing
TGP to incur significant restructuring transition costs. Pursuant to the
provisions of Order 636 allowing for the recovery of transition costs related to
the restructuring, TGP has made filings to recover GSR costs resulting from
remaining gas purchase obligations, costs related to its Bastian Bay facilities,
the remaining unrecovered balance of purchased gas ("PGA") costs and the
"stranded" costs of TGP's continuing contractual obligations to pay for capacity
on other pipeline systems ("TBO costs").
S-19
<PAGE> 20
TGP's filings to recover costs related to its Bastian Bay facilities have
been rejected by the FERC based on the continued use of the gas production from
the field; however, the FERC recognized the ability of TGP to file for the
recovery of losses upon disposition of these assets. TGP has filed for appellate
review of the FERC actions and is confident that the Bastian Bay costs will
ultimately be recovered as transition costs under Order 636; the FERC has not
contested the ultimate recoverability of these costs.
The filings implementing TGP's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993, subject
to refund and pending FERC review and approval for eligibility and prudence: (1)
direct-billing of unrecovered PGA costs to its former sales customers over a
twelve-month period; (2) recovery of TBO costs, which TGP is obligated to pay
under existing contracts, through a surcharge from firm transportation
customers, adjusted annually; and (3) recovery of 90% of GSR costs over a period
of up to 36 months from firm transportation customers and recovery of 10% of
such costs from interruptible transportation customers over a period of up to 60
months.
Following negotiations with its customers, TGP filed in July 1994 with the
FERC a Stipulation and Agreement (the "PGA Stipulation"), which provides for the
recovery of PGA costs of approximately $100 million and the recovery of costs
associated with the transfer of storage gas inventory to new storage customers
in TGP's restructuring proceeding. The PGA Stipulation eliminates all challenges
to the PGA costs, but establishes a cap on the charges that may be imposed upon
former sales customers. On April 5, 1995, the FERC orders approving the PGA
Stipulation and resolving all outstanding issues became final. TGP implemented
the terms of the PGA Stipulation and made refunds in May 1995. The refunds had
no material effect on the Company's reported net income. The orders approving
the PGA Stipulation have been appealed to the D.C. Circuit Court of Appeals by
certain customers. TGP believes the FERC orders approving the PGA Stipulation
will be upheld on appeal.
TGP is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function. The FERC issued an order
requiring TGP to refund certain costs from this surcharge and refunds were made
in May 1996. TGP is appealing this decision and believes such appeal will likely
be successful.
In order to resolve litigation concerning purchases made by TGP of
synthetic gas produced from the Great Plains coal gasification plant ("Great
Plains"), TGP, along with three other pipelines, executed four separate
settlement agreements with Dakota Gasification Company ("Dakota") and the U.S.
Department of Energy ("DOE") and initiated four separate proceedings at the FERC
seeking approval to implement the settlement agreements. Among other things, the
settlement required TGP to pay Dakota over a limited period a premium over the
spot price for Dakota's production and resolves such litigation. As of December
31, 1996, TGP had paid $86.9 million of this obligation and had a remaining
nominal obligation through December 2003 of $54.6 million. The FERC previously
ruled that the costs related to the Great Plains project are eligible for
recovery through GSR and other special recovery mechanisms and that the costs
are eligible for recovery for the duration of the term of the original gas
purchase agreements. On October 18, 1994, the FERC consolidated the four
proceedings and set them for hearing before an administrative law judge ("ALJ").
The hearing, which concluded in July 1995, was limited to the issue of whether
the settlement agreements are prudent. The ALJ concluded, in his initial
decision issued in December 1995, that the settlement was not prudent. In
December 1996, the FERC unanimously reversed that decision and upheld the
settlement among the pipelines, DOE and Dakota, meaning that the full amount
paid by TGP pursuant to the settlement is recoverable.
Also related to TGP's recovery of GSR costs, on October 14, 1993, TGP was
sued in the State District Court of Ector County, Texas, by ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and
TransTexas contended that TGP had an obligation to purchase gas production which
TransTexas unilaterally attempted to add to the reserves originally dedicated to
a 1979 gas contract. An amendment to the pleading sought $1.5 billion from TGP
for alleged damages caused by TGP's refusal to purchase gas produced from the
TransTexas leases covering the new production and lands. In June 1996, TGP
reached a settlement with ICA and TransTexas for $125 million wherein ICA and
TransTexas agreed to terminate their contract rights, released TGP from
liability under the contract, and indemnified TGP against
S-20
<PAGE> 21
future claims, including royalty owner claims. TGP has filed with the FERC to
recover from its customers as GSR costs amounts previously paid to TransTexas
for gas purchased above the market price as well as the $125 million settlement
payment. In connection with that litigation, certain royalty interest owners
filed a claim against TGP alleging that they are sellers entitled to tender gas
to TGP under the settled contract. This claim fell under the indemnification
provisions of TGP's settlement with ICA and TransTexas, requiring ICA and
TransTexas to defend and indemnify TGP. This royalty owner litigation was
settled in December 1996 at no cost to TGP. The royalty owners' claims against
TGP have been dismissed.
TGP has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
TGP. One of these matters involved the dispute between TGP, as purchaser, under
a contract with Lenape Resources Corp., the Coastal Corporation and Tesoro
Petroleum Corporation. On August 1, 1995, the Texas Supreme Court affirmed a
ruling of the Texas Court of Appeals favorable to TGP in one of these matters
and indicated that it would remand the case to the trial court. On April 18,
1996, however, the Texas Supreme Court withdrew its initial opinion and
substituted an opinion reversing the Court of Appeals decision. In June 1996,
TGP filed a motion for rehearing with the Texas Supreme Court which was denied
in August 1996. In December 1996, TGP entered into settlement agreements with
each of the parties to this gas purchase contract, resulting in the termination
of the gas purchase contract. TGP paid a total of approximately $72 million to
terminate this contract, an amount substantially less than the sum accrued by
TGP for this gas purchase contract. During the course of this action, TGP had
either paid, or provided for the payment of, amounts it believes were
appropriate to cover the resolution of its contract reformation litigation,
including providing a bond in the amount of $206 million. On September 30, 1996,
TGP paid approximately $193 million to the producers and the producers agreed to
release all but approximately $2 million of the bonded amount. On November 1,
1996, a final order was issued which assessed only $456,000 of the $2 million to
TGP and TGP was released from this remaining bond amount. On October 1, 1996,
TGP filed to recover the pricing differential portion of this payment from its
customers.
As of September 30, 1996, TGP has deferred GSR costs, filed with the FERC
but yet to be recovered from its customers, of approximately $527 million, net
of $414 million previously recovered and subject to refund. A phased proceeding
is underway at the FERC with respect to the recovery of TGP's GSR costs.
Testimony has been completed in connection with Phase I of that proceeding
relating to the eligibility of GSR cost recovery; oral argument on eligibility
issues was originally set by a FERC ALJ for late October 1996. The Chief Judge
of the FERC has since issued orders (i) canceling the October 1996 oral
argument, (ii) convening settlement discussions which commenced on October 9,
1996, and (iii) postponing scheduling oral argument on eligibility issues.
Phase II of the proceeding on the prudency of the costs to be recovered and
on certain contract specific eligibility issues has not yet been scheduled.
Although the Order 636 transition cost recovery mechanism provides for complete
recovery by pipelines of eligible and prudently incurred transition costs,
certain customers have challenged the prudence and eligibility of TGP's GSR
costs and TGP has engaged in settlement discussions with its customers
concerning the amount of such costs in response to the FERC's public statements
encouraging such settlements.
On October 23, 1996, in anticipation of consummation of the Merger, El Paso
reached a preliminary understanding with certain customers of the TGP System
(the "El Paso Preliminary GSR Understanding"). Under the El Paso Preliminary GSR
Understanding, El Paso will settle the customers' challenges to TGP's GSR and
other transition costs, and establish a cost recovery mechanism for a portion of
TGP's transition costs, effective January 1, 1997. TGP expects that the El Paso
Preliminary GSR Understanding will be finalized and filed with the FERC during
the first quarter of 1997. The purchase accounting adjustments in the Unaudited
Pro Forma Combined Financial Statements of El Paso and El Paso Tennessee and
notes thereto included elsewhere in this Prospectus Supplement assume the
settlement with respect to TGP's GSR costs on the terms of the El Paso
Preliminary GSR Understanding.
Assuming the El Paso Preliminary GSR Understanding is finalized and filed
with the FERC, non-consenting customers will have the opportunity to object to
the proposed settlement. Given the uncertainty
S-21
<PAGE> 22
over whether the FERC will approve the proposed GSR cost recovery settlement in
the form ultimately presented to it, the Company is unable to predict the timing
or the ultimate impact that the resolution of these issues will have on its
consolidated financial position or results of operations.
Other Rate Matters
On December 30, 1994, TGP filed for a general rate increase (the "1995 Rate
Case"). On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, TGP began
collecting rates, subject to refund, reflecting an $87 million increase in TGP's
annual revenue requirement. A Stipulation and Agreement was filed with an ALJ in
this proceeding on April 5, 1996. This Stipulation proposes to resolve the rates
that are the subject of the 1995 Rate Case, including a structural rate design
that results in a larger proportion of TGP's transportation revenues being
dependent upon throughput. Under the Stipulation, TGP is required to refund,
upon final approval of the Stipulation, the difference between the revenues
collected under the July 1, 1995 motion rates and the rates underlying the
Stipulation. TGP is reserving revenues it believes are adequate to cover the
income impact of the Stipulation. On October 30, 1996, the FERC approved the
Stipulation resolving the 1995 Rate Case, with certain modifications and
clarifications which are not material and which should not cause changes adverse
to TGP. Two parties have filed requests for rehearing of the order approving the
settlement. TGP believes that the order approving the Stipulation will be upheld
on rehearing.
In June 1995, El Paso made a filing with the FERC for approval of new
system rates for mainline transportation to be effective January 1, 1996. In
July 1995, the FERC accepted and suspended El Paso's filing to be effective
January 1, 1996, subject to refund and certain other conditions. The FERC also
set El Paso's rates for hearing. In March 1996, El Paso filed a comprehensive
offer of settlement which, if approved by the 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 ten-year period
from January 1, 1996, through December 31, 2005, subject to annual escalation
after 1997; (ii) payments within eight years to El Paso 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 El Paso (65%) and
its customers (35%) 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 the FERC.
In March 1996, Southern California Edison Company ("Edison"), a firm
shipper on the EPNG System, filed its own offer of settlement. While Edison's
offer is similar in many respects to El Paso's, it contains provisions that El
Paso believes would be adverse to its interests if Edison's offer were approved
and El Paso's offer were rejected. On November 16, 1996, the parties filed
initial comments regarding the two offers of settlement, and, on December 6,
1996, reply comments were filed. Comments supporting El Paso's settlement were
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 the EPNG System. The same entities filed comments opposing
Edison's offer. In its comments, Edison argued that El Paso's offer of
settlement should not be approved and that, in any event, an evidentiary hearing
was required before the El Paso proposal could be forwarded to or considered by
the FERC. Under the FERC rules, the presiding ALJ must decide whether the
settlements may be certified to the FERC at this time. An order by the ALJ is
expected in the near future.
