TEJAS GAS CORP, 424B2, 1996-07-05

TEJAS GAS CORP
424B2, 1996-07-05
NATURAL GAS TRANSMISSION

Previous: SYMETRICS INDUSTRIES INC, 8-K/A, 1996-07-05

Next: TEJAS GAS CORP, 424B2, 1996-07-05

- --------------------------------------------------------------------------------
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO COMPLETION
PURSUANT TO RULE 424 UNDER THE SECURITIES ACT OF 1933, AS AMENDED. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415 UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. A FINAL PROSPECTUS SUPPLEMENT AND PROSPECTUS WILL BE
DELIVERED TO PURCHASERS OF THESE SECURITIES. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
- --------------------------------------------------------------------------------

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JULY 5, 1996

PROSPECTUS SUPPLEMENT Reg. No. 333-06027
(TO PROSPECTUS DATED JULY 3, 1996) Filed Pursuant to
Rule 424(b)(2)
2,825,000 SHARES

TEJAS GAS CORPORATION

COMMON STOCK
------------------------

All of the shares of common stock, par value $.25 per share (the "Common
Stock"), offered hereby are being sold by Tejas Gas Corporation (the "Company").
Of the 2,825,000 shares of Common Stock offered hereby, 2,260,000 shares of
Common Stock are being offered in the United States and Canada (the "U.S.
Offering") by the U.S. Underwriters (as defined herein) and 565,000 shares of
Common Stock are being offered outside the United States and Canada (the
"International Offering" and, together with the U.S. Offering, the "Offerings")
by the International Managers (as defined herein). The public offering price and
the aggregate underwriting discount per share will be identical for both
Offerings. See "Underwriting."

The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "TEJ." On July 1, 1996, the last reported sale price of the
Common Stock on the NYSE was $35 3/8 per share. See "Price Range of Common Stock
and Dividend Policy."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THE ACCOMPANYING PROSPECTUS FOR
A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
------------------------

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.

================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------

Per Share................ $ $ $
- --------------------------------------------------------------------------------
Total(3)................. $ $ $
================================================================================

(1) The Company has agreed to indemnify the several Underwriters (as defined
herein) against certain liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $ .

(3) The Company has granted to the U.S. Underwriters and the International
Managers options for 30 days to purchase up to an additional 339,000 and
84,750 shares of Common Stock, respectively, at the Price to Public less
Underwriting Discount, solely to cover over-allotments, if any. If such
options are exercised in full, the Price to Public, Underwriting Discount
and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."

------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1996.
------------------------
MERRILL LYNCH & CO.

OPPENHEIMER & CO., INC.

PAINEWEBBER INCORPORATED

PRUDENTIAL SECURITIES INCORPORATED
------------------------
The date of this Prospectus Supplement is , 1996.
<PAGE>
IN CONNECTION WITH THESE OFFERINGS, THE UNDERWRITERS MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT 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>
[GRAPHIC OMITTED]

Omitted graphic of Texas, Oklahoma and Louisiana shows Tejas Natural Gas
Pipelines, Transok Natural Gas Pipelines, Proposed Transok Pipeline Extensions,
Tejas/Transok Natural Gas Storage Facilities, Tejas/Transok Natural Gas
Processing and Treating Plants (three Tejas plants in West Virginia not shown),
Major Natural Gas Pipeline Receipt and Delivery Points.

<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION
SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE ACCOMPANYING PROSPECTUS.
UNLESS THE CONTEXT INDICATES OTHERWISE, REFERENCES IN THIS PROSPECTUS SUPPLEMENT
TO THE "COMPANY" OR "TEJAS" ARE TO TEJAS GAS CORPORATION AND ITS
SUBSIDIARIES. AS USED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, "MMCF" MEANS MILLION CUBIC FEET AND "BCF" MEANS BILLION CUBIC
FEET. UNLESS OTHERWISE NOTED, ALL REFERENCES IN THIS PROSPECTUS SUPPLEMENT TO
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AND TO BE OFFERED IN THE
OFFERINGS ASSUMES THAT THE OVER-ALLOTMENT OPTIONS GRANTED TO THE UNDERWRITERS IN
CONNECTION WITH THE OFFERINGS ARE NOT EXERCISED.

THE COMPANY

The Company is a major intrastate natural gas pipeline company engaged in
the business of purchasing, gathering, processing, treating, transporting and
marketing natural gas. The Company is one of the largest independent intrastate
gatherers and transporters of natural gas volumes through company-owned
pipelines in the United States. The Company's operations are situated primarily
in the major gas-producing areas in Texas, Louisiana, the Texas and Louisiana
Gulf Coast regions and Oklahoma, with additional facilities located in West
Virginia. The Company is a holding company that conducts operations through four
principal subsidiaries, Tejas Gas Corp. ("Tejas Gas"), Acadian Gas Corporation
("Acadian"), Tejas Natural Gas Company ("TNGC") and, since June 1996,
Transok, Inc. ("Transok"). See " -- Transok Acquisition." In addition, the
Company offers natural gas marketing throughout North America as well as other
related energy and financial services through Coral Energy Resources, L.P.
("Coral"), a joint venture partnership with Shell Oil Company ("Shell").

As of June 6, 1996, following the Transok acquisition, the Company owned
and/or operated approximately 12,500 miles of intrastate natural gas pipeline
systems, including systems held in nine joint ventures. The Company's pipeline
systems consist of main lines, lateral lines and gathering lines and have
approximately 290 interconnections with both interstate and intrastate pipelines
in Texas, Oklahoma and Louisiana. Through these interconnections, the Company
can access natural gas supplies from sources not directly connected to its
pipelines and deliver natural gas to those customers who are outside of the
Company's geographical area of pipeline operations. Excluding Transok, the
Company's natural gas sales, transportation and processing activities recorded
an average total throughput of 3.2 BCF of natural gas per day ("BCF/d") in
1995 and 3.5 BCF/d in the first quarter of 1996. Transok's average total
throughput was 1.8 BCF/d in 1995 and 1.7 BCF/d in the first quarter of 1996. The
Company also owns underground natural gas storage facilities in Texas and
Oklahoma and leases an underground natural gas storage facility in Louisiana.
These facilities have a combined storage capacity of 155 BCF and a withdrawal
capacity of 1.1 BCF/d. In addition, the Company operates nine owned and seven
leased natural gas processing plants, which have a combined processing capacity
of approximately 725 MMCF of natural gas per day ("MMCF/d") and approximately
50,000 barrels of natural gas liquids ("NGLs") per day.

The Company and Shell formed Coral in order to better serve their customers
and position their consolidated natural gas marketing activities for further
growth. Coral currently ranks among the top five natural gas marketers in the
United States. Coral commenced operations with natural gas sales of 3.7 BCF/d,
1.5 BCF/d of which was natural gas purchased on the Company's systems. In
addition to volumes provided by the Company, Coral markets substantially all of
Shell's U.S. natural gas production. As of June 30, 1996, sales by Coral had
grown to approximately 4.5 BCF/d. Effective July 1, 1996, sales of natural gas
increased to approximately 5.0 BCF/d as a result of Coral's acquisition of Catex
Vitol, Inc., which markets natural gas primarily to industrial end users. Coral
is obligated to purchase all natural gas tendered by its partners at market
index prices, subject to customary notice requirements. In the future Coral will
purchase Transok volumes on comparable terms as other gas tendered by the
Company. In addition, Coral has received regulatory approval to market
electricity in wholesale markets and has begun increasing staff and taking other
administrative measures in anticipation of commencing such activities in the
third quarter of 1996.
S-3

BUSINESS STRATEGY

Company's national marketing presence through enhancement of Coral's natural gas
marketing business and Coral's expansion into power marketing.

Consistent with this strategy, in June 1996 the Company acquired Transok
from Central and South West Corporation ("CSW"), an electric utility holding
company. See "-- Transok Acquisition." Management believes that the
acquisition of Transok is a significant step in implementing the Company's
business strategy and providing opportunities for future growth. Specifically,
management believes that Transok provides to the Company (i) high-quality and
well-maintained assets, (ii) expansion into a geographic region situated in or
near long-lived natural gas reserves, (iii) an opportunity to develop a
significant volume of west-to-east natural gas transportation, facilitating the
movement of natural gas supplies into attractive markets, (iv) potential for the
continued expansion of Transok's gathering and transmission systems and natural
gas processing capabilities, (v) opportunities to expand Coral's natural gas
marketing activities utilizing Transok's access to large volumes of natural gas
supplies, (vi) a long-term contractual relationship with Public Service Company
of Oklahoma ("PSO") and (vii) a strong management team positioned to take
advantage of Transok's asset base and geographic location.

To further enhance throughput on the newly acquired Transok pipeline
system, the Company is proposing to construct two 24-inch pipelines aggregating
approximately 130 miles at a combined cost of approximately $75 million. These
proposed pipelines, which are expected to help facilitate the movement of
volumes of natural gas from western to eastern Oklahoma, are anticipated to be
completed by mid-1997. This is expected to allow the Company to increase
Transok's pipeline throughput. Any such additional supplies would also
complement the Company's processing activities in Oklahoma. Natural gas volumes
not delivered by Transok to parties within Oklahoma will be delivered to Coral
at pipeline delivery points located on the Company's system. The Company will be
paid a market index price associated with such delivery points. These volumes
will provide Coral with additional supply sources, which should enhance its
capability to market natural gas, particularly in the Midwest. A new supply
region should also provide Coral with an opportunity to benefit from price
differentials that occur from time to time between different geographic delivery
points.

Over the last eight years, the Company has added significantly to its
pipeline system largely through its acquisition of Gulf Energy Holdings, Inc. in
1988, Acadian in 1990, Exxon's Texas and Louisiana intrastate natural gas
pipeline operations in 1993 and Transok in 1996. During this time period, the
Company also built two new pipelines connecting additional natural gas supplies
to the Company's pipeline network and entered into three joint venture
partnerships, which resulted in increased throughput on the Company's pipeline
systems. Average throughput on the Company's pipeline systems has increased from
approximately 356 MMCF/d at year end 1987 to approximately 4.6 BCF/d in 1996. As
a result of these acquisitions, the Company now has pipeline assets located in
Texas, Louisiana and Oklahoma, states which have extensive reserves of natural
gas. The Company accesses natural gas through wells connected directly to its
onshore systems and through pipeline interconnections with third parties. The
Company's pipelines located in Texas and Louisiana are also able to source
natural gas produced in the Gulf of Mexico and delivered onshore. The Transok
acquisition provides the Company with a long-lived source of dedicated natural
gas in the Hugoton and Anadarko basins located in Oklahoma, as well as access to
natural gas produced in the Permian basin in west Texas and the Arkoma basin
located in eastern Oklahoma and Arkansas. These basins are new supply regions
for the Company.

The Company's business development activities will be primarily focused on
increasing natural gas sales to industrial and commercial end users and local
distribution companies ("LDCs"). In addition to the flexibility of being able
to move natural gas through the Company's existing transmission and gathering
systems, these business development activities will be enhanced by the natural
gas marketing and risk management activities provided by Coral.

S-4

TRANSOK ACQUISITION

On June 6, 1996, the Company acquired Transok from CSW through a merger of
a recently formed wholly owned subsidiary of the Company into Transok.
Immediately prior to the acquisition, Transok sold seven natural gas processing
plants (the "Transok Plants") to a third party lessor (the "Lessor"), which
in turn leased these facilities to the Company.

capacity of 564 MMCF/d of natural gas; (iii) a 26 BCF-capacity natural gas
reservoir storage facility with 300 MMCF/d of withdrawal and 200 MMCF/d of
injection capacity; and (iv) 1.4 trillion cubic feet of connected third-party
natural gas reserves. Transok's average system throughput was 1.2 BCF/d during
the first quarter of 1996 and 1.3 BCF/d in 1995. NGL production averaged 25,100
barrels per day during the first quarter of 1996 and 22,400 barrels per day in
1995.

The total purchase price received by CSW at closing was $690 million in
cash, of which $565 million was paid by the Company and $125 million was paid by
the Lessor to acquire the Transok Plants. In addition, as part of the
transaction, Transok retained $200 million of long-term debt. The Company's
financing for its cash requirements consisted of (i) $178 million borrowed under
an existing credit facility and (ii) $387 million, net of a voluntary
prepayment, borrowed under a new $425 million credit facility (the "Transok
Credit Facility"). The Lessor is leasing the Transok Plants to the Company for
a five-year term with annual lease payments of approximately $9 million. The
lease agreement may be extended by the Company, with approval by the Lessor, and
provides the Company the option to purchase the Transok Plants during the term.
The option to purchase all of the Transok Plants is exercisable for $125
million. If such purchase option is not exercised, the Company will be obligated
to pay the Lessor a termination fee of approximately $106 million at the end of
the lease. However, such fee will be reduced by the amount, if any, by which the
proceeds from the Lessor's sale of the assets exceeds $19 million. The lease
also provides the Company the option to purchase at any time during the term one
or more of the Transok Plants for an aggregate amount not exceeding $31 million,
with corresponding reductions in the $106 million termination fee and $19
million threshold amount.

THE OFFERINGS

Common Stock Offered by the
Company(1):
U.S. Offering............... 2,260,000 shares
International Offering...... 565,000 shares
-----------------
Total.................. 2,825,000 shares
=================
Common Stock Outstanding(2):
Before the Offerings........ 17,408,793 shares
After the Offerings......... 20,233,793 shares

Use of Proceeds.................. The net proceeds from the sale of the Common
Stock offered hereby will be used to repay
indebtedness incurred in connection with the
Transok acquisition. See "Use of Proceeds."

NYSE Symbol...................... TEJ
- ------------
(1) Excludes 423,750 shares of Common Stock subject to purchase upon exercise of
the Underwriters' over-allotment option.

(2) Based on the number of shares of Common Stock outstanding on June 30, 1996.
Does not include 1,532,141 shares of Common Stock issuable upon conversion
of the Company's 5 1/4% Convertible Preferred Stock or 1,406,331 shares of
Common Stock reserved for issuance upon exercise of outstanding stock
options under the Company's benefit plans.

S-5

SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA

The following unaudited summary pro forma financial and operating data for
the three months ended March 31, 1996 and the year ended December 31, 1995 give
effect to (i) the Transok acquisition under the purchase method of accounting
and the related assumptions, including payments pursuant to the lease of the
Transok Plants, and adjustments described in the notes to the Unaudited Pro
Forma Consolidated Financial Statements, (ii) the borrowing by the Company of
$565 million (the "Acquisition Debt") to finance the Transok acquisition and
(iii) the issuance and sale of 2,825,000 shares of Common Stock pursuant to the
Offerings and the application of the net proceeds therefrom to repay
approximately $95 million of Acquisition Debt. The summary pro forma financial
statements should be read in conjunction with the Consolidated Financial
Statements and related footnotes of the Company and Transok, both included
elsewhere in this Prospectus Supplement. The summary pro forma financial
statements have been prepared based upon assumptions deemed appropriate by the
Company and may not be indicative of actual results. The results of Transok are
included with the Company's results of operations from June 6, 1996, the date on
which the Transok acquisition was consummated.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996 YEAR ENDED DECEMBER 31, 1995
-------------------------------- ----------------------------------
HISTORICAL HISTORICAL
------------------- ---------------------
COMPANY TRANSOK PRO FORMA COMPANY TRANSOK PRO FORMA
------- -------- --------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $432,401 $254,439 $686,840 $1,043,621 $715,718 $1,759,339
Gross profit(1)....................... 43,329 41,693 85,022 166,533 140,097 306,630
Equity in earnings (loss) of
unconsolidated entities............. 3,666 634 4,300 (158) 2,186 2,028
Interest expense...................... 5,155 4,755 17,337 26,130 18,826 77,172
Earnings before income taxes.......... 17,645 12,591 23,032 51,790 39,089 56,654
Net earnings.......................... 10,938 8,312 14,855 32,937 25,327 37,387
Net earnings applicable to common
stock............................... 8,840 8,312 12,757 24,544 25,327 28,994
OTHER DATA:
Capital expenditures(2)............... 6,758 10,003 16,761 19,101 65,931 85,032
Depreciation and amortization......... 8,079 8,282 15,711 32,324 27,979 60,303
Cash operating income(3).............. 31,432 25,818 56,823 107,887 85,162 192,242
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)............. (11,724) (30,739) (11,724 ) 40,610 (42,003) 40,798
Property, plant and equipment, net.... 613,453 633,144 1,353,864 614,734 632,552 1,354,553
Total assets.......................... 881,958 787,696 1,799,205 915,451 772,280 1,830,773
Long-term debt........................ 242,075 200,000 929,488 306,075 200,000 993,488
Preferred Membership Units of a
subsidiary.......................... 50,683 -- 50,683 50,683 -- 50,683
Stockholders' equity.................. 311,332 406,719 302,485 397,872
PER SHARE DATA:
Earnings per common share(4).......... $ .51 $ .63 $ 1.41 $ 1.44
Cash operating income per common
share(4)............................ 1.81 2.81 6.22 9.53
Average common shares
outstanding(4)...................... 17,405 20,230 17,352 20,177
</TABLE>
- ------------
(1) Revenues less cost of sales.

(2) Excludes acquisitions and investments in unconsolidated entities.

(3) Earnings from operations before depreciation and amortization plus equity in
earnings (loss) from unconsolidated entities.

(4) Earnings per common share, cash operating income per common share and
average common shares outstanding have been adjusted to give retroactive
effect to a stock dividend of one-tenth of one share per outstanding share
effected in July 1995 and a three-for-two stock split effected in April
1996, as if such transactions had occurred at the beginning of each period
presented.
S-6
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996 AS OF DECEMBER 31, 1995
------------------------------- -------------------------------
HISTORICAL HISTORICAL
------------------ ------------------
COMPANY TRANSOK PRO FORMA COMPANY TRANSOK PRO FORMA
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Miles of pipeline(1)............... 5,488 7,094 12,582 5,488 7,094 12,582
Operating gas processing
plants(2)....................... 8 8 16 8 7 15
Processing capacity
(MMCF/d)................... 165 564 729 165 444 609
Operating treating plants.......... 2 -- 2 2 -- 2
Treating capacity (MMCF/d).... 100 -- 100 100 -- 100
Underground natural gas storage
facilities:
Number of storage
facilities(3)................. 2 1 3 2 1 3
Storage capacity (BCF).......... 129 26 155 129 26 155
Withdrawal capacity (MMCF/d).... 775 300 1,075 775 300 1,075
Injection capacity (MMCF/d)..... 320 200 520 160 200 360

THREE MONTHS ENDED
MARCH 31, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------- -------------------------------
HISTORICAL HISTORICAL
------------------ ------------------
COMPANY TRANSOK PRO FORMA COMPANY TRANSOK PRO FORMA
------- ------- --------- ------- ------- ---------
AVERAGE DAILY THROUGHPUT IN MMCF:
System sales....................... 1,860 271 2,131 1,515 249 1,764
Transportation..................... 1,480 898 2,378 1,469 1,085 2,554
Gulf Coast Partnership (Company's
share).......................... 113 -- 113 115 -- 115
------- ------- --------- ------- ------- ---------
Total system throughput....... 3,453 1,169 4,622 3,099 1,334 4,433
Off-system sales................... 5 488 493 11 424 435
Gas processed...................... 75 68(4) 143 76 65(4) 141
------- ------- --------- ------- ------- ---------
Total throughput.............. 3,533 1,725 5,258 3,186 1,823 5,009
======= ======= ========= ======= ======= =========
PROCESSING AND TREATING DATA:
Average daily natural gas liquids
production in thousands of gallons.. 143 1,052 1,195 179 941 1,120
Average daily treating plant inlet
volumes in MMCF/d............... 47 -- 47 43 -- 43
</TABLE>
- ------------
(1) Includes 858 miles of pipelines owned by joint ventures in which the Company
has an interest and 508 miles of systems leased to the Company and includes,
for the Transok and Pro Forma columns, 204 miles of pipelines owned by
partnerships and joint ventures in which Transok has an interest and 386
miles of systems leased to Transok.

(2) In connection with the Transok acquisition, seven of the eight Transok
plants were leased to the Company.

(3) Includes one leased storage facility in Louisiana.

(4) Represents processing fuel and shrinkage. Excludes 357 MMCF/d additional
throughput for the three months ended March 31, 1996 and 363 MMCF/d for the
year ended December 31, 1995 included under "System Sales" and
"Transportation" above.

S-7

SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA

This summary historical financial and operating data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included herein and the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus Supplement. See "Selected Historical Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ------------ ------------ ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 432,401 $ 215,633 $ 1,043,621 $ 1,031,967 $ 790,178 $ 524,471 $ 454,528
Gross profit(1).................... 43,329 41,863 166,533 158,138 111,980 78,773 78,596
Earnings from operations........... 19,687 19,250 75,721 71,323 51,292 33,930 33,855
Equity in earnings (loss) of
unconsolidated entities.......... 3,666 (74) (158) 1,057 2,043 1,181 --
Interest expense................... 5,155 6,321 26,130 24,670 18,053 18,534 22,933
Earnings before income taxes....... 17,645 13,009 51,790 48,005 35,980 17,794 13,426
Net earnings(2).................... 10,938 8,179 32,937 30,546 22,069 11,903 10,828
Net earnings applicable to common
stock(2)......................... 8,840 6,081 24,544 22,153 17,016 11,903 10,828
OTHER DATA:
Capital expenditures(3)............ 6,758 10,139 19,101 63,225 10,066 24,175 8,658
Depreciation and amortization...... 8,079 7,947 32,324 30,398 23,314 18,938 18,713
Cash operating income(4)........... 31,432 27,123 107,887 102,778 76,649 54,049 52,568
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit).......... (11,724) 27,931 40,610 23,040 (21,911) (13,009) (1,475)
Property, plant and equipment,
net.............................. 613,453 625,170 614,734 621,528 588,352 347,684 342,538
Total assets....................... 881,958 831,237 915,451 840,958 786,504 471,883 439,191
Long-term debt..................... 242,075 378,275 306,075 378,875 337,275 224,965 224,965
Preferred Membership Units of a
subsidiary....................... 50,683 -- 50,683 -- -- -- --
Common stockholders' equity(5)..... 196,332 168,555 187,485 162,474 140,050 127,970 115,941
Stockholders' equity............... 311,332 283,555 302,485 277,474 255,050 127,970 115,941
PER SHARE DATA:
Earnings per common share(2)(6).... $ .51 $ .35 $ 1.41 $ 1.25 $ .96 $ .68 $ .62
Cash operating income per common
share(4)(6)...................... 1.81 1.56 6.22 5.79 4.32 3.10 3.03
Average common shares
outstanding(6)................... 17,405 17,339 17,352 17,738 17,738 17,409 17,345
</TABLE>
- ------------
(1) Revenues less cost of sales.

(2) Net earnings, net earnings applicable to common stock and earnings per
common share for the year 1991 include an increase of $2,290, $2,290 and
$.20, respectively, for the cumulative effect of a change in the accounting
method of income taxes.

(3) Excludes acquisitions and investments in unconsolidated entities.

(4) Earnings from operations before depreciation and amortization plus equity in
earnings (loss) from unconsolidated entities.

(5) Total stockholders' equity less liquidation value of preferred stock.

(6) Earnings per common share, cash operating income per common share and
average common shares outstanding have been adjusted to give retroactive
effect to a three-for-two stock split effected in March 1993, a stock
dividend of one-tenth of one share per outstanding share effected in July
1995 and a three-for-two stock split effected in April 1996, as if such
transactions had occurred at the beginning of each period presented.