TGP and El Paso, as with all interstate pipelines, are subject to a FERC
audit review of their books and records. Both currently have open audits
covering the years 1991-1994 for TGP and 1991-1995 for El Paso. The FERC audit
staff is expected to issue both audit reports in early 1997.
S-22
<PAGE> 23
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
and the Terms Agreement relating to the Common Stock, the Company has agreed to
sell to Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs &
Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriters"),
and the several Underwriters have agreed to purchase from the Company, an
aggregate of 2,750,000 shares of Common Stock. The number of shares of Common
Stock that each Underwriter has agreed to purchase is set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
---------
Total............................................. 2,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. If any of the shares of Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all such
shares of Common Stock (other than the shares of Common Stock covered by the
over-allotment option described below) must be so purchased.
The Company has been advised that the Underwriters propose to offer the
Common Stock to the public initially at the price to the public set forth on the
cover page of this Prospectus Supplement and to certain dealers (who may include
the Underwriters) at such price less a concession not to exceed $ per share.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share to any other Underwriter and certain other dealers.
After the completion of the Offering, the offering price and other selling terms
may be changed by the Underwriters.
The Company has granted to the Underwriters an option to purchase up to
412,500 additional shares of Common Stock at the public offering price set forth
on the cover page hereof less underwriting discounts and commissions, solely to
cover over-allotments. Such option may be exercised once at any time until 30
days after the date of this Prospectus Supplement. To the extent that the
Underwriters exercise such option, each of the Underwriters will be committed,
subject to certain conditions, to purchase a number of option shares
proportionate to such Underwriter's initial commitment as indicated in the
preceding table.
The Company, subject to certain exceptions, has agreed not to offer, sell
or otherwise dispose of any shares of Common Stock, or any shares exercisable
for or convertible into shares of Common Stock, prior to the expiration of 90
days from the date of this Prospectus Supplement, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
In the ordinary course of their respective businesses, certain of the
Underwriters and their affiliates have engaged, and may in the future engage, in
investment banking or commercial banking transactions with the Company.
Donaldson, Lufkin & Jenrette Securities Corporation received customary financial
advisory fees in connection with the Merger and the subsequent sale of Tenneco
Ventures, and customary underwriting fees in connection with the El Paso Debt
Offering. Goldman, Sachs & Co. received customary underwriting fees in
connection with the El Paso Debt Offering.
S-23
<PAGE> 24
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York. Certain legal matters
with respect to the shares of Common Stock offered hereby will be passed upon
for the Underwriters by Andrews & Kurth L.L.P., Houston, Texas.
S-24
<PAGE> 25
UNAUDITED PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF EL PASO AND TENNECO ENERGY
The following Unaudited Pro Forma Combined Financial Statements of El Paso
and Tenneco Energy (the "Pro Forma Financial Statements") illustrate the effects
of: (i) the Corporate Restructuring Transactions, the Cash Realignment, the Debt
Realignment, the issuance of the Series A Preferred Stock and the Distributions;
(ii) the Merger; and (iii) the Refinancing Transactions (including the
Offering). The Unaudited Pro Forma Consolidated Balance Sheet has been prepared
as if such transactions occurred on September 30, 1996; the Unaudited Pro Forma
Consolidated Statements of Income have been prepared as if such transactions
occurred as of January 1, 1995.
The Pro Forma Financial Statements reflect El Paso having acquired 100% of
the outstanding Old Tenneco Stock (as defined). In connection with the Merger,
El Paso acquired an amount of debt equal to $2.6 billion (subject to certain
adjustments) less the Series A Preferred Stock issuance proceeds, issued
approximately $750 million (subject to the effects of a collar on the average
Common Stock market price) of Common Stock of El Paso to holders of Old Tenneco
Stock, assumed the $295 million of Series A Preferred Stock (net of issuance
costs), and acquired an estimated amount of $600 million in other liabilities of
certain discontinued businesses of Old Tenneco for a total purchase price of
approximately $4.0 billion. El Paso's acquisition of El Paso Tennessee will be
accounted for under the purchase method. The Pro Forma Financial Statements
reflect the issuance of Common Stock in the Merger as approved by the
stockholders of El Paso at a special meeting held on December 9, 1996.
A final determination of required purchase accounting adjustments,
including the allocation of the purchase price to the assets acquired and
liabilities assumed based on their respective fair values, has not yet been
made. Accordingly, the purchase accounting adjustments made in connection with
the development of the Pro Forma Financial Statements are preliminary and have
been made solely for purposes of developing the pro forma combined financial
information. However, management believes that the pro forma adjustments and the
underlying assumptions reasonably present the significant effects of the Merger
and the Refinancing Transactions. In addition, El Paso is undertaking a study to
determine the fair value of El Paso Tennessee's assets and liabilities and will
revise purchase accounting adjustments upon completion of that study. The actual
financial position and results of operations of the combined entity will differ,
perhaps significantly, from the pro forma amounts reflected herein because of a
variety of factors, including access to additional information, changes in value
and changes in operating results between the dates of the pro forma financial
information and the date on which the purchase accounting adjustments are
finalized. The Pro Forma Financial Statements are not necessarily indicative of
actual operating results or financial position had the transactions occurred as
of the dates indicated above, nor do they purport to indicate operating results
or financial position which may be attained in the future.
The significant adjustments to the pro forma financial position reflect (i)
reductions to cash, receivables and payables and increases to debt for the
Corporate Restructuring Transactions, the Cash Realignment and the Debt
Realignment, (ii) increases to property, plant and equipment and accrued
liabilities and decreases to regulatory assets for the purchase price
allocation, and (iii) decreases to property, plant and equipment and debt and
increases to equity for asset sales, debt restructuring and equity offerings in
connection with the Merger and the Refinancing Transactions.
As used herein: (a) "Refinancing Transactions" means certain transactions
with respect to El Paso Tennessee undertaken to reduce the amount of El Paso
Tennessee debt, namely (i) the Monetization Transactions for net proceeds of
approximately $500 million, and (ii) the Offering and the use of the net
proceeds thereof to purchase the Subordinated El Paso Tennessee Preferred Stock
(and the use by El Paso Tennessee of the proceeds from the sale of the
Subordinated El Paso Tennessee Preferred Stock to repay a portion of its
long-term debt outstanding under the El Paso Tennessee Credit Agreement); (b)
"Cash Realignment" means the allocation at the effective time of the Merger of
cash and cash equivalents among El Paso Tennessee, New Tenneco and Newport News;
(c) "Debt Realignment" means the restructuring prior to the Merger and the
Distributions of indebtedness for money borrowed of Old Tenneco and certain of
its
S-25
<PAGE> 26
consolidated subsidiaries (the "Tenneco Energy Consolidated Debt") through a
series of tender offers, exchange offers, payments, redemptions, prepayments and
defeasances, which was intended to reduce the total amount of Tenneco Energy
Consolidated Debt to an amount that, when added to the total amount of certain
other liabilities and obligations of Tenneco Energy outstanding as of the
effective time of the Merger, equals $2.65 billion, less the proceeds of the
issuance of the Series A Preferred Stock and subject to certain other
adjustments; (d) "Corporate Restructuring Transactions" means the various
intercompany transfers and distributions undertaken by Old Tenneco and its
subsidiaries designed to restructure, divide and separate their businesses and
assets so that, upon the consummation of the Distributions, the assets,
liabilities and operations of the Industrial Business were directly and
indirectly owned and operated by New Tenneco and the assets, liabilities and
operations of the Shipbuilding Business were directly and indirectly owned and
operated by Newport News; and (e) "Old Tenneco Stock" means, collectively, the
shares of Old Tenneco's common stock, par value $5.00 per share, the shares of
Old Tenneco's $7.40 Cumulative Preferred Stock, no par value (the "$7.40
Preferred Stock"), and the shares of Old Tenneco's $4.50 Cumulative Preferred
Stock, no par value (the "$4.50 Preferred Stock"), in each case outstanding
immediately prior to the Merger.
The pro forma adjustments do not reflect any potential operating
efficiencies or cost savings which El Paso believes are achievable with respect
to the combined companies.
S-26
<PAGE> 27
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA
------------------------------------------
RESTRUCTURING, PRO FORMA MERGER
REALIGNMENT -------------------------------------------
TENNECO AND SERIES A TENNECO EL PASO/
EL PASO ENERGY PREFERRED STOCK ENERGY MERGER REFINANCING TENNECO ENERGY
HISTORICAL HISTORICAL ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- --------------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary
investments............ $ 52 $ 35 $ (2)(d) $ 87 $ $ $ 139
54(g)
Receivables.............. 317 1,187 (82)(a) 839 1,156
(303)(b)
37(c)
Other current assets..... 124 153 (10)(c) 143 267
------ ------ ------ ------ ------ ----- ------
Total current
assets........... 493 1,375 (306) 1,069 1,562
------ ------ ------ ------ ------ ----- ------
Net property, plant and
equipment................ 1,991 2,972 (39)(c) 2,933 1,720(k) (540)(n) 6,104
Other assets and deferred
charges.................. 290 1,101 (130)(b) 960 (590)(j) 40(n) 700
(11)(c)
------ ------ ------ ------ ------ ----- ------
Total assets....... $2,774 $5,448 $ (486) $4,962 $1,130 $(500) $8,366
====== ====== ====== ====== ====== ===== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......... $ 398 $ 836 $ (784)(f) $ 52 $ $ 330(o) $ 780
Payables................. 386 475 (120)(a) 353 20(h) 759
(2)(b)
Other current
liabilities............ 199 553 (4)(c) 433 120(j) 752
(116)(f)
------ ------ ------ ------ ------ ----- ------
Total current
liabilities...... 983 1,864 (1,026) 838 140 330 2,291
------ ------ ------ ------ ------ ----- ------
Long-term debt............. 665 1,603 1,120(f) 2,428 (500)(n) 2,125
(295)(e) (138)(m)
(330)(o)
Other liabilities and
deferred credits......... 82 585 (15)(c) 568 151(j) 801
(2)(d)
Deferred income taxes...... 296 437 (14)(b) 423 335(l) 1,054
------ ------ ------ ------ ------ ----- ------
2,026 4,489 (232) 4,257 626 (638) 6,271
------ ------ ------ ------ ------ ----- ------
Minority interest.......... 40 295(k) 335
------ ------ ------ ------ ------ ----- ------
Preferred stock with
mandatory redemption
provisions............... 113 113 (113)(i)
------ ------ ------ ------ ------ ----- ------
Stockholders' equity:
Preferred stock.......... 295(e) 295 (295)(k)
Common stock............. 113 56(i) 8(m) 177
Additional paid in
capital................ 484 858(i) 130(m) 1,472
Accumulated earnings..... 111 111
Tenneco Energy combined
equity................. 846 38(a) 297 (297)(k)
(417)(b)
(4)(c)
(220)(f)
54(g)
------ ------ ------ ------ ------ ----- ------
Total stockholders'
equity........... 708 846 (254) 592 322 138 1,760
------ ------ ------ ------ ------ ----- ------
Total liabilities
and stockholders'
equity........... $2,774 $5,448 $ (486) $4,962 $1,130 $(500) $8,366
====== ====== ====== ====== ====== ===== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
S-27
<PAGE> 28
EL PASO NATURAL GAS COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
RESTRUCTURING, REALIGNMENT AND SERIES A PREFERRED STOCK ISSUANCE:
(a) To reflect the settlement of intercompany trade accounts receivable and
intercompany trade accounts payable with Tenneco Energy affiliates.