S-8

<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Miles of pipeline(1)............... 5,488 5,426 5,488 5,426 5,323 3,197 2,626
Operating gas processing plants.... 8 8 8 8 8 8 7
Processing capacity
(MMCF/d)................... 165 165 165 165 165 165 165
Operating treating plants.......... 2 2 2 2 2 2 2
Treating capacity (MMCF/d).... 100 100 100 100 100 100 100
Underground natural gas storage
facilities:
Number of storage
facilities(2)................. 2 2 2 2 2 1 --
Storage capacity (BCF).......... 129 129 129 129 129 4 --
Withdrawal capacity (MMCF/d).... 775 775 775 525 445 225 --
Injection capacity (MMCF/d)..... 320 160 160 160 160 80 --

THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
AVERAGE DAILY THROUGHPUT IN MMCF:
System sales....................... 1,860 1,352 1,515 1,285 831 628 623
Transportation..................... 1,480 1,492 1,469 1,688 913 400 456
Gulf Coast Partnership (Company's
share).......................... 113 115 115 113 110 92 --
--------- --------- --------- --------- --------- --------- ---------
Total system throughput....... 3,453 2,959 3,099 3,086 1,854 1,120 1,079
Off-system sales................... 5 3 11 10 54 69 75
Gas processed...................... 75 79 76 84 97 83 73
--------- --------- --------- --------- --------- --------- ---------
Total throughput.............. 3,533 3,041 3,186 3,180 2,005 1,272 1,227
========= ========= ========= ========= ========= ========= =========
PROCESSING AND TREATING DATA:
Average daily natural gas liquids
production in thousands of
gallons......................... 143 191 179 190 215 172 137
Average daily treating plant inlet
volumes in MMCF................. 47 45 43 53 54 55 57
</TABLE>
- ------------
(1) Includes 858 miles of pipelines owned by joint ventures in which the Company
has an interest and 508 miles of leased systems.

(2) Includes one leased storage facility in Louisiana.

S-9

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock offered
hereby will be approximately $95 million (approximately $110 million if the
Underwriters' over-allotment options are exercised in full) based on an assumed
offering price of $35 3/8 per share. All of the net proceeds will be used to
repay indebtedness incurred under the Transok Credit Facility in connection with
the Transok acquisition. Such indebtedness bears interest at a variable annual
rate (currently 6.7%) based on LIBOR or the agent bank's base rate and matures
on December 31, 1997.

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company and its subsidiaries as of March 31, 1996 (i) on a historical basis,
(ii) pro forma for the acquisition of Transok and related financing transactions
and (iii) pro forma as adjusted to give effect to the issuance and sale of the
shares of Common Stock in the Offerings and the application of the estimated net
proceeds therefrom as described in "Use of Proceeds." This table should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto, and the unaudited pro forma consolidated financial statements and
the notes thereto included elsewhere in this Prospectus Supplement.

AS OF MARCH 31, 1996
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(IN THOUSANDS)
LONG-TERM DEBT (NET OF CURRENT
MATURITIES)
Medium-term notes.................. $ -- $ 200,000 $ 200,000
Bank credit facilities............. 231,900 814,700 719,313
Other.............................. 10,175 10,175 10,175
---------- ---------- -----------
Total long-term debt.......... 242,075 1,024,875 929,488
---------- ---------- -----------
PREFERRED MEMBERSHIP UNITS OF A
SUBSIDIARY......................... 50,683 50,683 50,683
---------- ---------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value,
6,000,000 shares authorized:
200,000 shares of 9.96%
Cumulative Preferred Stock
issued and outstanding
($50,000,000 liquidation
preference)................ 200 200 200
260,000 shares of 5 1/4%
Convertible Preferred Stock
issued and outstanding
($65,000,000 liquidation
preference)................ 260 260 260
Common Stock, $.25 no par value,
30,000,000 shares authorized;
17,405,307 shares issued and
outstanding, actual; 20,230,307
shares issued and outstanding,
as adjusted(1).................. 4,351 4,351 5,057
Capital surplus.................... 191,497 191,497 286,178
Retained earnings.................. 115,024 115,024 115,024
---------- ---------- -----------
Total stockholders' equity.... 311,332 311,332 406,719
---------- ---------- -----------
Total capitalization.... $ 604,090 $1,386,890 $ 1,386,890
========== ========== ===========
- ------------
(1) Does not include 1,532,141 shares issuable upon conversion of the Company's
5 1/4% Convertible Preferred Stock and 1,406,331 shares reserved for
issuance upon exercise of outstanding stock options under the Company's
benefit plans.

S-10

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock is traded on the NYSE under the symbol "TEJ."
The following table sets forth the high and low sale prices of the Common Stock
for the periods indicated below as reported on the NYSE Composite Tape.

PRICE
------------------------
HIGH LOW
--------- ---------
1994
First Quarter................... $34 25/64 $29 45/64
Second Quarter.................. 32 47/64 29 3/32
Third Quarter................... 31 3/4 27 11/32
Fourth Quarter.................. 28 55/64 24 27/32
1995
First Quarter................... $28 55/64 $24 35/64
Second Quarter.................. 33 15/16 26 3/4
Third Quarter................... 35 59/64 30
Fourth Quarter.................. 36 30 1/2
1996
First Quarter................... $35 59/64 $29 53/64
Second Quarter.................. 39 32 43/64
Third Quarter (through July 1,
1996)......................... 35 5/8 35 1/8

On July 1, 1996, the last reported sale price of the Common Stock on the
NYSE Composite Tape was $35 3/8 per share. As of June 30, 1996, there were 936
holders of record of Common Stock.

On July 19, 1995, the Company's Board of Directors authorized a stock
dividend of one-tenth of one share of Common Stock for each share of Common
Stock outstanding payable to stockholders of record as of July 27, 1995. On
April 11, 1996, the Company's Board of Directors authorized a three-for-two
stock split effected in the form of a stock dividend, effective May 13, 1996 for
stockholders of record as of April 26, 1996. Stock prices used in the above
tables have been adjusted to give retroactive effect to such transactions for
each period presented. Such adjusted prices may not reflect prices which may
actually have occurred had such transactions been in effect during the periods
presented.

No cash dividends have been paid on the Common Stock by the Company since
its shares were publicly distributed, and the Company does not currently intend
to pay cash dividends on its Common Stock. Such policy will be reviewed by the
Board of Directors of the Company from time to time in light of, among other
things, the Company's earnings and financial position, capital requirements and
limitations imposed by its credit facilities. The Company's credit facilities
restrict the distributions it may receive from its subsidiaries. The terms of
the Company's outstanding 9.96% Cumulative Preferred Stock and 5 1/4%
Convertible Preferred Stock restrict the distributions the Company may make if
there is any arrearage in dividends thereon. See "Risk Factors -- Reliance on
Funds From Operating Subsidiaries; Restrictions on Distributions; Dividends" in
the accompanying Prospectus and "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources, Liquidity and Outlook."

S-11

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma consolidated statements of earnings for
the year ended December 31, 1995 and the three-month periods ended March 31,
1996 and 1995 and the unaudited pro forma consolidated balance sheet as of March
31, 1996 (the "Pro Forma Consolidated Financial Statements") give effect to (i)
the Transok acquisition under the purchase method of accounting and the related
assumptions and adjustments described in the notes to the Pro Forma Consolidated
Financial Statements, (ii) the borrowing by the Company of its cash requirements
of $565 million, plus related financing costs, to finance the Transok
acquisition and (iii) the issuance and sale of 2,825,000 shares of Common Stock
pursuant to the Offerings and the application of the net proceeds therefrom as
described in "Use of Proceeds."

The Pro Forma Consolidated Financial Statements are based upon the
historical audited and unaudited consolidated financial statements of the
Company and Transok and should be read in conjunction with the audited and
unaudited financial statements and notes thereto of the Company and Transok
included in this Prospectus Supplement. Because of the seasonal nature of the
Company's and Transok's operations, among other factors, the results of the
interim periods presented are not necessarily indicative of the results to be
expected of an entire year.

The unaudited pro forma consolidated statements of earnings for the year
ended December 31, 1995 and the three months ended March 31, 1996 and 1995 were
prepared assuming that the transactions described above were consummated as of
the beginning of each period presented. The unaudited pro forma consolidated
balance sheet as of March 31, 1996 was prepared assuming that the transactions
described above were consummated as of March 31, 1996. The Pro Forma
Consolidated Financial Statements have been prepared based upon assumptions
deemed appropriate by the Company and may not be indicative of actual results.

S-12

TEJAS GAS CORPORATION -- TRANSOK ACQUISITION
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ----------------------------------------------------------
TEJAS ACQUIRED TRANSOK COMBINED
GAS TRANSOK ACQUISITION COMBINED OFFERING OPERATIONS
CORPORATION OPERATIONS ADJUSTMENTS OPERATIONS ADJUSTMENTS AND OFFERING
----------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $1,043,621 $715,718 $ -- $1,759,339 $1,759,339
Cost of Sales........................ 877,088 575,621 -- 1,452,709 1,452,709
----------- ---------- ----------- ---------- ------------
Gross Profit..................... 166,533 140,097 -- 306,630 306,630
Operating Expense.................... 38,081 25,123 6,058(a) 69,262 69,262
----------- ---------- ----------- ---------- ------------
Operating Income................. 128,452 114,974 (6,058) 237,368 237,368
----------- ---------- ----------- ---------- ------------
Taxes, other than income taxes....... -- 9,248 -- 9,248 9,248
General and Administrative........... 20,407 22,750 (5,250)(b) 37,907 37,907
Depreciation and Amortization........ 32,324 27,979 1,201(c) 61,504 61,504
----------- ---------- ----------- ---------- ------------
Earnings From Operations............. 75,721 54,997 (2,009) 128,709 128,709
----------- ---------- ----------- ---------- ------------
Other Income (Expenses):
Equity in Earnings (Loss) of
Unconsolidated subsidiaries.... (158) 2,186 -- 2,028 2,028
Interest income.................. 448 -- -- 448 448
Interest expense................. (26,130) (14,031) (44,165)(d) (84,326) $ 7,154(d) (77,172)
Factoring expenses............... -- (4,795) 4,795(e) -- --
Distributions on Preferred
Membership Units of a
Subsidiary..................... (36) -- -- (36) (36)
Other, net....................... 1,945 732 -- 2,677 2,677
----------- ---------- ----------- ---------- ----------- ------------
Total............................ (23,931) (15,908) (39,370) (79,209) 7,154 (72,055)
----------- ---------- ----------- ---------- ----------- ------------
Earnings Before Income Taxes......... 51,790 39,089 (41,379) 49,500 7,154 56,654
----------- ---------- ----------- ---------- ----------- ------------
Income Taxes:
Current..................... 9,656 2,555 -- 12,211 12,211
Deferred.................... 9,197 11,207 (16,138)(f) 4,266 2,790(f) 7,056
----------- ---------- ----------- ---------- ----------- ------------
Total............................ 18,853 13,762 (16,138) 16,477 2,790 19,267
----------- ---------- ----------- ---------- ----------- ------------
Net Earnings................ 32,937 25,327 (25,241) 33,023 4,364 37,387
Preferred Dividend Requirements...... 8,393 -- -- 8,393 8,393
----------- ---------- ----------- ---------- ----------- ------------
Net Earnings Applicable to Common
Stock.............................. $ 24,544 $ 25,327 $ (25,241) $ 24,630 $ 4,364 28,994
=========== ========== =========== ========== =========== ============
Average Shares Outstanding........... 17,352 17,352 2,825(k) 20,177
Earnings Per Share................... $ 1.41 $ 1.42 $ 1.44
</TABLE>
See notes to unaudited pro forma consolidated financial statements