(b) To reflect the distribution to New Tenneco of receivables previously sold
to Tenneco Credit Corporation, a Tenneco Energy affiliate which has been
renamed "El Paso Energy Credit Corporation".
(c) To reflect the transfer from Tenneco Energy to New Tenneco and affiliates
of certain assets and liabilities held at the corporate level.
(d) To reflect the transfer to New Tenneco of insurance liabilities and the
related portfolio of short-term cash investments and other assets
previously held by Eastern Insurance Company Limited.
(e) To reflect the issuance by Old Tenneco of $300 million of Series A
Preferred Stock, with an 8 1/4% per annum dividend yield, for net proceeds
of $295 million, and the use of the net proceeds for the repayment of
Tenneco Energy Consolidated Debt.
(f) To reflect the restructuring and realignment of the Old Tenneco debt
pursuant to the Debt Realignment, the Distributions and the applicable
provisions of the Merger Agreement, and the assumed payment of accrued
interest on the Tenneco Energy Consolidated Debt defeased, redeemed,
tendered or exchanged as part of the Debt Realignment. The amount of
"Tenneco Energy as Adjusted" debt immediately prior to the Merger consists
primarily of borrowings under the El Paso Tennessee Credit Agreement and is
calculated from the provisions of the Merger Agreement as follows (in
millions):
<TABLE>
<S> <C>
Base Debt Amount per Merger Agreement....................... $2,611
Less: Series A Preferred Stock issuance proceeds............ (300)
------
2,311
Plus: Cash settlement payments.............................. 439
Less: Estimated collections subject to refund............... (270)
------
"Tenneco Energy as Adjusted" debt........................... $2,480
======
</TABLE>
(g) To reflect the contribution to Tenneco Energy of cash pursuant to the Cash
Realignment.
MERGER ADJUSTMENTS:
(h) To reflect the liability for the estimated legal, investment banking and
stock issuance costs of $20 million to be incurred by El Paso in
connection with the Merger.
(i) To reflect the issuance of approximately 18.793 million shares of Common
Stock valued at $914 million based on an assumed price of $48.625 per
share as of December 9, 1996. The equity consideration was issued in
exchange for the $113 million of $7.40 Preferred Stock and $4.50
Preferred Stock at an assumed redemption amount equal to $138 million
with the remainder exchanged for Old Tenneco common stock.
S-28
<PAGE> 29
(j) To reflect the preliminary estimated acquisition adjustments under the
purchase method of accounting to record assets acquired and liabilities
assumed at estimated fair value for (i) reduction of certain other assets,
deferred charges and regulatory assets, (ii) revision of benefit plan
assumptions relating to the retiree medical plan obligation, other
employee benefit costs and environmental costs, and (iii) the accrual of
an obligation to New Tenneco which is expected to be paid after completion
of the transaction as a result of the utilization of certain tax benefits
generated by the Debt Realignment. The following adjustments reflect El
Paso management's intended business strategies which may differ from the
business strategies employed by Tenneco Energy management prior to the
Merger (in millions):
<TABLE>
<S> <C>
Other assets and deferred charges........................... $590
Other liabilities and deferred credits...................... 151
Other current liabilities................................... 120
----
$861
====
</TABLE>
(k) The following adjustments are made to adjust the historical values of
certain assets and liabilities to their estimated fair values as follows
(in millions):
<TABLE>
<S> <C>
Increase property, plant and equipment...................... $1,720
Reduce other asset and deferred charges..................... (590)
Increase current liabilities................................ (140)
Increase other liabilities and deferred credits............. (151)
Increase deferred income taxes.............................. (335)
Eliminate Tenneco Energy stockholders' equity:
Tenneco Energy preferred stock............................ 113
Tenneco Energy equity..................................... 297
------
Issuance of Common Stock.................................... $ 914
======
</TABLE>
The allocation above reflects El Paso's internal evaluation of the excess
purchase price and is subject to the completion of an independent appraisal
of the fair value of the property. It is not expected that any excess
purchase price allocated to property, plant and equipment will be allowed
for regulatory purposes or recovered through rates. Should the independent
appraisal not support such allocation to property, plant and equipment, the
excess of total purchase price over the fair value of the net assets
acquired will be reflected as goodwill.
(l) To reflect the increase in deferred income taxes of $335 million which
have been provided for temporary differences after the allocation of the
pro forma purchase price and acquisition adjustments. The following pro
forma adjustments were required for estimated book and tax basis
differences resulting from the allocation of the pro forma purchase price,
at an assumed tax rate of 39% (in millions):
<TABLE>
<S> <C>
Property, plant and equipment............................... $ 671
Other assets................................................ (230)
Other liabilities........................................... (106)
-----
$ 335
=====
</TABLE>
S-29
<PAGE> 30
REFINANCING TRANSACTIONS:
(m) To reflect the assumed issuance of $144 million of Common Stock, for net
proceeds of $138 million and the use of such net proceeds to purchase the
Subordinated El Paso Tennessee Preferred Stock from El Paso Tennessee (and
the use of the proceeds from the sale of the El Paso Tennessee Preferred
Stock by El Paso Tennessee to repay long-term debt outstanding under the El
Paso Tennessee Credit Agreement acquired pursuant to the Merger).
(n) To reflect the Monetization Transactions (i.e., the monetization of $500
million of assets through sales and project financings, at book value), and
to reflect El Paso's remaining $40 million investment in certain Australian
projects using the equity method. These proceeds were used to pay down
long-term debt outstanding under the El Paso Tennessee Credit Agreement
acquired pursuant to the Merger.
(o) To reflect the replacement of a portion of the remaining balance under the
El Paso Tennessee Credit Agreement with short-term and long-term financing
at interest rates of 6% and 8% per annum, respectively.
S-30
<PAGE> 31
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA
-----------------------------------------
RESTRUCTURING, PRO FORMA MERGER
REALIGNMENT -------------------------------------
AND SERIES A EL PASO/
TENNECO PREFERRED TENNECO TENNECO
EL PASO ENERGY STOCK ENERGY MERGER REFINANCING ENERGY
HISTORICAL HISTORICAL ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- -------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $1,938 $1,997 $ $1,997 $ $ (36)(j) $3,899
Operating costs and expenses..... 1,744 1,865 (51)(a) 1,814 32(e) (31)(j) 3,565
6(f)
Employee separation and asset
impairment charge.............. 99 99
------ ------ ---- ------ ------ ----- ------
Operating income................. 95 132 51 183 (38) (5) 235
Other (income) expense, net...... (1) (132) 8(a) (124) (125)
Interest expense................. 73 101 55(c) 156 (38)(i) 183
(5)(k)
(3)(j)
------ ------ ---- ------ ------ ----- ------
Income before income taxes and
minority interest.............. 23 163 (12) 151 (38) 41 177
Provision for income taxes
(benefit)(1)................... 9 36 (2)(d) 34 (15)(g) (1)(j) 45
18(l)
------ ------ ---- ------ ------ ----- ------
Income before minority
interest....................... 14 127 (10) 117 (23) 24 132
Minority interest................ 19(h) 19
------ ------ ---- ------ ------ ----- ------
Income before extraordinary
charges........................ 14 127 (10) 117 (42) 24 113
Preferred stock dividends........ 7 19(b) 26 (19)(h)
(7)(h)
------ ------ ---- ------ ------ ----- ------
Net income available to
Common Stock................... $ 14 $ 120 $(29) $ 91 $ (16) $ 24 $ 113
====== ====== ==== ====== ====== ===== ======
Net income per average share of
Common Stock(2)................ $ .40 $ 2.00
====== ======
Number of shares used in
computation of net income per
share of Common Stock (in
thousands)..................... 34,994 18,793 2,750 56,537
====== ====== ===== ======
</TABLE>
- ---------------
(1) The provision for income taxes for Tenneco Energy reflects the realization
of unrecognized deferred tax assets, reducing the overall effective tax rate
significantly below the assumed statutory rate of 39%. If the statutory rate
has been used, the combined provision for income taxes would have been $69
million and the pro forma combined amounts for net income available to
Common Stock and net income per average share of Common Stock would have
been $89 million and $1.57, respectively.
(2) Per share data is calculated using the net income available to Common Stock
divided by the pro forma weighted average shares of Common Stock
outstanding. The pro forma weighted average shares of Common Stock
outstanding includes the following assumptions: (i) the issuance of 18.793
million shares of Common Stock to holders of Old Tenneco Stock under the
terms of the Merger; and (ii) the assumed issuance of 2.750 million shares
of Common Stock at $52.25 per share in the Offering as part of the
Refinancing Transactions, the proceeds of which will be used to purchase the
Subordinated El Paso Tennessee Preferred Stock from El Paso Tennessee (and
the use of the proceeds from the sale of the El Paso Tennessee Preferred
Stock by El Paso Tennessee to repay long-term debt outstanding under the El
Paso Tennessee Credit Agreement acquired pursuant to the Merger). Net income
per average share of Common Stock excluding the employee separation and
asset impairment special charge ($60 million after tax) would be $2.11 and
$3.06 per share of Common Stock for the El Paso Historical and El
Paso/Tenneco Energy Combined presentations, respectively.
See accompanying Notes to Unaudited Pro Forma Combined Income Statements.
S-31
<PAGE> 32
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA
-----------------------------------------
RESTRUCTURING, PRO FORMA MERGER
REALIGNMENT -------------------------------------
AND SERIES A EL PASO/
TENNECO PREFERRED TENNECO TENNECO
EL PASO ENERGY STOCK ENERGY MERGER REFINANCING ENERGY
HISTORICAL HISTORICAL ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- -------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $1,038 $1,921 $ $1,921 $ $ (47)(j) $2,912
Operating costs and expenses..... 826 1,843 (93)(a) 1,750 43(e) (41)(j) 2,586
8(f)
------ ------ ---- ------ ------ ----- ------
Operating income............... 212 78 93 171 (51) (6) 326
Other (income) expense, net...... (7) (190) 84(a) (106) (113)
Interest expense................. 86 122 92(c) 214 (51)(i) 240
(6)(k)
(3)(j)
------ ------ ---- ------ ------ ----- ------
Income before income taxes and
minority interest.............. 133 146 (83) 63 (51) 54 199
Provision for income taxes
(benefit)(1)................... 48 (11) (33)(d) (44) (20)(g) 24(l) 7
(1)(j)
------ ------ ---- ------ ------ ----- ------
Income before minority
interest....................... 85 157 (50) 107 (31) 31 192
Minority interest................ 25(h) 25
------ ------ ---- ------ ------ ----- ------
Income before extraordinary
charges........................ 85 157 (50) 107 (56) 31 167
Preferred stock dividends........ 12 25(b) 37 (25)(h)
(12)(h)
------ ------ ---- ------ ------ ----- ------
Net income available to
Common Stock................... $ 85 $ 145 $(75) $ 70 $ (19) $ 31 $ 167
====== ====== ==== ====== ====== ===== ======
Net income per average share of
Common Stock(2)................ $ 2.47 $ 2.98
====== ======
Number of shares used in
computation of net income per
share of Common Stock (in
thousands)..................... 34,495 18,793 2,750 56,038
====== ====== ===== ======
</TABLE>
- ---------------
(1) The provision for income taxes for Tenneco Energy reflects the realization
of unrecognized deferred tax assets, reducing the overall effective tax rate
significantly below the assumed statutory rate of 39%. If the statutory rate
had been used, the combined provision for income taxes would have been $78
million and the pro forma combined amounts for net income available to
Common Stock and net income per average share of Common Stock would have
been $96 million and $1.71, respectively.
(2) Per share data is calculated using the net income available to Common Stock
divided by the pro forma weighted average shares of Common Stock
outstanding. The pro forma weighted average shares of Common Stock
outstanding includes the following assumptions: (i) the issuance of 18.793
million shares of Common Stock to holders of Old Tenneco Stock under the
terms of the Merger; and (ii) the assumed issuance of 2.750 million shares
of Common Stock at $52.25 per share in the Offering as part of the
Refinancing Transactions, the proceeds of which will be used to purchase the
Subordinated El Paso Tennessee Preferred Stock from El Paso Tennessee (and
the use of the proceeds from the sale of the El Paso Tennessee Preferred
Stock by El Paso Tennessee to repay long-term debt outstanding under the El
Paso Tennessee Credit Agreement acquired pursuant to the Merger).
See accompanying Notes to Unaudited Pro Forma Combined Income Statements.
S-32
<PAGE> 33
EL PASO NATURAL GAS COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
RESTRUCTURING, REALIGNMENT AND SERIES A PREFERRED STOCK ISSUANCE:
(a) To reflect the earnings impact of the distribution to New Tenneco of
receivables previously sold to Tenneco Credit Corporation, a Tenneco
Energy affiliate which has been renamed "El Paso Energy Credit
Corporation".
(b) To reflect preferred stock dividends on the Series A Preferred Stock
issued at a dividend yield of 8 1/4% per annum.
(c) To reflect interest expense on additional debt issued under the El
Paso Tennessee Credit Agreement. For purposes of the pro forma
calculations, an assumed interest rate of 8% per annum has been used.
(d) To reflect the income tax expense effects of pro forma adjustments.
MERGER ADJUSTMENTS:
(e) To reflect depreciation expense related to the increase in fair value
of property, plant and equipment, depreciated over a 40-year period
which approximates the FERC approved depreciation rate for the
regulated property, plant and equipment of Tenneco Energy
prospectively.
(f) To reflect the assumed pro forma postretirement cost for Tenneco
Energy employees.
(g) To reflect the income tax expense effects of pro forma adjustments at
an estimated rate of 39%.
(h) To reflect the Series A Preferred Stock dividends as minority interest
and the elimination of dividends on the $7.40 Preferred Stock and $4.50
Preferred Stock.
REFINANCING TRANSACTIONS:
(i) To reflect an interest expense reduction relating to debt repaid from
the net proceeds from the Offering and proceeds from the Monetization
Transactions (i.e., the monetization of $500 million of asset sales and
project financings at book value).
(j) To remove the historical operating results of Tenneco Energy's
exploration and production business which is assumed to be disposed at
book value.
(k) To reflect the interest expense reduction relating to the replacement
of the remaining balance under the El Paso Tennessee Credit Agreement
with short-term and long-term financing at interest rates of 6% and 8%
per annum, respectively. A 1/8% per annum change in interest rates
would have the impact of increasing total pro forma interest expense by
approximately $1.7 million and $2.2 million for the nine months ended
September 30, 1996 and the year ended December 31, 1995, respectively.
(l) To reflect the income tax expense effects of pro forma adjustments at
an estimated rate of 39%.
S-33
<PAGE> 34
PROSPECTUS
EL PASO NATURAL GAS COMPANY
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
---------------------
El Paso Natural Gas Company ("EPG" or the "Company") may offer and sell
from time to time in one or more series its (i) unsecured debt securities
consisting of notes, debentures or other evidences of indebtedness (the "Debt
Securities"), (ii) shares of preferred stock, $.01 par value (the "Preferred
Stock"), and (iii) shares of common stock, $3.00 par value (the "Common Stock").
The Debt Securities, the Preferred Stock and the Common Stock offered hereby are
collectively hereinafter referred to as the "Securities". The Securities will be
limited to an aggregate initial public offering price not to exceed
$800,000,000, or, in the case of Debt Securities, the equivalent thereof in one
or more foreign currencies, including composite currencies. The Securities may
be offered, separately or together, in separate series, in amounts, at prices
and on terms to be determined at the time of sale and set forth in a supplement
to this Prospectus (a "Prospectus Supplement").
Certain specific terms of the particular Securities in respect of which
this Prospectus is being delivered will be set forth in a related Prospectus
Supplement, including, where applicable, (i) in the case of Debt Securities, the
specific designation, aggregate principal amount, authorized denominations,
maturities, interest rate or rates (which may be fixed or variable), the date or
dates on which interest, if any, shall be payable, the place or places where
principal of and premium, if any, and interest, if any, on such Debt Securities
of the series will be payable, terms of optional or mandatory redemption or any
sinking fund or analogous provisions, currency or currencies, or currency unit
or currency units of denomination and payment if other than U.S. dollars, the
initial public offering price, terms relating to temporary or permanent global
securities, provisions regarding convertibility, if any, provisions regarding
registration of transfer or exchange, the proceeds to EPG and other special
terms; (ii) in the case of Preferred Stock, the specific designations, the
number of shares, dividend rights (including, if applicable, the manner of
calculation thereof), and any liquidation, redemption, conversion, voting and
other rights, the initial public offering price and other special terms; and
(iii) in the case of Common Stock, the terms of the offering and sales thereof.
The Securities may be offered and sold to or through underwriters, dealers,
or agents as designated from time to time, or through a combination of such
methods, and also may be offered and sold directly to one or more other
purchasers. See "Plan of Distribution". The names of, and the principal amounts
or number of shares to be purchased by, underwriters, dealers or agents, and the
compensation of such underwriters, dealers or agents, including any applicable
fees, commissions, and discounts, will be set forth in the related Prospectus
Supplement. No Securities may be sold without delivery of a Prospectus
Supplement describing such series or issue of Securities and the method and
terms of offering thereof.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 5, 1996
<PAGE> 35
AVAILABLE INFORMATION
EPG is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: 7 World Trade Center,
Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material also
may be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Such material also
may be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. EPG's Common Stock is listed on the New York
Stock Exchange (the "NYSE"), and reports, proxy statements and other information
concerning EPG may be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
This Prospectus does not contain all of the information set forth in the
Registration Statement, of which this Prospectus is a part, filed with the
Commission under the Securities Act of 1933, as amended (the "Securities Act").
Reference is made to such Registration Statement for further information with
respect to EPG and the Securities offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the Commission by EPG
pursuant to the Exchange Act are incorporated herein by reference:
1. EPG's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 (the "Form 10-K");
2. EPG's Quarterly Report on Form 10-Q for the quarterly periods ended
March 31, 1996, as amended pursuant to a Form 10-Q/A filed May 15, 1996,
and June 30, 1996;
3. The portions of EPG's definitive Proxy Statement for the Annual
Meeting of Stockholders held on April 30, 1996 that have been incorporated
by reference into the Form 10-K;
4. EPG's Current Reports on Form 8-K dated May 2, 1996, and June 28,
1996;
5. EPG's Current Report on Form 8-K dated October 22, 1996, as amended
pursuant to a Form 8-K/A filed November 5, 1996 (the "November Current
Report"); and
6. EPG's Registration Statement on Form 8-A filed with respect to the
Common Stock, as amended to date.
All documents filed by EPG pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the Securities offered hereby shall be deemed to
be incorporated by reference in this Prospectus and to be part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained therein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
EPG will provide without charge to each person, including any beneficial
owner of a Security, to whom a copy of this Prospectus is delivered, upon
written or oral request of such person, a copy of any or all documents
incorporated by reference in this Prospectus (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
such documents). Written requests for such copies should be directed to the Vice
President, Investor and Public Relations, El Paso Natural Gas Company, One Paul
Kayser Center, 100 North Stanton Street, El Paso, Texas 79901 (telephone (915)
541-2600).
2
<PAGE> 36
THE COMPANY
GENERAL
EPG is a Delaware corporation which was incorporated in 1928. In
recognition of changes in the natural gas industry and the manner in which EPG
manages its businesses, and in order to facilitate a more detailed understanding
of the various activities in which it engages, EPG 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 includes 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. The 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.
The field and merchant services segment provides field services, including
gathering, products extraction, dehydration, purification and compression. In
addition, the field and merchant services segment purchases, markets and trades
natural gas, natural gas liquids, power and other energy commodities, and
provides risk management activities associated with these commodities. This
segment has approximately 7,900 miles of gathering lines and 64,000 horsepower
of compression located in the San Juan, Anadarko and Permian Basins, and in East
Texas and Louisiana.
The corporate and other segment includes El Paso Energy International,
through which EPG conducts its international activities, and other corporate
activities.
EPG's principal executive offices are located at One Paul Kayser Center,
100 North Stanton Street, El Paso, Texas 79901, and its telephone number at that
address is (915) 541-2600. Upon consummation of the Merger (as defined below),
if it occurs, EPG's principal executive offices will be located at 1010 Milam
Street, Houston, Texas, and its telephone number at that address will be (713)
757-2131.
THE TENNECO MERGER
On June 19, 1996, EPG, El Paso Merger Company, an indirect wholly owned
subsidiary of EPG ("El Paso Subsidiary"), and Tenneco Inc. ("Tenneco") entered
into a definitive merger agreement (as amended and supplemented from time to
time, the "Merger Agreement"), pursuant to which El Paso Subsidiary will be
merged with and into Tenneco (the "Merger"). 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 "Distributions"). The remaining existing and discontinued operations of
Tenneco, consisting primarily of those operations related to the transmission
and marketing of natural gas (the "Energy Business"), will continue to be owned
by Tenneco.
The Merger is conditioned upon, among other things, the receipt of tax
rulings stating that the Distributions and the Merger are tax-free (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 El Paso in the Merger will consist of:
- the retention after the Merger of approximately $2.65 billion of debt and
preferred stock obligations of Tenneco, subject to certain adjustments;
- the issuance of EPG equity securities valued at approximately $895.9
million, based on a closing price per share on the NYSE of $47.50 for
Common Stock on November 4, 1996, to Tenneco's existing common and
preferred stockholders, subject to the formulas set forth in the Merger
Agreement; and
3
<PAGE> 37
- the retention of approximately $600 million of estimated assumed
liabilities related to certain discontinued businesses of Tenneco.