S-13

TEJAS GAS CORPORATION -- TRANSOK ACQUISITION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ----------------------------------------------------------
TEJAS ACQUIRED TRANSOK COMBINED
GAS TRANSOK ACQUISITION COMBINED OFFERING OPERATIONS
CORPORATION OPERATIONS ADJUSTMENTS OPERATIONS ADJUSTMENTS AND OFFERING
----------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 432,401 $254,439 $ -- $686,840 $686,840
Cost of Sales........................ 389,072 212,746 -- 601,818 601,818
----------- ---------- ----------- ---------- ------------
Gross Profit..................... 43,329 41,693 -- 85,022 85,022
Operating Expense.................... 9,516 6,163 1,740(a) 17,419 17,419
----------- ---------- ----------- ---------- ------------
Operating Income................. 33,813 35,530 (1,740) 67,603 67,603
----------- ---------- ----------- ---------- ------------
Taxes, other than income taxes....... -- 2,567 -- 2,567 2,567
General and Administrative........... 6,047 7,779 (1,313)(b) 12,513 12,513
Depreciation and Amortization........ 8,079 8,282 (650)(c) 15,711 15,711
----------- ---------- ----------- ---------- ------------
Earnings From Operations............. 19,687 16,902 223 36,812 36,812
----------- ---------- ----------- ---------- ------------
Other Income (Expenses):
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries.... 3,666 634 -- 4,300 4,300
Interest income.................. 302 -- -- 302 302
Interest expense................. (5,155) (2,929) (11,042)(d) (19,126) $ 1,789(d) (17,337)
Factoring expenses............... -- (1,826) 1,826(e) -- --
Distributions on Preferred
Membership Units of a
Subsidiary..................... (947) -- -- (947) (947)
Other, net....................... 92 (190) -- (98) (98)
----------- ---------- ----------- ---------- ----------- ------------
Total............................ (2,042) (4,311) -- (15,569) 1,789 (13,780)
----------- ---------- ----------- ---------- ----------- ------------
Earnings Before Income Taxes......... 17,645 12,591 (8,993) 21,243 1,789 23,032
----------- ---------- ----------- ---------- ----------- ------------
Income Taxes:
Current..................... 3,939 (900) -- 3,039 3,039
Deferred.................... 2,768 5,179 (3,507)(f) 4,440 698(f) 5,138
----------- ---------- ----------- ---------- ----------- ------------
Total............................ 6,707 4,279 (3,507) 7,479 698 8,177
----------- ---------- ----------- ---------- ----------- ------------
Net Earnings................ 10,938 8,312 (5,486) 13,764 1,091 14,855
Preferred Dividend Requirements...... 2,098 -- -- 2,098 2,098
----------- ---------- ----------- ---------- ----------- ------------
Net Earnings Applicable to Common
Stock................................ $ 8,840 $ 8,312 $ (5,486) $ 11,666 $ 1,091 $ 12,757
=========== ========== =========== ========== =========== ============
Average Shares Outstanding........... 17,405 17,405 2,825(k) 20,230
Earnings Per Share................... $ 0.51 $ 0.67 $ 0.63
</TABLE>
See notes to unaudited pro forma consolidated financial statements

S-14

TEJAS GAS CORPORATION -- TRANSOK ACQUISITION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ----------------------------------------------------------
TEJAS ACQUIRED TRANSOK COMBINED
GAS TRANSOK ACQUISITION COMBINED OFFERING OPERATIONS
CORPORATION OPERATIONS ADJUSTMENTS OPERATIONS ADJUSTMENTS AND OFFERING
----------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 215,633 $158,122 $ -- $373,755 373,755
Cost of Sales........................ 173,770 123,500 -- 297,270 297,270
----------- ---------- ----------- ---------- ------------
Gross Profit..................... 41,863 34,622 -- 76,485 76,485
Operating Expense.................... 9,372 6,558 1,515(a) 17,445 17,445
----------- ---------- ----------- ---------- ------------
Operating Income................. 32,491 28,064 (1,515) 59,040 59,040
----------- ---------- ----------- ---------- ------------
Taxes, other than income taxes....... -- 2,661 -- 2,661 2,661
General and Administrative........... 5,294 7,608 (1,313)(b) 11,589 11,589
Depreciation and Amortization........ 7,947 7,982 (692)(c) 15,237 15,237
----------- ---------- ----------- ---------- ------------
Earnings From Operations............. 19,250 9,813 490 29,553 29,553
----------- ---------- ----------- ---------- ------------
Other Income (Expenses):
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries.... (74) 749 -- 675 675
Interest income.................. 127 -- -- 127 127
Interest expense................. (6,321) (2,686) (11,042)(d) (20,049) 1,789(d) (18,260)
Factoring expenses............... -- (1,166) 1,166(e) -- --
Distributions on Preferred
Membership Units of a
Subsidiary..................... -- -- -- -- --
Other, net....................... 27 380 -- 407 407
----------- ---------- ----------- ---------- ----------- ------------
Total............................ (6,241) (2,723) (9,876) (18,840) 1,789 (17,051)
----------- ---------- ----------- ---------- ----------- ------------
Earnings Before Income Taxes......... 13,009 7,090 (9,386) 10,713 1,789 12,502
----------- ---------- ----------- ---------- ----------- ------------
Income Taxes:
Current..................... 1,955 (1,095) -- 860 860
Deferred.................... 2,875 3,485 (3,661)(f) 2,699 698(f) 3,397
----------- ---------- ----------- ---------- ----------- ------------
Total............................ 4,830 2,390 (3,661) 3,559 698 4,257
----------- ---------- ----------- ---------- ----------- ------------
Net Earnings................ 8,179 4,700 (5,725) 7,154 1,091 8,245
Preferred Dividend Requirements...... 2,098 -- -- 2,098 2,098
----------- ---------- ----------- ---------- ----------- ------------
Net Earnings Applicable to Common
Stock................................ $ 6,081 $ 4,700 $ (5,725) $ 5,056 1,091 6,147
=========== ========== =========== ========== =========== ============
Average Shares Outstanding........... 17.339 17,339 2,825(k) 20,164
Earnings Per Share................... $ .35 $ .29 $ .30
</TABLE>
See notes to unaudited pro forma consolidated financial statements

S-15

TEJAS GAS CORPORATION -- TRANSOK ACQUISITION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ----------------------------------------------------------
TEJAS ACQUIRED TRANSOK COMBINED
GAS TRANSOK ACQUISITION COMBINED OFFERING OPERATIONS
CORPORATION OPERATIONS ADJUSTMENTS OPERATIONS ADJUSTMENTS AND OFFERING
----------- ---------- ----------- ---------- ----------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents........ $ 937 $ 7,797 $ -- $ 8,734 $ 8,734
Accounts receivable.............. 185,081 71,630 30,739(h) 287,450 287,450
Exchange gas receivable.......... 9,547 -- -- 9,547 9,547
Working gas...................... 10,484 117 -- 10,601 10,601
Prepaids and other current
assets......................... 3,042 20,750 -- 23,792 23,792
Deferred tax asset............... 2,948 914 3,862 3,862
----------- ---------- ----------- ----------
Total current assets........ 212,039 101,208 30,739 343,986 343,986
----------- ---------- ----------- ---------- ------------
Property, Plant and Equipment........ 799,817 878,058 (137,647)(i) 1,540,228 1,540,228
Less: Accumulated depreciation
and amortization............... 186,364 244,914 (244,914)(i) 186,364 186,364
----------- ---------- ----------- ---------- ------------
Net property, plant and
equipment................. 613,453 633,144 107,267 1,353,864 1,353,864
----------- ---------- ----------- ---------- ------------
Investment in Unconsolidated
Entities........................... 35,005 29,805 -- 64,810 64,810
Goodwill, Net of Accumulated
Amortization....................... 10,161 -- -- 10,161 10,161
Other Assets......................... 11,300 23,539 (8,455)(i) 26,384 26,384
----------- ---------- ----------- ---------- ------------
Total....................... $ 881,958 $787,696 $ 129,551 $1,799,205 $1,799,205
=========== ========== =========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Gas purchases payable............ $ 163,820 $124,998 $ -- $ 288,818 $ 288,818
Exchange gas payable............. 14,285 -- -- 14,285 14,285
Accounts payable................. 10,929 2,828 -- 13,757 13,757
Accrued liabilities.............. 22,163 1,333 -- 23,496 23,496
Deferred credits................. 3,428 -- -- 3,428 3,428
Income taxes payable............. 3,821 2,788 -- 6,609 6,609
Current maturities of long-term
obligations.................... 5,317 -- -- 5,317 5,317
----------- ---------- ----------- ---------- ------------
Total current liabilities... 223,763 131,947 -- 355,710 355,710
----------- ---------- ----------- ---------- ------------
Deferred Credit and Other
Liabilities........................ -- -- 2,500(g) 2,500 2,500
Long-Term Debt....................... 242,075 200,000 582,800(j) 1,024,875 $ (95,387)(k) 929,488
Deferred Income Taxes................ 54,105 121,371 (121,371)(i) 54,105 54,105
Preferred Membership Units of a
Subsidiary......................... 50,683 -- -- 50,683 50,683
Stockholders' Equity:
Preferred Stock.................. 460 -- -- 460 460
Common Stock..................... 4,351 9,219 (9,219)(i) 4,351 706(k) 5,057
Additional paid-in capital....... 191,497 162,000 (162,000)(i) 191,497 94,681(k) 286,178
Retained earnings................ 115,024 163,159 (163,159)(i) 115,024 115,024
----------- ---------- ----------- ---------- ----------- ------------
Total stockholders'
equity.................... 311,332 334,378 (334,378) 311,332 95,387 406,719
----------- ---------- ----------- ---------- ----------- ------------
Total....................... $ 881,958 $787,696 $ 129,551 $1,799,205 $ -- $1,799,205
=========== ========== =========== ========== =========== ============
</TABLE>
See notes to unaudited pro forma consolidated financial statements

S-16

TEJAS GAS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996
AND 1995

1. BASIS OF PRESENTATION

The Unaudited Pro Forma Consolidated Balance Sheet is presented assuming
the combination and the Offerings occurred on March 31, 1996. The Unaudited Pro
Forma Consolidated Statements of Earnings for the year ended December 31, 1995
and the three months ended March 31, 1996 and 1995 are presented as if the
combination and the Offerings occurred at the beginning of each period
presented. The Pro Forma Consolidated Financial Statements may not necessarily
be indicative of the results which would actually have occurred if the
combination had been in effect on the date or for the periods indicated or which
may result in the future.

While the 1996 first quarter pro forma statement of earnings indicates a
32% improvement over the historical Tejas' 1996 first quarter, Tejas does not
anticipate the improvement created by the merger for the full year 1996 to be
significantly greater than the pro forma improvement reflected for the year
ended December 31, 1995 or for the three-month period ended March 31, 1995.
Projected improvements versus those anticipated for Tejas before the merger are
not expected to be substantial until the completion of proposed capital
expenditure programs related to the west to east movement of natural gas on the
Transok system. Under current plans, these programs are expected to be
implemented by the end of 1997. Tejas believes that the improvements from these
proposed capital expenditures and the enhanced ability to market gas within the
state of Oklahoma will result in Transok making a significant contribution to
Tejas' consolidated earnings beginning in 1998.

The Company plans to apply the majority of its available free cash flow to
fund proposed capital expenditures for the remainder of 1996 and 1997. In
conjunction with the Company's intent to reduce debt, the Company anticipates
applying the assumed net proceeds of $95 million from the Offerings to repay
outstanding indebtedness. In addition, the Company is considering other
alternatives to reduce leverage. After the application of the assumed proceeds
of the Offerings, the Company's pro forma debt-to-capitalization as of March 31,
1996 would be approximately 67%. In addition to the Offerings, should one or
more of the alternatives under consideration be implemented, the Company would
anticipate further reducing this ratio to approximately 60% by the end of 1996
or mid-1997.

2. PRO FORMA ADJUSTMENTS -- STATEMENTS OF EARNINGS

The pro forma adjustments to the Unaudited Pro Forma Consolidated
Statements of Earnings reflect the following:

(a) OPERATING EXPENSES -- Through the consolidation and realignment of
operations and field-based personnel (a reduction of personnel from
approximately 540 at December 31, 1995 to approximately 480 at June 6,
1996), Tejas anticipates a reduction of Transok's historical operating,
general and administration costs. Such reductions amount to approximately
$2.8 million for the year ended December 31, 1995 and approximately $0.7
million for the quarters ended March 31, 1996 and 1995. Offsetting these
reductions is an increase in rental expense associated with the lease of
seven Transok gas processing plants. The rental expense for the twelve
month period is $9.8 million and the expense for both three month periods
is $2.4 million, including amortization of associated finance costs for all
periods presented. Additionally, this pro forma statement of earnings
reflects a 1995 reclassification of $0.9 million from operating expense to
depreciation expense to reflect Transok's change in presentation of
financial data related to depreciation of transportation equipment.

(b) GENERAL AND ADMINISTRATIVE EXPENSES -- A significant portion of
the historical amounts incurred by Transok for general and administrative
expenses represent parent company allocations. Based on Tejas' projected
actual cost of providing such incremental corporate services, the
historical amounts have been reduced by $2.4 million and $0.6 million for
the 1995 annual period and both the 1996 and 1995 three-month periods,
respectively. In addition, general and administrative expenses have been
reduced by $2.8 million for the year ended December 31, 1995 and $0.7
million for the three months ended March 31, 1996 and 1995 to reflect
personnel and other cost reductions.

S-17

TEJAS GAS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

(c) DEPRECIATION AND AMORTIZATION -- The adjustment reflects the pro
forma depreciation and amortization expense based on the use of adjusted
asset lives and salvage value, straight-line method of depreciation for all
assets and the allocation of the purchase price.

(d) INTEREST EXPENSE -- The acquisition adjustments for interest
expense reflect interest computed on the additional indebtedness incurred
for the purchase of Transok. The principal amount of indebtedness incurred
was approximately $582.8 million, including related transaction costs, and
the interest rate used to calculate the interest expense was 7.5%. Interest
expense also includes amortization of financing costs. The offering
adjustments for interest expense reflect the paydown of Acquisition Debt
from the net proceeds of the Offerings.

(e) FACTORING EXPENSE -- Transok has historically factored a portion
of its accounts receivable balances to its parent company in order to
obtain greater liquidity. Since accounts receivable will no longer be
factored, a pro forma adjustment has been made to reverse the factoring
expense of $4.8 million for the 1995 annual period, $1.8 million for the
1996 and $1.2 million for the 1995 three-month periods.

(f) INCOME TAXES -- The adjustment for income taxes represent the tax
effect of the foregoing pro forma adjustments computed at a 39% statutory
income tax rate which reflects both federal and state income tax rates. The
reduction of income taxes resulting from the pro forma adjustments is
classified as deferred on the income statement due to Tejas' alternative
minimum tax position during the pro forma periods.

3. PRO FORMA ADJUSTMENTS -- BALANCE SHEET

The pro forma adjustments to the Unaudited Pro Forma Consolidated Balance
Sheet reflect the following:

(g) DEFERRED CREDITS AND OTHER LIABILITIES -- A $2.5 million liability
has been recorded to reflect management's current intent to (i) exercise a
purchase option on an office building that Transok is currently leasing and
(ii) subsequently sell the building for an estimated $2.5 million loss.

(h) NET WORKING CAPITAL ADJUSTMENT -- The adjustment reflects a $30.7
million working capital contribution by CSW as required by the terms of the
Merger Agreement.

(i) ALLOCATION OF PURCHASE PRICE -- Total cash consideration to be
paid by Tejas for the Transok, Inc. acquisition, plus related transaction
costs, was $582.8 million. In addition, Tejas assumed $200.0 million of
Transok's outstanding debt. The adjustments reflect the recording of the
acquisition using the purchase method of accounting and the allocation of
the purchase price based on the fair value of the assets and liabilities
acquired. The allocation of the purchase price is preliminary, as valuation
and other studies have not been finalized. It is not expected that the
final allocation of the purchase price will produce materially different
results from those presented herein. The adjustments also take into
consideration the sale by Transok to a third party of seven Transok gas
processing plants, immediately prior to the acquisition, and the leasing of
those plants by Tejas.

(j) LONG-TERM DEBT -- Adjustment to record borrowings associated with
the cash consideration paid to purchase Transok. Of the total cash
consideration of approximately $582.8 million, including transaction costs;
$401.9 million was obtained through the new credit facilities and $180.9
million was obtained under the existing credit facilities of Tejas Gas and
Acadian.

(k) COMMON STOCK AND ADDITIONAL PAID IN CAPITAL -- Adjustment to
record the issuance of 2,825,000 shares of common stock. The proceeds will
be used to pay down the Acquisition Debt. The assumed sales price is $35
3/8 per share (closing price on July 1, 1996), with a par value of $.25 per
share.

S-18

SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth certain selected historical financial data
of the Company. The selected historical financial data as of December 31, 1995,
1994, 1993, 1992 and 1991 and for each of the five years in the period ended
December 31, 1995 have been derived from the audited consolidated financial
statements of the Company. The selected historical financial data as of and for
the three months ended March 31, 1996 and 1995 have been derived from the
Company's unaudited consolidated financial statements which, in the opinion of
management of the Company, reflect all adjustments (which are of a normal
recurring nature) that are necessary to present fairly such financial data. Such
selected historical financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included herein and the Consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus Supplement.
The amounts shown below include the operations of TNGC only for the period
subsequent to the acquisition of its operations on September 15, 1993.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- ----------- ----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 432,401 $ 215,633 $ 1,043,621 $ 1,031,967 $ 790,178 $ 524,471 $ 454,528
Gross profit(1).................... 43,329 41,863 166,533 158,138 111,980 78,773 78,596
Earnings from operations........... 19,687 19,250 75,721 71,323 51,292 33,930 33,855
Equity in earnings (loss) of
unconsolidated entities.......... 3,666 (74) (158) 1,057 2,043 1,181 --
Interest expense................... 5,155 6,321 26,130 24,670 18,053 18,534 22,933
Earnings before income taxes....... 17,645 13,009 51,790 48,005 35,980 17,794 13,426
Net earnings(2).................... 10,938 8,179 32,937 30,546 22,069 11,903 10,828
Net earnings applicable to common
stock(2)......................... 8,840 6,081 24,544 22,153 17,016 11,903 10,828
OTHER DATA:
Capital expenditures(3)............ 6,758 10,139 19,101 63,225 10,066 24,175 8,658
Depreciation and amortization...... 8,079 7,947 32,324 30,398 23,314 18,938 18,713
Cash operating income(4)........... 31,432 27,123 107,887 102,778 76,649 54,049 52,568
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit).......... (11,724) 27,931 40,610 23,040 (21,911) (13,009) (1,475)
Property, plant and equipment,
net.............................. 613,453 625,170 614,734 621,528 588,352 347,684 342,538
Total assets....................... 881,958 831,237 915,451 840,958 786,504 471,883 439,191
Long-term debt..................... 242,075 378,275 306,075 378,875 337,275 224,965 224,965
Preferred Membership Units of a
subsidiary....................... 50,683 -- 50,683 -- -- -- --
Common stockholders' equity(5)..... 196,332 168,555 187,485 162,474 140,050 127,970 115,941
Stockholders' equity............... 311,332 283,555 302,485 277,474 255,050 127,970 115,941
PER SHARE DATA:
Earnings per common share(2)(6).... $ .51 $ .35 $ 1.41 $ 1.25 $ .96 $ .68 $ .62
Cash operating income per common
share(4)(6)...................... 1.81 1.56 6.22 5.79 4.32 3.10 3.03
Average common shares
outstanding(6)................... 17,405 17,339 17,352 17,738 17,738 17,409 17,345
</TABLE>
- ------------
(1) Revenues less cost of sales.

(2) Net earnings, net earnings applicable to common stock and earnings per
common share for the year 1991 include an increase of $2,290, $2,290 and
$0.20, respectively, for the cumulative effect of a change in the accounting
method of income taxes.

(3) Excludes acquisitions and investments in unconsolidated entities.

(4) Earnings from operations before depreciation and amortization plus equity in
earnings (loss) from unconsolidated entities.

(5) Total stockholders' equity less liquidation value of preferred stock.

S-19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the Company's financial condition, results
of operations, capital resources and liquidity. This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus Supplement.

RESULTS OF OPERATIONS

FIRST QUARTER 1996 VERSUS FIRST QUARTER 1995

The Company's net earnings for the first three months of 1996 were $10.9
million as compared to $8.2 million for the first three months of 1995, an
increase of $2.7 million. Net earnings applicable to common stock for the first
quarter of 1996 were $8.8 million as compared to $6.1 million for the first
quarter of 1995, an increase of $2.7 million. Earnings per common share, after
restatement for the three-for-two stock split, increased to $.51 for the 1996
first quarter as compared to $.35 for the 1995 first quarter. Net earnings
applicable to common stock and per share results include a provision for
dividends on the Company's 9.96% Cumulative Preferred Stock (the "9.96%
Preferred Stock") and the Company's 5 1/4% Convertible Preferred Stock (the
"5 1/4% Preferred Stock").

NATURAL GAS SYSTEMS

Sales and transportation of natural gas through its owned and/or operated
natural gas pipeline systems is the Company's core business. For the first
quarter of 1996, the Company's system volumes increased 16% from the first
quarter of 1995 to a total of 3.5 BCF/d. Improved sales volumes resulted in a
$1.6 million increase in gross profit for the first quarter of 1996 as compared
to the first quarter of 1995. A significant portion of this improvement was the
result of the availability of natural gas and the operational flexibility at the
West Clear Lake Storage Facility ("WCLSF"), the upward pressure on natural gas
prices due to weather-related demands and a 38% increase in system sales
throughput.

ENERGY MARKETING PARTNERSHIP -- CORAL ENERGY RESOURCES, L.P.

The Coral energy marketing venture between the Company and Shell commenced
operations in November, 1995. Coral's total sales volume for the first quarter
of 1996 averaged 4.1 BCF/d which contributed $3.9 million to the Company's
pre-tax income.

NATURAL GAS PROCESSING/OFF-SYSTEM

During the first quarter of 1996, the Company's natural gas processing and
off-system marketing activities contributed gross profit of $2.0 million as
compared to $2.1 million for the corresponding period in 1995. The decrease in
gross profit for such activities reflects decreased profitability for natural
gas processing primarily as a result of decreased processing throughput.

REVENUES

Revenues for the first three months of 1996 were $432.4 million as compared
to $215.6 million for the first three months of 1995, an increase of $216.8
million. This revenue increase of over 100% resulted primarily from increased
system sales throughput due to weather-related demands. This increase in demand
also caused an increase in natural gas prices.

OPERATING EXPENSES/DEPRECIATION/GENERAL AND ADMINISTRATIVE EXPENSES

Operating expenses, depreciation, and general and administrative expenses
increased by $1.0 million for the first quarter of 1996 as compared to the first
quarter of 1995. The increase was primarily due to the expensing of one-time
project development costs in the first quarter of 1996.

OTHER INCOME (EXPENSE)

Interest expense decreased by $1.2 million in the first quarter of 1996 as
compared to the first quarter of 1995 as a result of lower average debt
balances. This decrease was partially offset by $0.9 million of distributions on
preferred equity interests of a subsidiary that were issued to a third party in
December 1995.

S-20

YEAR ENDED DECEMBER 31, 1995 VERSUS 1994

The Company's net earnings increased to $32.9 million for the year ended
December 31, 1995, compared to $30.5 million for the year ended December 31,
1994, an 8% increase. Net earnings applicable to common stock for the year ended
December 31, 1995, were $24.5 million, up from $22.2 million in 1994. Earnings
per common share increased to $1.41 per share for the 1995 annual period as
compared to $1.25 for the 1994 annual period, an increase of 13%. Net earnings
applicable to common stock and per share results for 1995 and 1994 are after
provisions for $8.4 million in dividends on the 9.96% Preferred Stock and the
5 1/4% Preferred Stock.