The proposed issuance by EPG (the "Stock Issuance") of up to 23,894,862
shares of Common Stock (or such greater number of shares of Common Stock as may
be required under the Merger Agreement under certain circumstances if the
closing price per share of Common Stock on the NYSE on the day prior to the vote
at the Tenneco Special Meeting (as defined below) is less than $31.3875) 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 (the "El Paso
Special Meeting"). If the Stock Issuance is not approved, the Merger is still
expected to be consummated but EPG will issue to Tenneco stockholders 7,000,000
shares of Common Stock, with the balance of the equity consideration to consist
of depositary shares, each representing a 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, of which the Merger
and the Distributions are parts, at a special meeting (the "Tenneco Special
Meeting") to be held on December 10, 1996.
There can be no assurance that the Stock Issuance will be approved.
Furthermore, although EPG believes that all the conditions to the Merger will be
satisfied, there can be no assurance that such conditions will be satisfied and
that the Merger will be consummated.
For further information regarding the Merger and the various transactions
to be undertaken in connection therewith, see EPG's definitive Joint Proxy
Statement-Prospectus relating to the El Paso Special Meeting (the "Joint Proxy
Statement-Prospectus"), which has been filed as an exhibit to the November
Current Report, which November Current Report is incorporated herein by
reference.
USE OF PROCEEDS
Unless otherwise specified in a Prospectus Supplement, the net proceeds
from the sale of the Securities will be used for general corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF
EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------------
JUNE 30, 1996 1995 1994 1993 1992 1991
------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and
Preferred and Preference Stock Dividend
Requirements................................. --(a) 2.51x 2.87x 3.04x 2.73x 2.86x
</TABLE>
- ---------------
(a) Earnings for the six months ended June 30, 1996 were inadequate to cover
fixed charges by $18 million due to a special charge for employee separation
and asset impairments of $99 million pre-tax.
The ratio of earnings to combined fixed charges and preferred and
preference stock dividend requirements for the periods presented is the same as
the ratio of earnings to fixed charges since EPG has no outstanding preferred
stock or preference stock and, therefore, no dividend requirements.
For purposes of calculating these ratios: (i) "fixed charges" represent
interest expense (exclusive of interest on rate refunds), amortization of debt
costs and the portion of rental expense representing the interest factor; and
(ii) "earnings" represent the aggregate of income from continuing operations
before income taxes, interest expense (exclusive of interest on rate refunds),
amortization of debt costs and the portion of rental expense representing the
interest factor.
4
<PAGE> 38
DESCRIPTION OF DEBT SECURITIES
The Debt Securities offered hereby will represent unsecured obligations of
EPG. The Debt Securities offered hereby will be issued under an Indenture (the
"Indenture"), between EPG and The Chase Manhattan Bank, as trustee (the
"Trustee"). The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder from time to time in one or more
series.
The terms of the Debt Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Debt Securities are subject to
all such terms, and holders of Debt Securities are referred to the Indenture and
the Trust Indenture Act for a statement of those terms.
The statements set forth below in this section are brief summaries of
certain provisions contained in the Indenture, do not purport to be complete,
and are subject to, and are qualified in their entirety by reference to, all the
provisions of the Indenture, including the definitions therein of certain terms,
a copy of which Indenture is included as an exhibit to the Registration
Statement of which this Prospectus is a part. Capitalized terms used in this
section and not otherwise defined in this section have the respective meanings
assigned to them in the Indenture.
GENERAL
Reference is made to the Prospectus Supplement relating to the particular
series offered thereby for the terms of such Debt Securities, including where
applicable: (a) the form and title of the Debt Securities; (b) the aggregate
principal amount of the Debt Securities; (c) the date or dates on which the Debt
Securities may be issued; (d) the date or dates on which the principal of and
premium, if any, on the Debt Securities shall be payable; (e) the rate or rates
(which may be fixed or variable) at which the Debt Securities shall bear
interest, if any, and the date or dates from which such interest shall accrue;
(f) the dates on which interest, if any, shall be payable and the record dates
for the interest payment dates; (g) the place or places where the principal of
and premium, if any, and interest, if any, on the Debt Securities of the series
will be payable; (h) the period or periods, if any, within which, the price or
prices at which, and the terms and conditions upon which, the Debt Securities
may be redeemed at the option of EPG or otherwise; (i) any optional or mandatory
redemption or any sinking fund or analogous provisions; (j) if other than
denominations of $1,000 and integral multiples thereof, the denominations in
which the Debt Securities of the series shall be issuable; (k) if other than the
principal amount thereof, the portion of the principal amount of the Debt
Securities which shall be payable upon declaration of the acceleration of the
maturity thereof in accordance with the provisions of the Indenture; (l) whether
payment of the principal of and premium, if any, and interest, if any, on the
Debt Securities shall be without deduction for taxes, assessments, or
governmental charges paid by the holders; (m) the currency or currencies, or
currency unit or currency units, in which the principal of and premium, if any,
and interest, if any, on the Debt Securities shall be denominated, payable,
redeemable or purchasable, as the case may be; (n) any Events of Default (as
defined below) with respect to the Debt Securities that differ from those set
forth in the Indenture; (o) whether the Debt Securities will be convertible; (p)
whether the Debt Securities of such series shall be issued as a global
certificate or certificates and, in such case, the identity of the depositary
for such series; and (q) any other terms not inconsistent with the Indenture.
If any Debt Securities offered hereby are sold for foreign currencies or
foreign currency units or if the principal of and premium, if any, or interest,
if any, on any series of Debt Securities is payable in foreign currencies or
foreign currency units, the restrictions, elections, tax consequences, specific
terms and other information with respect to such issue of Debt Securities and
such currencies and currency units will be set forth in the Prospectus
Supplement relating thereto.
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the Debt Securities offered hereby will be issued only in fully registered form
in denominations of $1,000 or any integral multiple thereof. The Debt Securities
of a series may be issuable in the form of one or more global certificates,
which will be denominated in an amount equal to all or a portion of the
aggregate principal amount of such Debt Securities. See "-- Global Debt
Securities".
5
<PAGE> 39
One or more series of Debt Securities offered hereby may be sold at a
substantial discount below their stated principal amount, bearing no interest or
interest at a rate that at the time of issuance is below market rates. The
Federal income tax consequences and special considerations applicable to any
such series of Debt Securities will be described generally in the Prospectus
Supplement relating thereto.
GLOBAL DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with, or on
behalf of, a depositary (the "Depositary") identified in the Prospectus
Supplement relating to such series. Unless and until such global certificate or
certificates are exchanged in whole or in part for Debt Securities in
individually certificated form, a global Debt Security may not be transferred
except as a whole to a nominee of the Depositary for such global Debt Security,
or by a nominee for the Depositary to the Depositary, or to a successor of the
Depositary or a nominee of such successor.
The specific terms of the depositary arrangement with respect to a series
of Debt Securities and the rights of, and limitations on, owners of beneficial
interests in a global Debt Security representing all or a portion of a series of
Debt Securities will be described in the Prospectus Supplement relating to such
series.
CERTAIN COVENANTS
Limitations on Liens. The Indenture provides that EPG will not, nor will it
permit any Restricted Subsidiary (as defined below) to, create, assume, incur or
suffer to exist any Lien (as defined below) upon any Principal Property (as
defined below), whether owned or leased on the date of the Indenture or
thereafter acquired, to secure any Debt (as defined below) of EPG or any other
Person (as defined below) (other than the Debt Securities issued thereunder),
without in any such case making effective provision whereby all of the Debt
Securities Outstanding thereunder shall be secured equally and ratably with, or
prior to, such Debt so long as such Debt shall be so secured. There is excluded
from this restriction:
(i) any Lien upon any property or assets of EPG or any Restricted
Subsidiary in existence on the date of the Indenture or created pursuant to
an "after-acquired property" clause or similar term in existence on the
date of the Indenture or any mortgage, pledge agreement, security agreement
or other similar instrument in existence on the date of the Indenture;
(ii) any Lien upon any property or assets created at the time of
acquisition of such property or assets by EPG or any Restricted Subsidiary
or within one year after such time to secure all or a portion of the
purchase price for such property or assets or Debt incurred to finance such
purchase price, whether such Debt was incurred prior to, at the time of or
within one year of such acquisition;
(iii) any Lien upon any property or assets existing thereon at the
time of the acquisition thereof by EPG or any Restricted Subsidiary
(whether or not the obligations secured thereby are assumed by EPG or any
Restricted Subsidiary);
(iv) any Lien upon any property or assets of a Person existing thereon
at the time such Person becomes a Restricted Subsidiary by acquisition,
merger or otherwise;
(v) the assumption by EPG or any Restricted Subsidiary of obligations
secured by any Lien existing at the time of the acquisition by EPG or any
Restricted Subsidiary of the property or assets subject to such Lien or at
the time of the acquisition of the Person which owns such property or
assets;
(vi) any Lien on property to secure all or part of the cost of
construction or improvements thereon or to secure Debt incurred prior to,
at the time of, or within one year after completion of such construction or
making of such improvements, to provide funds for any such purpose;
(vii) any Lien on any oil, gas, mineral and processing and other plant
properties to secure the payment of costs, expenses or liabilities incurred
under any lease or grant or operating or other similar agreement in
connection with or incident to the exploration, development, maintenance or
operation of such properties;
6
<PAGE> 40
(viii) any Lien arising from or in connection with a conveyance by EPG
or any Restricted Subsidiary of any production payment with respect to oil,
gas, natural gas, carbon dioxide, sulphur, helium, coal, metals, minerals,
steam, timber or other natural resources;
(ix) any Lien in favor of EPG or any Restricted Subsidiary;
(x) any Lien created or assumed by EPG or any Restricted Subsidiary in
connection with the issuance of Debt the interest on which is excludable
from gross income of the holder of such Debt pursuant to the Internal
Revenue Code of 1986, as amended, or any successor statute, for the purpose
of financing, in whole or in part, the acquisition or construction of
property or assets to be used by EPG or any Subsidiary;
(xi) any Lien upon property or assets of any foreign Restricted
Subsidiary to secure Debt of that foreign Restricted Subsidiary;
(xii) Permitted Liens (as defined below);
(xiii) any Lien upon any additions, improvements, replacements,
repairs, fixtures, appurtenances or component parts thereof attaching to or
required to be attached to property or assets pursuant to the terms of any
mortgage, pledge agreement, security agreement or other similar instrument,
creating a Lien upon such property or assets permitted by clauses (i)
through (xii), inclusive, above; or
(xiv) any extension, renewal, refinancing, refunding or replacement
(or successive extensions, renewals, refinancing, refundings or
replacements) of any Lien, in whole or in part, that is referred to in
clauses (i) through (xiii), inclusive, above, or of any Debt secured
thereby; provided, however, that the principal amount of Debt secured
thereby shall not exceed the greater of the principal amount of Debt so
secured at the time of such extension, renewal, refinancing, refunding or
replacement and the original principal amount of Debt so secured (plus in
each case the aggregate amount of premiums, other payments, costs and
expenses required to be paid or incurred in connection with such extension,
renewal, refinancing, refunding or replacement); provided further, however,
that such extension, renewal, refinancing, refunding or replacement shall
be limited to all or a part of the property (including improvements,
alterations and repairs on such property) subject to the encumbrance so
extended, renewed, refinanced, refunded or replaced (plus improvements,
alterations and repairs on such property).