NATURAL GAS SYSTEMS

Sales, storage and transportation of natural gas through its owned and/or
operated natural gas pipeline systems and gas storage facilities is the
Company's core business. Volumes related to those activities accounted for 97%
of total systems throughput and 95%, or $158.3 million, of gross profit
(revenues less cost of sales) during 1995 as compared to 97% of total throughput
and 95%, or $150.1 million, of gross profit in 1994. Improved sales volumes, a
$4.5 million gain associated with a long-term gas sales contract, and gas
purchase and sales activity supported by the WCLSF were partially offset by
lower transportation volumes. Transportation volumes were impacted by the
expiration of two low margin transportation contracts and a reduction in volumes
nominated under a third low margin contract. In addition, transportation volumes
were negatively impacted by warmer than normal weather in the Company's market
area during the first half of 1995.

Revenues for the Company's natural gas systems increased to $1,012.5
million in 1995 as compared to $999.3 million for 1994, an increase of $13.2
million. This increase resulted from increased system sales volumes which were
partially offset by lower average sales prices and decreased transport volumes.

NATURAL GAS PROCESSING/OFF-SYSTEM MARKETING

Natural gas processing and off-system marketing activities contributed
approximately 2.4% and 0.3%, respectively, to total 1995 throughput and 4.8% and
0.1%, respectively, to gross profit. Gross profit from these two components of
the Company's operations increased to $8.2 million in 1995 as compared to $8.0
million in 1994 as a result of lower fuel and shrinkage costs for natural gas
processing.

Revenues for natural gas processing and off-system marketing decreased to
$31.1 million in 1995 as compared to $32.6 million in 1994, as a result of
decreased throughput and production by suppliers.

OPERATING EXPENSES/DEPRECIATION/GENERAL AND ADMINISTRATIVE EXPENSES

Operating expenses, depreciation, and general and administrative expenses
increased by $4.0 million during 1995 over 1994. Reduced operating expenses and
depreciation as a result of a small, non-strategic system in Louisiana disposed
of during the second quarter of 1995, was partially offset by increased ad
valorem taxes along with the depreciation on the fixed assets of a small
gathering and marketing company acquired in February 1995 and other capital
expenditures.

OTHER INCOME (EXPENSE)

Equity in earnings (loss) of unconsolidated entities decreased by $1.2
million in 1995 over 1994 reflecting the Company's share of losses in Evangeline
Gas Pipeline Company, LP and Evangeline Gas Corp. ("Evangeline") and decreased
earnings of Gulf Coast Natural Gas Company ("Gulf Coast"). The decreased
earnings from Gulf Coast and the Company's increased share of the losses
incurred by Evangeline was partially offset by the two months of earnings of
Coral. Earnings in Gulf Coast were lower primarily due to lower margins on sales
of natural gas volumes. In 1995, the Company's interests in Evangeline bore 100%
of all losses compared to 45% in 1994.

A gain of approximately $1.6 million, net of certain reserves, was
recognized by the Company during the second quarter of 1995, on the sale of a
small, non-strategic gathering system located offshore Louisiana.

Interest expense increased by $1.5 million in 1995 as compared to 1994
primarily due to a slightly higher effective rate of interest and an increase in
the average outstanding debt balance.

S-21

INCOME TAXES

Income tax expense increased $1.4 million in 1995 over 1994 due to
increased pre-tax earnings.

YEAR ENDED DECEMBER 31, 1994 VERSUS 1993

The Company's net earnings increased to $30.5 million for the year ended
December 31, 1994, compared to $22.1 million for the year ended December 31,
1993, a 38% increase. Net earnings applicable to common stock for the year ended
December 31, 1994, were $22.2 million, up from $17.0 million in 1993. Earnings
per common share increased to $1.25 per share for the 1994 annual period as
compared to $0.96 for the 1993 annual period, an increase of 30%. Net earnings
applicable to common stock and per share results for 1994 and 1993 are after
provisions for $8.4 million and $5.1 million, respectively, in dividends on the
9.96% Preferred Stock and the 5 1/4% Preferred Stock.

As more fully discussed below, the Company's growth in net earnings for the
year ended December 31, 1994 is the result of several factors, the most
significant of which was the inclusion of operations acquired by the Company
from Exxon Corporation (the "Acquired Exxon Operations") on September 15,
1993.

NATURAL GAS SYSTEMS

Sales and transportation of natural gas through its wholly or jointly owned
pipeline systems is the Company's core business and accounted for 97% of total
throughput and 95%, or $150.1 million of gross profit (revenues less cost of
sales) during 1994 as compared to 92% of total throughput and 92%, or $103.3
million of gross profit during 1993. Additionally, the gross profit attributable
to the Company's share of Gulf Coast gross profit decreased to $4.8 million in
1994 as compared to $5.5 million in 1993. As Gulf Coast is accounted for using
the equity method of accounting, the gross profit attributable to the Company's
share of Gulf Coast volumes is reported net of all expenses in the "Equity in
earnings of unconsolidated entities" amount on the Company's Consolidated
Statements of Earnings. During 1994, the Company's average daily system
throughput increased by 1,232 MMCF or 66% while natural gas systems gross profit
increased by $46.8 million. Substantially all of the increase in systems
throughput and gross profit is attributable to the Acquired Exxon Operations and
the expansion of the Company's pipeline facilities in south Texas.

Revenues for the Company's natural gas systems increased to $999.3 million
in 1994 as compared to $720.1 million for 1993, an increase of $279.2 million.
Such increase reflects the inclusion of the Acquired Exxon Operations for a full
year in 1994 partially offset by a 13% decrease in natural gas commodity prices
during 1994 as compared to 1993.

NATURAL GAS PROCESSING/OFF-SYSTEM MARKETING

Natural gas processing and off-system marketing activities contributed
approximately 2.7% and 0.3%, respectively, to total 1994 throughput and 4.9% and
0.1%, respectively, to gross profit. Gross profit from these two components of
the Company's operations decreased to $8.0 million in 1994 as compared to $8.7
million in 1993 as a result of lower volumes for off-system marketing activities
and higher fuel and shrinkage costs primarily in the first quarter, for natural
gas processing.

Revenues for natural gas processing and off-system marketing decreased to
$32.6 million in 1994 as compared to $70.1 million in 1993, principally because
of lower volumes sold in off-system marketing activities.

OPERATING EXPENSES/DEPRECIATION/GENERAL AND ADMINISTRATIVE EXPENSES

Operating expenses, depreciation, and general and administrative expenses
increased by $26.1 million during 1994 over 1993. Such increase was due largely
to the inclusion of the Acquired Exxon Operations.

OTHER INCOME (EXPENSE)

Equity in earnings (loss) of unconsolidated entities decreased by $1.0
million in 1994 over 1993 reflecting the Company's share of losses in Evangeline
and decreased earnings of Gulf Coast. Gulf Coast's

S-22

throughput for 1994 increased by approximately 3% over 1993 because of
additional supplies available from South Texas, however, margins were lower.

Interest expense increased by $6.6 million in 1994 as compared to 1993.
Such increase was primarily due to the addition of debt to finance the
acquisition of the Acquired Exxon Operations, partially offset by reductions in
debt from the proceeds of the Company's issuance of preferred stock in 1993.

INCOME TAXES

In August 1993, new legislation raised the maximum income tax rate for
corporations from 34% to 35%. A $0.8 million non-cash charge to deferred income
tax was made in 1993 for prior years as a result of the change in tax rates. The
remaining $2.7 million increase in income tax expense for 1994 as compared to
1993 is primarily the result of higher pretax earnings.

CAPITAL RESOURCES, LIQUIDITY AND OUTLOOK

CASH FROM OPERATING ACTIVITIES

For the quarter ended March 31, 1996, net cash provided by operating
activities totaled $70.3 million as compared to $12.7 million for the same
period in 1995. This $57.6 million increase in net cash provided by operations
is primarily due to changes in working capital. Excluding net changes in working
capital components, the Company's operating activities generated $21.0 million
in cash during the first three months of 1996 as compared to $20.0 million in
the first three months of 1995, an increase of $1.0 million. For the year ended
December 31, 1995, net cash provided by operating activities totaled $48.7
million as compared to $33.7 million for the same period in 1994. This increase
in net cash provided by operations was due to a $3.2 million increase in net
earnings adjusted for depreciation and amortization and other noncash items and
a $11.8 million decrease in the use of cash for working capital components. The
decrease in use of cash for working capital was due to a $7.4 million decrease
in storage gas inventory with the remainder due primarily to the timing of cash
receipts and payments. Excluding net changes in working capital components, the
Company's operating activities generated $76.4 million in cash during 1995 as
compared to $73.1 million in 1994.

CASH FLOW FROM INVESTING ACTIVITIES

Net cash used in investing activities during the first quarter of 1996
totaled $8.1 million. Approximately $6.8 million was used for capital
expenditures, primarily related to the expansion of the WCLSF. For the year
ended December 31, 1995, net cash used in investing activities totaled $25.2
million for capital expenditures and other investment activities. Capital
expenditures totaled $19.1 million, which included $3.8 million for the WCLSF,
$2.9 million for a new natural gas pipeline in Grimes County, Texas and $12.4
million for other capital expenditures. In addition, $6.7 million was used to
acquire a gathering system and marketing operation in Louisiana.

CASH FLOWS FROM FINANCING ACTIVITIES

The Company reduced long-term debt by $64.0 million during the first
quarter of 1996 with the necessary funds being provided primarily from cash
generated by its operating activities and proceeds from the sale of storage gas
inventory. The Company made debt payments under its revolving credit facilities
of $74.1 million during 1995 with the necessary funds being provided by cash
generated from its operating activities and $55.0 million in proceeds from the
sale of preferred equity interests in a subsidiary during December 1995. See
" -- Liquidity." During the same period, the Company also made periodic
borrowings totaling $22.0 million under its revolving credit facilities to fund
capital expenditures and to supplement its working capital requirements
including purchases of storage gas inventory. Additionally, the Company made net
payments of $19.7 million under its various money market credit lines.

LIQUIDITY

The Company's working capital decreased $52.3 million from $40.6 million at
December 31, 1995 to a deficit of $11.7 million at March 31, 1996. This decrease
was due primarily to the sale of a significant portion of the Company's
investment in storage gas inventory. In order to effectively utilize its cash

S-23

balances, the Company will continue to make periodic borrowings under its
revolving credit facilities and money market credit lines to meet immediate cash
needs.

At March 31, 1996, the Company's long-term debt with banks totaled $231.9
million, consisting of $217.9 million borrowed under its $480 million revolving
credit facilities established for its subsidiaries TAHC and TNGC and $14.0
million borrowed under various money market credit lines. In addition, the
Company had $11.2 million in notes payable related to industrial development
revenue bonds issued by Lewis and Pleasants Counties, West Virginia. In
connection with the Company's acquisition of Transok, the Company (i) incurred
indebtedness of $386 million, net of a voluntary payment, under the Transok
Credit Facility, which matures on December 31, 1997, (ii) borrowed $180.9
million under the TAHC credit facility and (iii) assumed $200 million of
Transok's medium term notes. Following the Transok acquisition, the Company's
long-term debt aggregated approximately $1.0 billion.

Effective January 12, 1995, the Company amended its credit facilities to
combine a majority of the existing bank debt of its three principal operating
subsidiaries into a single, $455.0 million, eight-year, revolving credit
facility at a newly formed subsidiary, Tejas-Acadian Holding Company ("TAHC").
One of the subsidiaries, TNGC, retained a $25 million working capital facility
with terms and conditions substantially similar to the combined facility. These
two facilities combined provide the Company's subsidiaries with $480.0 million
in borrowing capacity. At March 31, 1996, the Company had available borrowing
capacity under the TAHC and TNGC revolving credit agreements (the "Credit
Agreements") of $239 million after giving effect to borrowings under the Credit
Agreements and its money market lines (offset by available cash pursuant to the
terms of such money market lines of credit) and certain letters of credit.
Following the acquisition of Transok, availability under the TAHC and TNGC
revolving credit facilities was reduced to $58.1 million. Under the terms of the
Credit Agreements, after two years, the revolving credit facilities will, unless
extended at the option of the lenders, convert to six-year reducing revolvers.
During the fourth quarter of 1995, the lenders under such Credit Agreements
agreed to extend by one year both the maturity date and the period in which
commitment reductions commence. Commitment reductions of $15.0 million per
quarter are currently scheduled to begin March 31, 1998 with the final remaining
commitment reduction to occur on December 31, 2003. Based upon the current terms
of the Credit Agreements and the outstanding principal balance thereunder at
June 6, 1996, the date of the Transok acquisition, no principal payments will be
required until early 1999.

The obligations under the Credit Agreements are secured by the capital
stock, partnership interests and various intercompany notes of all material
subsidiaries and partnerships of TAHC (excluding the capital stock of Acadian,
but including the capital stock and partnership interests of the material
operating subsidiaries and partnerships of Acadian) and are guaranteed by such
subsidiaries and partnerships. In addition, the Company guarantees TNGC's
obligations under a lease of certain pipeline and related facilities from a
third party. The obligations under the Transok Credit Facility are secured by
the capital stock of all of Transok's subsidiaries and certain partnership
interests held by Transok and are guaranteed by such subsidiaries. The Transok
Credit Facility is also secured by certain intercompany notes. In addition, the
Company guarantees Transok's obligations under the Transok Credit Facility and
under the lease agreement for the Transok Plants. All of the Company's credit
facilities are subject to certain covenants, including the maintenance of
certain financial ratios, with which the Company expects to be able to comply in
the ordinary course of business. The notes payable relating to the Lewis and
Pleasants counties bonds are secured by bank letters of credit, which in turn
are secured by mortgages on two natural gas processing plants located in West
Virginia. Such notes are also subject to certain covenants that require the
Company's subsidiaries, Gulf Energy Development Corporation and Gulf Energy
Gathering and Processing Corporation, to maintain certain financial standards.

Although TAHC and TNGC have additional borrowing capacity available under
the Credit Agreements, the amount of loans, advances and distributions that may
be made to the Company from TAHC or TNGC is subject to certain limitations. At
June 6, 1996, immediately following the Transok acquisition, the permitted
amount of such payments was $101.0 million, of which $21.3 million could be paid
as dividends and $79.7 million could be loaned to the Company or used to repay
loans from the Company. Such limitations are not expected to have any material
effect on the ability of the Company to meet its cash obligations. The Company's
liquidity is ultimately dependent on cash generated by operations, and the

S-24

Company believes its earnings from operations will generate sufficient cash to
fund expansion projects, make required debt payments and meet anticipated
dividend requirements of the 9.96% Preferred Stock and 5 1/4% Preferred Stock in
the foreseeable future. Based on the terms of the Credit Agreements and the
outstanding principal balance at June 6, 1996, no principal payments are
required until early 1999. The Transok Credit Facility matures on December 31,
1997.

The Company has uncommitted money market credit lines which allow the
Company to borrow up to $40.0 million for periods of up to two months. Any such
borrowings are unsecured and may be extended for additional periods if agreed to
by the lender. At March 31, 1996, the Company had an outstanding balance of $14
million under such lines. The Company has agreed to maintain funds including
availability under the Credit Agreements sufficient to repay borrowings under
the money market credit lines.

On December 29, 1995, a subsidiary of the Company, Tejas-Magnolia Energy,
L.L.C. ("Tejas-Magnolia"), issued preferred equity interests to a third party
in return for a capital investment of $55.0 million. Tejas-Magnolia is required
to make preferred distributions to the third party which constitute a return on
capital (at an effective fixed after tax cost to the Company of 4.2%) and return
of capital over an eight-year term. Annual distributions (including returns on
and of capital) of approximately $8.7 million are payable from 1996 through 2001
and approximately $9.5 million in each of 2002 and 2003. In connection with the
issuance of the preferred equity interests in Tejas-Magnolia, another subsidiary
of the Company has contributed a portion of the proceeds from sales under
certain long-term natural gas sales contracts to Tejas-Magnolia in exchange for
common equity interests in Tejas-Magnolia. This ongoing contribution supports
the preferred distribution obligations of Tejas-Magnolia during the eight-year
term.

As part of the Transok acquisition in June 1996 and the acquisition of
pipeline and related facilities from Exxon in September 1993, the Company
entered into five-year operating leases with third parties for seven natural gas
processing plants and the pipeline system, respectively. Lease payments under
the two leases are adjusted quarterly based upon the respective lessor's
financing costs. However, with respect to the Exxon lease, the Company has
entered into interest rate swap agreements in a notional amount of $144.5
million to hedge the effects of such adjustments on the required minimum lease
payments. The Transok lease expires June 6, 2001 unless extended by mutual
consent of the lessor and lessee for up to two additional two-year extensions.
The Exxon lease expires on September 14, 1998. Upon expiration of the leases,
the Company, at its option, may either purchase the leased properties or pay
termination fees of $106 million under the Transok lease or $122.8 million under
the Exxon lease.

The Company's WCLSF requires the maintenance of cushion gas in order to
sustain anticipated operational requirements. Such cushion gas requirements have
been satisfied by a combination of natural gas purchased by the Company and
third party natural gas stored in the facility. At March 31, 1996, the Company
had purchased approximately 10.4 BCF of cushion gas. In late 1994, the Company
entered into an agreement with a third party whereby the third party agreed to
purchase up to 35 BCF of natural gas at a cost not to exceed $65.0 million and
to store such gas in the WCLSF. The agreement with the third party is currently
scheduled to expire in September 2000. In order to secure the Company's ability
to purchase the gas from the third party, the agreement provides for the payment
by the Company of a reservation fee to the third party which is adjusted
quarterly based upon the third party's financing costs. On certain option dates,
the Company may elect to purchase specified volumes of the third party's natural
gas based on market prices. Should the Company decline to purchase the natural
gas, the third party may instruct the Company to sell such volumes on the third
party's behalf. In such case, it will be necessary for the Company to obtain
cushion gas through other means in order to meet the anticipated operational
requirements of the WCLSF. At March 31, 1996, the third party had 18.5 BCF of
natural gas in storage at the WCLSF, which such party purchased for $33.1
million. Based upon the volumes and rates in effect at March 31, 1996, the
Company estimates the net annual cost related to the reservation fee on the 18.5
BCF of natural gas to be approximately $1.2 million. The Company owns, as a
result of the Transok acquisition, a 26 BCF storage facility in Oklahoma (the
"Greasy Creek Storage Facility"). The Greasy Creek Storage Facility requires
the maintenance of cushion gas in order to sustain operational requirements.
Such gas is currently provided by Transok.

S-25

The Company has an obligation to redeliver certain volumes of gas from the
WCLSF. In addition to the 18.5 BCF described above, the Company has an
obligation to redeliver approximately 1.8 BCF of gas held in storage for other
third parties. The Company bears the cost of physical loss, if any, incurred
during storage. Management estimates that physical losses will not be
significant and has insured against physical losses due to catastrophic events.
Of the total 35 BCF of natural gas in the WCLSF at March 31, 1996, 20.3 BCF was
owned by third parties.

In order to hedge the interest rate risks associated with the Company's
financing activities (including an operating lease obligation), the Company
frequently enters into interest rate swaps with financial institutions in order
to manage interest rate risk. While the interest rate swaps eliminate the risks
associated with increases in the floating interest rates of the Company's
obligations, the swaps also eliminate the opportunities associated with
reductions in such floating interest rates. Payments received or made by the
Company under such interest rate swaps are recorded as reductions to or
increases in interest expense over the life of the interest rate derivative
instrument. In connection with the Transok acquisition, the Company also entered
into certain fixed interest rate swaps and caps and a notional amount of $200
million of other interest rate option agreements. As of June 30, 1996, the
Company has entered into a total notional amount of $580.5 million of fixed
interest rate swaps and caps for hedging purposes with a weighted average LIBOR
rate of 6.22% (excluding the Company's average borrowing cost over LIBOR). The
weighted average life of the interest rate swap and cap hedging transactions is
approximately four years.

The Company uses derivative financial instruments (primarily futures, swaps
and other contracts) as an extension of its commercial natural gas purchases and
sales and to hedge price exposure, including location and pricing basis, of its
storage and exchange gas inventories, commitments, and certain anticipated
transactions. While the derivative financial instruments are intended to reduce
the risks associated with unfavorable changes in such prices, the derivative
financial instruments also reduce the opportunities associated with favorable
changes in market prices. Any increases or decreases in the market value of such
derivative transactions are deferred and accounted for as part of the
transactions or activities being hedged. The Company's interest rate and other
derivative agreements are with established exchanges, energy companies, and
major financial institutions, and the Company believes that its counterparties
will be able to satisfy their contractual obligations. Coral engages in similar
derivatives transactions for its own account. Transok has historically entered
into anticipatory hedges for gas storage and gas processing. The methodology
used could result in Transok's having open positions in anticipation of future
requirements. Since the Transok acquisition, the Company has caused Transok to
close all open positions in order to more closely coordinate hedging activities
with the Company's hedging policy.

In the normal course of business, the Company regularly reviews
opportunities for the possible acquisition of additional natural gas pipelines
and companies that own natural gas pipelines. When potential acquisition
opportunities are deemed to be consistent with the Company's growth strategy,
bids or offers in amounts and with terms acceptable to the Company may be
submitted. It is uncertain whether any such bids or offers which may be
submitted by the Company would be acceptable to the sellers of such acquisition
targets. In the event of a future significant acquisition, the Company may
require additional financing in connection therewith.

NEW FINANCIAL ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Certain long-lived assets and certain identifiable
intangibles to be disposed of must be reported at the lower of carrying amount
or fair value less cost to sell. SFAS No. 121 is effective for the fiscal years
beginning after December 15, 1995. As of March 31, 1996 the Company is not aware
of any assets that would meet the test for impairment.

In October, 1995, the FASB issued SFAS No. 123 ACCOUNTING FOR STOCK BASED
COMPENSATION which defines a fair value method of accounting for employee stock
options and similar equity instruments. This

S-26

statement is effective for fiscal years beginning after December 15, 1995. As
allowed by SFAS No. 123, the Company plans to continue to measure compensation
cost for their plans using the intrinsic value method of accounting prescribed
by Accounting Principles Board Opinion No. 25 ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES with pro forma disclosure in the future of any difference between
compensation cost determined by using the intrinsic value method and the related
cost measured by using the fair value method.

OUTLOOK

The Company's management expects its results of operations for the entire
year of 1996 to be favorable when compared to the 1995 annual period due to
several factors. The Company believes there are many opportunities available for
future growth and continued expansion of operations. The Transok acquisition
provides the Company with the opportunity to increase the sale of natural gas to
certain new markets in Oklahoma and to increase the flow of gas, within the
state, west to east. While no prediction can be made as to the impact of Coral
on the Company's prospects, the Company believes that over the next several
years Coral should be in a position to take advantage of the unutilized capacity
in the Company's major long-distance transmission lines. In addition, the large
number of interconnects between the Company's pipelines and other intrastate and
interstate pipelines have the potential to become important supply points for
Coral. Additionally, substantial capacity remains to be developed at the WCLSF
which has the potential to continue to enhance profits from services provided to
both suppliers and consumers and from gas held in storage for future delivery.
The capital invested by the Company at WCLSF since September 1993 has increased
the availability of natural gas and the operational flexibility of the WCLSF.
This permitted the Company to sell approximately 11 BCF of additional natural
gas volumes out of the storage facility during the 1995-96 winter season and to
provide additional daily storage injection and withdrawal capabilities to
accommodate the seasonal needs of customers. Further development of the WCLSF is
possible and the Company will continue to monitor and review the economic
benefit of such development. There can be no assurance that market conditions,
including the average cost of natural gas held in storage, will always be
conducive to maintaining the current level of profitability. The Company has
historically shown the ability to adapt to changing operational requirements and
capitalize on new market opportunities. Although the foregoing factors present
the Company with opportunities to grow and expand, there can be no assurance
that such factors will result in future growth and expansion of the Company's
operations, revenues and earnings.

The Company intends to refinance or pay down borrowings under the Transok
Credit Facility (which matures on December 31, 1997) and other indebtedness
incurred in connection with the Transok acquisition through the application of
the net proceeds of the Offerings, the possible sale of interests in
non-strategic assets, formation of partnerships or joint ventures, placement of
long-term debt, renegotiation of credit facilities, the application of excess
cash flow, if any, or otherwise. In this connection, the Company is considering
the sale of approximately 1,000 miles of pipeline and a natural gas processing
plant in one of Transok's gathering systems. There can be no assurance that the
Company will be able to pay down such borrowings or other indebtedness or
successfully carry out such refinancing measures or that such measures, if
available, would be on terms favorable to the Company. Because of the many
opportunities the Company believes are available for future growth and continued
expansion of operations, the Company anticipates using substantially all of its
available cash in 1996 and 1997 for capital expenditures.

FORWARD LOOKING INFORMATION

The statements included in this Prospectus Supplement and the accompanying
Prospectus regarding future financial performance and results and the other
statements that are not historical facts are forward-looking statements. The
words "expect," "project," "estimate," "predict," "anticipate",
"believes" and similar expressions are also intended to identify
forward-looking statements. Such statements are subject to numerous risks,
uncertainties and assumptions, including but not limited to, the uncertainties
relating to industry and market conditions, prices of natural gas, and other
risks and uncertainties described in this Prospectus Supplement or the
accompanying Prospectus (including specifically those described in "Risk
Factors" in the accompanying Prospectus) and in the Company's other filings
with the Securities and Exchange Commission. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.

S-27

BUSINESS

THE COMPANY

The Company is a major intrastate natural gas pipeline company engaged in
the business of purchasing, gathering, processing, treating, transporting and
marketing natural gas. The Company is one of the largest independent intrastate
gatherers and transporters of natural gas volumes through company-owned
pipelines in the United States. The Company's operations are situated primarily
in the major gas-producing areas in Texas, Louisiana, the Texas and Louisiana
Gulf Coast regions and Oklahoma, with additional facilities located in West
Virginia. The Company is a holding company that conducts operations through four
principal subsidiaries, Tejas Gas, Acadian, TNGC and, since June 1996, Transok.
See "-- Transok Acquisition." In addition, the Company offers natural gas
marketing throughout North America as well as other related energy and financial
services through Coral, a joint venture partnership with Shell.

As of June 6, 1996, following the Transok acquisition, the Company owned
and/or operated approximately 12,500 miles of intrastate natural gas pipeline
systems, including systems held in nine joint ventures. The Company's pipeline
systems consist of main lines, lateral lines and gathering lines and have
approximately 290 interconnections with both interstate and intrastate pipelines
in Texas, Oklahoma and Louisiana. Through these interconnections, the Company
can access natural gas supplies from sources not directly connected to its
pipelines and deliver natural gas to those customers who are outside of the
Company's geographical area of pipeline operations. Excluding Transok, the
Company's natural gas sales, transportation and processing activities recorded
an average total throughput of 3.2 BCF/d in 1995 and 3.5 BCF/d in the first
quarter of 1996. Transok's average total throughput was 1.8 BCF/d in 1995 and
1.7 BCF/d in the first quarter of 1996. The Company also owns underground
natural gas storage facilities in Texas and Oklahoma and leases an underground
natural gas storage facility in Louisiana. These facilities have a combined
storage capacity of 155 BCF and a withdrawal capacity of 1.1 BCF/d. In addition,
the Company operates nine owned and seven leased natural gas processing plants,
which have a combined processing capacity of approximately 725 MMCF/d and
approximately 50,000 barrels of NGLs per day.

The Company, a Delaware corporation, was organized on September 16, 1988 by
Hamilton Oil Corporation ("HOC") for the purpose of holding the capital stock
of Tejas Gas, which had been an indirect, wholly owned subsidiary of HOC or its
predecessor since 1979. Tejas Gas has been engaged in natural gas pipeline
operations and related activities since its inception in 1967. On July 1, 1988,
Tejas Gas purchased all of the outstanding capital stock of Gulf Energy Holding,
Inc., another company engaged through subsidiaries in natural gas pipeline
operations, principally in Texas. On December 27, 1988, the Company's capital
stock was distributed to the stockholders of HOC in the form of a spin-off. On
December 28, 1990, the Company purchased through Acadian, a wholly owned
subsidiary, all of the capital stock of several corporations comprising the
Acadian Gas Group, a group of companies engaged in natural gas pipeline
operations, principally in Louisiana. On September 15, 1993, the Company,
through a newly formed wholly owned subsidiary, TNGC, acquired from Exxon
substantially all of Exxon's Texas and Louisiana intrastate natural gas pipeline
operations as well as a significant natural gas storage facility. In January
1995, the Company transferred the capital stock of Tejas Gas, Acadian and TNGC
to its wholly owned subsidiary, TAHC, in connection with the amendment and
consolidation of the Company's credit facilities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources, Liquidity and Outlook." The Company, through subsidiaries of Tejas
Alliance Holding Company, holds a one-third interest in Coral, a natural gas and
energy marketing joint venture. In June 1996, the Company, through a subsidiary
of Tejas Transok Holding Company, acquired Transok, an intrastate natural gas
pipeline operator and gas processor with assets located primarily in Oklahoma,
from CSW.

The executive offices of the Company are at 1301 McKinney, Suite 700,
Houston, Texas 77010, and its telephone number is (713) 658-0509.

S-28

BUSINESS STRATEGY

The Company's business strategy is to achieve (i) growth through
acquisitions and expansion of its existing pipeline systems, (ii) increased
utilization of its existing pipeline systems, and (iii) growth of the Company's
national marketing presence through enhancement of Coral's natural gas marketing
business and Coral's expansion into power marketing.

Consistent with this strategy, in June 1996 the Company acquired Transok
from CSW, an electric utility holding company. See "-- Transok Acquisition."
Management believes that the acquisition of Transok is a significant step in
implementing the Company's business strategy and providing opportunities for
future growth. Specifically, management believes that Transok provides to the
Company (i) high-quality and well-maintained assets, (ii) expansion into a
geographic region situated in or near long-lived natural gas reserves, (iii) an
opportunity to develop a significant volume of west-to-east natural gas
transportation, facilitating the movement of gas supplies into attractive
northeastern markets, (iv) potential for the continued expansion of Transok's
gathering and transmission systems and gas processing capabilities, (v)
opportunities to expand Coral's natural gas marketing activities utilizing
Transok's access to large volumes of gas supplies, (vi) a long-term contractual
relationship with PSO, and (vii) a strong management team positioned to take
advantage of Transok's asset base and geographic location.

To further enhance throughput on the newly acquired Transok pipeline
system, the Company is proposing to construct two 24-inch pipelines aggregating
approximately 130 miles at a combined cost of approximately $75 million. These
proposed pipelines, which are expected to help facilitate the movement of
volumes of natural gas from western to eastern Oklahoma, are anticipated to be
completed by mid-1997. This is expected to allow the Company to increase
Transok's pipeline throughput. Any such additional supplies will also complement
the Company's processing activities in Oklahoma. Natural gas volumes not
delivered by Transok to parties within Oklahoma will be delivered to Coral at
pipeline delivery points located on the Company's system. The Company will be
paid a market index price associated with such delivery points. These volumes
will provide Coral with additional supply sources, which should enhance its
capability to market natural gas, particularly in the Midwest. A new supply
region should also provide Coral with an opportunity to benefit from price
differentials that occur from time to time between different geographic delivery
points.

Transok has a contract with PSO extending through 2002 providing for the
transportation of up to 255 MMCF/d of natural gas on Transok's pipeline system.
Transok's pipeline system was initially developed to service PSO's Oklahoma
power plants. The Company believes that Transok's relationship with PSO and the
interconnection of Transok's pipeline system with PSO's power plants provides
the Company opportunities to sell or transport additional volumes of natural gas
directly to PSO and, through Coral, to explore electric power marketing
opportunities. PSO is among the industry leaders in providing low-cost
electricity from natural gas.

S-29

The Company anticipates its business development activities will be
primarily focused on increasing gas sales to industrial and commercial end users
and LDCs. In addition to the flexibility of being able to move gas through the
Company's existing transmission and gathering systems, these business
development activities will be enhanced by the gas marketing and risk management
activities provided by Coral.

TRANSOK ACQUISITION

On June 6, 1996, the Company acquired Transok from CSW through a merger of
a recently formed wholly owned subsidiary of the Company into Transok pursuant
to an Agreement of Merger dated May 9, 1996, between the Company and CSW, as
amended. Immediately prior to the acquisition, Transok sold the Transok Plants
to the Lessor, which in turn leased these facilities to the Company.

Transok operates intrastate natural gas pipeline systems in Oklahoma,
Louisiana and Texas and is the largest processor of natural gas in Oklahoma.
Transok's operations include (i) approximately 7,000 miles of gathering and
transmission pipelines in Oklahoma, Louisiana and Texas with 2.3 BCF/d of
pipeline capacity; (ii) eight operating processing plants, of which seven are
leased to Transok, with total processing capacity of 564 MMCF/d of natural gas;
(iii) a 26 BCF-capacity natural gas reservoir storage facility with 300 MMCF/d
of withdrawal and 200 MMCF/d of injection capacity; and (iv) 1.4 trillion cubic
feet of connected third-party natural gas reserves. Transok's average system
throughput was 1.2 BCF/d during the first quarter of 1996 and 1.3 BCF/d in 1995.
NGL production averaged 25,100 barrels per day during the first quarter of 1996
and 22,400 barrels per day in 1995.

The total purchase price received by CSW at closing was $690 million in
cash, of which $565 million was paid by the Company and $125 million was paid by
the Lessor to acquire the Transok Plants. In addition, as part of the
transaction, Transok retained $200 million of long-term debt. The Company's
financing for its cash requirements consisted of (i) $178 million borrowed under
an existing credit facility and (ii) $387 million, net of a voluntary
prepayment, borrowed under the Transok Credit Facility. The Lessor is leasing
the Transok Plants to the Company for a five-year term with annual lease
payments of approximately $9 million. The lease agreement may be extended by the
Company, with approval by the Lessor, and provides the Company the option to
purchase the Transok Plants during the term. The option to purchase all of the
Transok Plants is exercisable for $125 million. If such purchase option is not
exercised, the Company will be obligated to pay the Lessor a termination fee of
approximately $106 million at the end of the lease. However, such fee will be
reduced by the amount, if any, by which the proceeds from the Lessor's sale of
the assets exceed $19 million. The lease also provides the Company the option to
purchase at any time during the term one or more of the Transok Plants for an
aggregate amount not exceeding $31 million, with corresponding reductions in the
$106 million termination fee and $19 million threshold amount.

Transok's business consists primarily of the transmission and gathering of
natural gas, and Transok's extensive transmission and gathering pipeline system
positions Transok as a major natural gas transporter, especially in facilitating
the movement of natural gas from western to eastern Oklahoma. Transok's
approximately 6,500 miles of pipeline (excluding leased lines and pipelines
owned by partnerships and joint ventures in which Transok has an interest) in
Oklahoma, Texas and Louisiana consists of approximately 1,980 miles of
transmission lines and 4,520 miles of gathering lines. Transok's pipeline system
includes 205 compressors with an aggregate compressor horsepower of 228,300,
which contributes to the system's peak capacity of approximately 2.3 BCF/d. As a
result of the physical location and design of Transok's pipeline system, Transok
has access to an abundant supply of natural gas reserves. Among other producing
regions in Oklahoma and northern Louisiana, portions of the pipeline system are
directly located in the Anadarko and Arkoma Basins. Transok also has access to
the Hugoton, Permian and San Juan basins through interconnections with other
pipelines. The