Notwithstanding the foregoing, under the Indenture, EPG may, and may permit
any Restricted Subsidiary to, create, assume, incur, or suffer to exist any Lien
upon any Principal Property to secure Debt of EPG or any Person (other than the
Debt Securities) that is not excepted by clauses (i) through (xiv), inclusive,
above without securing the Debt Securities issued under the Indenture, provided
that the aggregate principal amount of all Debt then outstanding secured by such
Lien and all similar Liens, together with all net sale proceeds from
Sale-Leaseback Transactions (as defined below) (excluding Sale-Leaseback
Transactions permitted by clauses (i) through (iv), inclusive, of the first
paragraph of the restriction on sale-leasebacks covenant described below) does
not exceed 15% of Consolidated Net Tangible Assets (as defined below).
Restriction on Sale-Leasebacks. The Indenture provides that EPG will not,
nor will it permit any Restricted Subsidiary to, engage in a Sale-Leaseback
Transaction, unless: (i) such Sale-Leaseback Transaction occurs within one year
from the date of acquisition of the Principal Property subject thereto or the
date of the completion of construction or commencement of full operations on
such Principal Property, whichever is later; (ii) the Sale-Leaseback Transaction
involves a lease for a period, including renewals, of not more than three years;
(iii) EPG or such Restricted Subsidiary would be entitled to incur Debt secured
by a Lien on the Principal Property subject thereto in a principal amount equal
to or exceeding the net sale proceeds from such Sale-Leaseback Transaction
without securing the Debt Securities; or (iv) EPG or such Restricted Subsidiary,
within a one-year period after such Sale-Leaseback Transaction, applies or
causes to be applied an amount not less than the net sale proceeds from such
Sale-Leaseback Transaction to (A) the repayment, redemption or retirement of
Funded Debt (as defined below) of EPG or any Subsidiary, or (B) investment in
another Principal Property.
7
<PAGE> 41
Notwithstanding the foregoing, under the Indenture, EPG may, and may permit
any Restricted Subsidiary to, effect any Sale-Leaseback Transaction that is not
excepted by clauses (i) through (iv), inclusive, of the above paragraph,
provided that the net sale proceeds from such Sale-Leaseback Transaction,
together with the aggregate principal amount of outstanding Debt (other than the
Debt Securities) secured by Liens upon Principal Properties not excepted by
clauses (i) through (xiv), inclusive, of the first paragraph of the limitation
on liens covenant described above, do not exceed 15% of the Consolidated Net
Tangible Assets.
Certain Defined Terms. As used herein:
"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets after deducting therefrom (i) all current liabilities
(excluding (A) any current liabilities that by their terms are extendable or
renewable at the option of the obligor thereon to a time more than 12 months
after the time as of which the amount thereof is being computed, and (B) current
maturities of long-term debt), and (ii) the value (net of any applicable
reserves) of all goodwill, trade names, trademarks, patents and other like
intangible assets, all as set forth on the consolidated balance sheet of EPG and
its consolidated subsidiaries for EPG's most recently completed fiscal quarter,
prepared in accordance with generally accepted accounting principles.
"Debt" means any obligation created or assumed by any Person for the
repayment of money borrowed and any purchase money obligation created or assumed
by such Person.
"Funded Debt" means all Debt maturing one year or more from the date of the
creation thereof, all Debt directly or indirectly renewable or extendible, at
the option of the debtor, by its terms or by the terms of any instrument or
agreement relating thereto, to a date one year or more from the date of the
creation thereof, and all Debt under a revolving credit or similar agreement
obligating the lender or lenders to extend credit over a period of one year or
more.
"Lien" means any mortgage, pledge, security interest, charge, lien or other
encumbrance of any kind, whether or not filed, recorded or perfected under
applicable law.
"Permitted Liens" means (i) Liens upon rights-of-way for pipeline purposes;
(ii) any governmental Lien, mechanics', materialmen's, carriers' or similar Lien
incurred in the ordinary course of business which is not yet due or which is
being contested in good faith by appropriate proceedings and any undetermined
Lien which is incidental to construction; (iii) the right reserved to, or vested
in, any municipality or public authority by the terms of any right, power,
franchise, grant, license, permit or by any provision of law, to purchase or
recapture or to designate a purchaser of, any property; (iv) Liens of taxes and
assessments which are (A) for the then current year, (B) not at the time
delinquent, or (C) delinquent but the validity of which is being contested at
the time by EPG or any Subsidiary in good faith; (v) Liens of, or to secure
performance of, leases; (vi) any Lien upon, or deposits of, any assets in favor
of any surety company or clerk of court for the purpose of obtaining indemnity
or stay of judicial proceedings; (vii) any Lien upon property or assets acquired
or sold by EPG or any Restricted Subsidiary resulting from the exercise of any
rights arising out of defaults on receivables; (viii) any Lien incurred in the
ordinary course of business in connection with workmen's compensation,
unemployment insurance, temporary disability, social security, retiree health or
similar laws or regulations or to secure obligations imposed by statute or
governmental regulations; (ix) any Lien upon any property or assets in
accordance with customary banking practice to secure any Debt incurred by EPG or
any Restricted Subsidiary in connection with the exporting of goods to, or
between, or the marketing of goods in, or the importing of goods from, foreign
countries; or (x) any Lien in favor of the United States of America or any state
thereof, or any other country, or any political subdivision of any of the
foregoing, to secure partial, progress, advance, or other payments pursuant to
any contract or statute, or any Lien securing industrial development, pollution
control, or similar revenue bonds.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust, other
entity, unincorporated organization, or government or any agency or political
subdivision thereof.
8
<PAGE> 42
"Principal Property" means (a) any pipeline assets of EPG or any
Subsidiary, including any related facilities employed in the transportation,
distribution or marketing of natural gas, that are located in the United States
or Canada, and (b) any processing or manufacturing plant owned or leased by EPG
or any Subsidiary that is located within the United States or Canada, except, in
the case of either clause (a) or (b), any such assets or plant which, in the
opinion of EPG's Board of Directors, is not material in relation to the
activities of EPG and its Subsidiaries as a whole.
"Restricted Subsidiary" means any Subsidiary of EPG owning or leasing any
Principal Property.
"Sale-Leaseback Transaction" means the sale or transfer by EPG or any
Restricted Subsidiary of any Principal Property to a Person (other than EPG or a
Subsidiary) and the taking back by EPG or any Restricted Subsidiary, as the case
may be, of a lease of such Principal Property.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that EPG may, without the consent of the Trustee or
the holders of any Debt Securities issued thereunder, consolidate or merge with,
or sell, lease or transfer its properties and assets as, or substantially as, an
entirety to, any Person, provided that (i) either EPG is the surviving entity or
such successor Person shall expressly assume the due and punctual payment of the
principal of, and any premium and interest on, all the Debt Securities and the
performance or observance of every covenant and condition of the Indenture on
the part of EPG to be performed or observed, (ii) immediately after giving
effect to the transaction, no Default or Event of Default exists, and (iii) EPG
has delivered the Officer's Certificate and Opinion of Counsel required by the
Indenture. Any such successor Person shall succeed to and be substituted for,
and may exercise every right and power of, EPG under the Indenture with the same
effect as if it had been named a party in the Indenture and EPG shall, except in
the case of a lease, be released and discharged from all its obligations under
the Debt Securities and the Indenture.
EVENTS OF DEFAULT
An "Event of Default" will occur under the Indenture with respect to Debt
Securities of a particular series issued thereunder upon: (a) default in the
payment of the principal of, or premium, if any, on, any Debt Security of such
series at its maturity; (b) default in the payment of any interest on any Debt
Security of such series when it becomes due and payable and continuance of such
default for a period of 30 days; (c) default in the performance, or breach, of
any term, covenant or warranty contained in the Indenture with respect to such
series for a period of 60 days upon giving written notice as provided in the
Indenture; (d) the occurrence of certain events of bankruptcy; or (e) any other
Event of Default applicable to such series.
The Indenture provides that if an Event of Default with respect to a series
of Debt Securities issued thereunder shall have occurred and be continuing,
either the Trustee or the holders of not less than 25% in principal amount of
Debt Securities of such series then outstanding may declare the principal amount
of all Debt Securities of such series to be due and payable immediately upon
giving written notice as provided in the Indenture. The Indenture provides that
the holders of a majority in principal amount of Debt Securities then
outstanding of such series may rescind and annul such declaration and its
consequences under certain circumstances.
The holders of a majority in principal amount of Debt Securities of a
series then outstanding may waive past defaults under the Indenture with respect
to such series and its consequences (except a continuing default in the payment
of principal of or premium, if any, or interest on any series of Debt Securities
or a default in respect of any covenant or provision of the Indenture which
cannot be modified or amended by a supplemental indenture without the consent of
the holder of each outstanding Debt Security affected thereby).
Pursuant to the Indenture, the holders of a majority in aggregate principal
amount of all affected series of Debt Securities then outstanding may direct
with respect to such series the time, method, and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that such direction shall not be in
conflict with any rule of law or the Indenture. Before proceeding to exercise
any right or power under the Indenture at the direction of any holders, the
9
<PAGE> 43
Trustee shall be entitled to receive from such holders reasonable security or
indemnity against the costs, expenses, and liabilities which might be incurred
by it in compliance with any such direction.
Under the terms of the Indenture, EPG is required to furnish to the Trustee
annually an Officer's Certificate to the effect that to the best of such
officer's knowledge, EPG is not in default in the performance and observance of
the terms, provisions and conditions of the Indenture or, if such officer has
knowledge that EPG is in default, specifying such default. The Indenture
requires the Trustee to give to all holders of Debt Securities outstanding
thereunder notice of any Default by EPG in the manner provided in the Indenture,
unless such Default shall have been cured or waived; however, except in the case
of a default in the payment of principal of and premium, if any, or interest, if
any, on any Debt Securities outstanding thereunder, the Trustee is entitled to
withhold such notice in the event that the board of directors, the executive
committee, or a trust committee of directors or certain officers of the Trustee
in good faith determine that withholding such notice is in the interest of the
holders of such outstanding Debt Securities.
SATISFACTION AND DISCHARGE; LEGAL AND COVENANT DEFEASANCE
Under the terms of the Indenture, EPG may satisfy and discharge certain
obligations to holders of Debt Securities of any series which have not already
been delivered to the Trustee for cancellation and which have either become due
and payable or are by their terms due and payable within one year or are to be
called for redemption within one year by (i) depositing or causing to be
deposited with the Trustee funds in an amount sufficient to pay the principal
and any premium and interest to the date of such deposit (in case of Debt
Securities of such series which have become due and payable) or to the Stated
Maturity or Redemption Date, as the case may be, (ii) paying or causing to be
paid all other sums payable under the Indenture with respect to such Debt
Securities, and (iii) delivering to the Trustee an Officer's Certificate and
Opinion of Counsel relating to such satisfaction and discharge.
The Indenture also provides that EPG and any other obligor, if any, will be
discharged from any and all obligations in respect of any series of Debt
Securities issued thereunder (excluding, however, certain obligations, such as
the obligation to register the transfer or exchange of such outstanding Debt
Securities of such series, to replace stolen, lost, mutilated or destroyed
certificates, to pay principal and interest on the original stated due dates or
specified redemption date, to make any sinking fund payments, and to maintain
paying agencies) on the 91st day following the deposit referred to in the
following clause (i), subject to the following conditions: (i) the irrevocable
deposit, in trust, of cash or U.S. Government Obligations (or a combination
thereof) which through the payment of interest and principal thereof in
accordance with their terms will provide cash in an amount sufficient to pay the
principal and interest and premium, if any, on the outstanding Debt Securities
of such series and any mandatory sinking fund payments, in each case, on the
stated maturity of such payments in accordance with the terms of the Indenture
and the outstanding Debt Securities of such series or on any Redemption Date
established pursuant to clause (iii) below, (ii) EPG's receipt of an Opinion of
Counsel based on the fact that (A) EPG has received from, or there has been
published by, the Internal Revenue Service a ruling, or (B) since the date of
the Indenture, there has been a change in the applicable federal income tax law,
in either case, to the effect that, and confirming that, the holders of the Debt
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance and will be subject to
federal income tax on the same amount and in the same manner and at the same
times, as would have been the case if such deposit and defeasance had not
occurred, (iii) if the Debt Securities are to be redeemed prior to Stated
Maturity (other than from mandatory sinking fund payments or analogous
payments), notice of such redemption shall have been duly given pursuant to the
Indenture or provision therefor satisfactory to the Trustee shall have been
made, (iv) no Event of Default or event which with notice or lapse of time or
both would become an Event of Default will have occurred and be continuing on
the date of such deposit, and (v) EPG's delivery to the Trustee of an Officer's
Certificate and an Opinion of Counsel, each stating that the conditions
precedent under the Indenture have been complied with.
Under the Indenture, EPG also may discharge its obligations referred to
above under "-- Certain Covenants" and "-- Consolidation, Merger and Sale of
Assets", as well as certain of its obligations relating to reporting obligations
under the Indenture, in respect of any series of Debt Securities on the 91st day
following
10
<PAGE> 44
the deposit referred to in clause (i) in the immediately preceding paragraph,
subject to satisfaction of the conditions described in clauses (i), (iii), (iv)
and (v) in the immediately preceding paragraph with respect to such series of
Debt Securities and the delivery of an Opinion of Counsel confirming that the
holders of the Debt Securities will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and covenant defeasance
and will be subject to federal income tax on the same amount and in the same
manner and at the same times, as would have been the case if such deposit and
covenant defeasance had not occurred.
CHANGES IN CONTROL AND HIGHLY LEVERAGED TRANSACTIONS
The Indenture does not contain provisions requiring redemption of the Debt
Securities issued thereunder, or adjustment to any terms of such Debt
Securities, upon any change in control of EPG.
Other than the limitations on Liens and the restriction on Sale-Leaseback
Transactions described above under "-- Certain Covenants", the Indenture does
not contain any covenant or other provisions designed to afford holders of the
Debt Securities issued thereunder protection in the event of a highly leveraged
transaction involving EPG.
MODIFICATION OF THE INDENTURE
The Indenture provides that EPG and the Trustee may enter into supplemental
indentures without the consent of the holders of Debt Securities issued
thereunder to: (a) secure any of such Debt Securities; (b) evidence the
succession of another Person to EPG under the Indenture and the Debt Securities
and the assumption by such successor Person of the obligations of EPG
thereunder; (c) add covenants and Events of Default for the benefit of the
holders of all or any series of such Debt Securities or to surrender any right
or power conferred by the Indenture upon EPG; (d) add to, change or eliminate
any of the provisions of the Indenture, provided that any such addition, change
or elimination shall become effective only after there are no such Debt
Securities of any series entitled to the benefit of such provision outstanding;
(e) establish the forms or terms of the Debt Securities of any series issued
thereunder; (f) cure any ambiguity or correct any inconsistency in the
Indenture; (g) evidence the acceptance of appointment by a successor trustee;
and (h) qualify the Indenture under the Trust Indenture Act.
The Indenture also contains provisions permitting EPG and the Trustee, with
the consent of the holders of a majority in aggregate principal amount of all
outstanding Debt Securities affected by such supplemental indenture (voting as
one class), to add any provisions to, or change in any manner or eliminate any
of the provisions of, the Indenture, or modify in any manner the rights of the
holders of such Debt Securities, provided that EPG and the Trustee may not,
without the consent of the holder of each outstanding Debt Security affected
thereby, (a) change the stated maturity of the principal of or any installment
of principal of or interest, if any, on, any Debt Security, or reduce the
principal amount thereof or premium, if any, on or the rate of interest thereon,
(b) reduce the percentage in principal amount of Debt Securities required for
any such supplemental indenture or for any waiver provided for in the Indenture,
(c) change EPG's obligation to maintain an office or agency for payment of Debt
Securities and the other matters specified therein, or (d) modify any of the
provisions of the Indenture relating to the execution of supplemental indentures
with the consent of holders of Debt Securities which are discussed in this
paragraph or modify any provisions relating to the waiver by holders of past
defaults and certain covenants, except to increase any required percentage or to
provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the holder of each outstanding Debt Security
affected thereby.
NO PERSONAL LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES OR STOCKHOLDERS
No director, officer, employee or stockholder, as such, of EPG or any of
its affiliates shall have any personal liability in respect of the obligations
of EPG under the Indenture or the Debt Securities by reason of his, her or its
status as such.
11
<PAGE> 45
APPLICABLE LAW
The Indenture is, and the Debt Securities offered hereby will be, governed
by, and construed in accordance with, the laws of the State of New York.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. If an Event of Default has occurred and is continuing, the
Trustee will use the same degree of care and skill in its exercise of the rights
and powers vested in it by the Indenture as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs.
The Indenture contains limitations on the rights of the Trustee, should it
become a creditor of EPG, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions;
provided, however, that if it acquires any conflicting interest, it must
eliminate such conflict or resign.
The Chase Manhattan Bank, a New York banking corporation, is the Trustee
under the Indenture. EPG maintains banking and other commercial relationships
with The Chase Manhattan Bank in the ordinary course of business.
DESCRIPTION OF CAPITAL STOCK
The statements under this caption are brief summaries, do not purport to be
complete, and are subject to, and are qualified in their entirety by reference
to, the more complete descriptions contained in (a) EPG's Restated Certificate
of Incorporation, as amended (the "EPG Charter"), and the Shareholder Rights
Agreement, dated as of July 7, 1992, between EPG and The First National Bank of
Boston, as Rights Agent (the "Shareholder Rights Agreement"), copies of which
are incorporated by reference as exhibits to the Registration Statement of which
this Prospectus is a part, and (b) the certificate of designation relating to
each series of Preferred Stock, which will be filed with the Commission at, or
prior to, the time of the offering of such series of Preferred Stock.
GENERAL
EPG currently is authorized by the EPG Charter to issue up to 100,000,000
shares of Common Stock and up to 25,000,000 shares of Preferred Stock. As of
September 30, 1996, there were issued and outstanding 36,212,026 shares of
Common Stock and no shares of Preferred Stock.
COMMON STOCK
EPG currently is authorized by the EPG Charter to issue up to 100,000,000
shares of Common Stock. The holders of Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors of EPG out of funds legally available
therefor. In the event of a liquidation, dissolution, or winding up of EPG,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preference of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities. There are no
redemption provisions with respect to any shares of Common Stock. All of the
outstanding shares of Common Stock are, and the Common Stock offered hereby will
be, upon issuance against full payment of the purchase price therefor, fully
paid and nonassessable.
The transfer agent and registrar for EPG's Common Stock is The First
National Bank of Boston.
12
<PAGE> 46
PREFERRED STOCK
EPG's Board of Directors, without any further action by the stockholders of
EPG, is authorized to issue up to 25,000,000 shares of Preferred Stock, and to
divide the Preferred Stock into one or more series, and to fix by resolution or
resolutions any of the designations, powers, preferences and rights, and the
qualifications, limitations, or restrictions of the shares of each such series,
including, but not limited to, dividend rates, conversion rights, voting rights,
terms of redemption and liquidation preferences, and the number of shares
constituting each such series. The issuance of Preferred Stock may have the
effect of delaying, deterring, or preventing a change in control of EPG.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular series of Preferred Stock will be described in the Prospectus
Supplement relating to that series. The description of Preferred Stock set forth
below and the description of the terms of the particular series of Preferred
Stock set forth in the related Prospectus Supplement do not purport to be
complete and are qualified in their entirety by reference to the certificate of
designation relating to the particular series of Preferred Stock.
The designations, powers, preferences and rights, and the qualifications,
limitations, or restrictions of the Preferred Stock of each series will be fixed
by the certificate of designation relating to such series. The Prospectus
Supplement relating to each series will specify the terms of the Preferred Stock
as follows:
(a) The maximum number of shares to constitute such series and the
distinctive designation thereof;
(b) The annual dividend rate, if any, on shares of such series,
whether such rate is fixed or variable or both, the date or dates from
which dividends will begin to accrue or accumulate, and whether dividends
will be cumulative;
(c) The price at which, and the terms and conditions on which, the
shares of such series may be redeemed, including the time during which
shares of such series may be redeemed and any accumulated dividends thereon
that the holders of shares of such series shall be entitled to receive upon
the redemption thereof;
(d) The liquidation preference, if any, and any accumulated dividends
thereon, that the holders of shares of such series shall be entitled to
receive upon the liquidation, dissolution, or winding up of the affairs of
EPG;
(e) Whether or not the shares of such series will be subject to
operation of a retirement or sinking fund, and, if so, the extent and
manner in which any such fund shall be applied to the purchase or
redemption of the shares of such series for retirement or for other
corporate purposes, and the terms and provisions relating to the operation
of such fund;
(f) The terms and conditions, if any, on which the shares of such
series shall be convertible into, or exchangeable for, debt securities,
shares of any other class or classes of capital stock of EPG, or any series
of any other class or classes, or of any other series of the same class,
including the price or prices or the rate or rates of conversion or
exchange and the method, if any, of adjusting the same;
(g) The voting rights, if any, on the shares of such series; and
(h) Any or all other preferences and relative, participating,
operational, or other special rights, qualifications, limitations, or
restrictions thereof.
The Federal income tax consequences and special considerations applicable
to any such series of Preferred Stock will be generally described in the
Prospectus Supplement relating thereto.
As of the date of this Prospectus, no Preferred Stock is outstanding.
Pursuant to the Shareholder Rights Agreement, the Board of Directors of EPG has
designated the Series A Preferred Stock (as defined below).
EPG is currently seeking approval from its stockholders to issue up to
23,894,862 shares of Common Stock (i.e., the Merger Stock Issuance) in
connection with the Merger. If the Merger Stock Issuance is not approved by the
stockholders of EPG, the Merger is still expected to be consummated, but common
13
<PAGE> 47
stockholders and certain preferred stockholders of Tenneco will receive an
aggregate of 7,000,000 shares of Common Stock plus depositary shares
representing interests in shares of a new series of Preferred Stock to be
designated the Adjustable Rate Cumulative Preferred Stock, $.01 par value per
share (the "AR Preferred Stock"). Each share of AR Preferred Stock will entitle
the holder thereof to 15 votes per share on all matters submitted to a vote at
any meeting of EPG stockholders. In addition, the EPG Charter provides that
holders of Preferred Stock of EPG, including the holders of Series A Preferred
Stock and AR Preferred Stock, shall have the right to vote together as a class
to elect two directors of EPG during any period that dividends on such stock are
in arrears in an amount equal to six quarterly dividend payments.
SHAREHOLDER RIGHTS AGREEMENT
In July 1992, EPG's Board of Directors declared a dividend distribution of
one right (a "Right") for each share of Common Stock then outstanding. All
shares of Common Stock issued subsequently also include these Rights. Under
certain conditions, each Right may be exercised to purchase from EPG one
one-hundredth of a share of a series of EPG's Preferred Stock, designated as
Series A Junior Participating Preferred Stock, $.01 par value (the "Series A
Preferred Stock"), at a price of $75 per one one-hundredth of a share, subject
to adjustment.
The EPG Charter provides that the holders of Series A Preferred Stock are
entitled to 100 votes per share on all matters submitted to a vote of the
stockholders of EPG, subject to adjustment. In addition, during any period that
dividends on the Series A Preferred Stock are in arrears in an amount equal to
six quarterly dividend payments, the holders of Series A Preferred Stock will
have the right to vote together as a class to elect two directors of EPG as
described above.
The Rights are exercisable only if, without the prior consent of EPG's
Board of Directors, a person or group acquires or obtains the right to acquire
beneficial ownership of 15% or more of the voting power of all outstanding
voting securities of EPG or commences or announces a tender or exchange offer,
after consummation of which such person or group would beneficially own 15% or
more of EPG's voting securities. If, after the Rights become exercisable, EPG is
involved in a merger or other business combination transaction in which its
Common Stock is exchanged or changed, or it sells 50% or more of its assets or
earning power, each Right will entitle the holder thereof to purchase, at the
Right's then-current exercise price, common stock of the acquiring company
having a value of twice the exercise price of the Right. If a person becomes the
beneficial owner of securities having 15% or more of the voting power of all
then-outstanding voting securities of EPG, or if, during any period of such
ownership, there shall be any reclassification of securities or recapitalization
of EPG, or any merger or consolidation of EPG with any of its subsidiaries or
any other transaction or series of transactions which has the effect, directly
or indirectly, of increasing by more than 1% the proportionate share of the
outstanding shares of any class of equity securities of EPG or any of its
subsidiaries which is directly or indirectly owned by such person, then each
Right not owned by such person will entitle the holder thereof to purchase, at
the Right's then-current exercise price, shares of Common Stock (or in certain
circumstances other equity securities of EPG with at least the same economic
value as the Common Stock) having a market value of twice the Right's
then-current exercise price. The Rights, which have no voting rights, expire no
later than July 7, 2002. The Rights may be redeemed by EPG under certain
circumstances prior to their expiration date at a purchase price of $.01 per
Right. It is possible that the existence of the Rights may have the effect of
delaying, deterring or preventing a takeover of EPG.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
EPG is subject to Section 203 of the Delaware General Corporation Law
("Section 203") which restricts certain transactions and business combinations
between a corporation and an interested stockholder (defined in Section 203,
generally, as a person owning 15% or more of a corporation's outstanding voting
stock) for a period of three years from the time such person becomes an
interested stockholder. Subject to certain exceptions, unless the transaction is
approved by the board of directors and the holders of at least 66 2/3% of the
outstanding voting stock of the corporation (excluding voting stock held by the
interested stockholder), Section 203 prohibits certain business transactions,
such as a merger with, disposition of assets to, or receipt of disproportionate
financial benefits by the interested stockholder, or any other transaction that
would increase
14
<PAGE> 48
the interested stockholder's proportionate ownership of any class or series of
the corporation's stock. The statutory ban does not apply if, upon consummation
of the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding voting stock held by persons who are both directors and
officers or by certain employee stock plans) or if either the proposed
transaction or the transaction by which the interested stockholder became such
is approved by the board of directors of the corporation prior to the time such
stockholder becomes an interested stockholder.
EPG'S RESTATED CERTIFICATE OF INCORPORATION
The EPG Charter contains provisions applicable to a merger, consolidation,
asset sale, liquidation, recapitalization, or certain other business
transactions, including the issuance of stock of EPG ("Business Combinations").
The EPG Charter requires the affirmative vote of 51% or more of the voting stock
of EPG, excluding any voting stock held by an interested stockholder (defined in
the EPG Charter as any person who owns 10% or more of the voting stock and
certain defined affiliates), with respect to all Business Combinations involving
the interested stockholder, unless directors who served as such prior to the
time the interested stockholder became an interested stockholder determine by a
two-thirds vote that (i) the proposed consideration meets certain minimum price
criteria, or (ii)(A) the interested stockholder holds 80% or more of the voting
stock and (B) the interested stockholder has not received (other than
proportionately as a stockholder) the benefit of any financial assistance from
EPG, whether in anticipation of or in connection with such Business Combination.
To meet the minimum price criteria, all stockholders must receive consideration
or retain value per share after the transaction which is not less than the price
per share paid by the interested stockholder. The EPG Charter also requires the
dissemination to stockholders of a proxy or information statement describing the
Business Combination.
The EPG Charter also prohibits the taking of any action by written
stockholder consent in lieu of a meeting and the subsequent amendment of the EPG
Charter to repeal or alter the above provisions without the affirmative vote of
51% of EPG's voting stock, excluding voting stock held by any interested
stockholder.
PLAN OF DISTRIBUTION
EPG may offer or sell Securities to or through one or more underwriters,
dealers or agents as designated from time to time, or through a combination of
such methods and also may offer or sell the Securities directly to one or more
other purchasers. EPG may sell Securities as soon as practicable after
effectiveness of the Registration Statement of which this Prospectus is a part.
A Prospectus Supplement will set forth the terms of the offering of the
particular series of Securities offered thereby, including: (i) the name or
names of any underwriters or agents; (ii) the initial public offering or
purchase price of such series of Securities; (iii) any underwriting discounts,
commissions, and other items constituting underwriters' compensation and any
other discount, concessions, or commissions allowed or reallowed or paid by any
underwriters to other dealers; (iv) any commissions paid to any agents; (v) the
net proceeds to EPG from the sales; and (vi) any securities exchanges or markets
on which the Securities may be listed.
Unless otherwise set forth in the Prospectus Supplement relating to a
particular series of Securities, the obligations of the underwriters to purchase
such series of Securities will be subject to certain conditions precedent and
each of the underwriters with respect to such series of Securities will be
obligated to purchase all of the Securities of such series allocated to it if
any such Securities are purchased. Any initial public offering price and any
discounts or concessions allowed, reallowed, or paid to dealers may be changed
from time to time.
The Securities may be offered and sold by EPG directly or through agents
designated by EPG from time to time. Unless otherwise indicated in the related
Prospectus Supplement, each such agent will be acting on a best efforts basis
for the period of its appointment. Any agent participating in the distribution
of Securities may be deemed to be an "underwriter", as that term is defined in
the Securities Act, of the Securities so
15
<PAGE> 49
offered and sold. The Securities also may be sold to dealers at the applicable
price to the public set forth in the Prospectus Supplement relating to such
series of Securities. Such dealers may be deemed to be "underwriters" within the
meaning of the Securities Act. Underwriters, dealers and agents may be entitled,
under agreements entered into with EPG, to indemnification by EPG against
certain civil liabilities, including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, or be customers of, EPG in the ordinary course of
business.
Other than Common Stock, all Securities offered will be a new issue of
securities with no established trading market. Any underwriter to whom
Securities are sold by EPG for public offering and sale may make a market in
such Securities, but such underwriters will not be obligated to do so and may
discontinue any market making at any time without notice. The Securities may or
may not be listed on a national securities exchange or a foreign securities
exchange, except that the Common Stock is listed on the NYSE. Any Common Stock
sold pursuant to a Prospectus Supplement will be listed on the NYSE, subject to
official notice of issuance. No assurance can be given as to the liquidity of or
the trading markets for any Securities.
LEGAL MATTERS
The validity of the Securities will be passed upon for EPG by Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional corporations),
New York, New York. If the Securities are being distributed in an underwritten
offering, the validity of the Securities will be passed upon for the
underwriters by counsel identified in the related Prospectus Supplement.
EXPERTS
The consolidated financial statements and financial statement schedules of
EPG as of December 31, 1995 and 1994, and for the years ended December 31, 1995,
1994, and 1993, incorporated by reference in this Prospectus, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of such firm as experts in
accounting and auditing.
The following financial statements and schedules are included or
incorporated by reference in the Joint Proxy Statement-Prospectus, which has
been filed as an exhibit to the November Current Report, which November Current
Report is incorporated by reference in this Prospectus (each of the following
capitalized terms has the meaning assigned to it in the Joint Proxy
Statement-Prospectus):
(i) (A) the Businesses of Tenneco Energy, (B) the Businesses of New
Tenneco, and (C) the Businesses of Newport News, each of which, to the
extent and for the periods indicated in their reports, have been audited by
Arthur Andersen LLP, independent public accountants, and are incorporated
herein by reference in reliance upon the authority of said firm as experts
in accounting and auditing in giving said reports; and
(ii) the combined financial statements of Mobil Plastics Division of
Mobil Oil Corporation for the period December 29, 1994 to November 17, 1995
and the year ended December 28, 1994 included in the Joint Proxy
Statement-Prospectus which was included as an exhibit to the November
Current Report, which is incorporated by reference herein have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon included therein. Such financial statements have been incorporated
herein by reference in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
16
<PAGE> 50
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE UNDERWRITERS OR ANY OTHER PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Supplement Summary......... S-3
Risk Factors.......................... S-10
Forward-Looking Statements............ S-14
Use of Proceeds....................... S-14
Price Range of Common Stock and
Dividend Information................ S-15
Capitalization........................ S-16
The Company........................... S-17
Underwriting.......................... S-23
Legal Matters......................... S-24
Unaudited Pro Forma Financial
Information......................... S-25
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Use of Proceeds....................... 4
Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed
Charges and Preferred and Preference
Stock Dividend Requirements......... 4
Description of Debt Securities........ 5
Description of Capital Stock.......... 12
Plan of Distribution.................. 15
Legal Matters......................... 16
Experts............................... 16
</TABLE>
2,750,000 SHARES
EL PASO NATURAL GAS
COMPANY
COMMON STOCK
------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
, 1997
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
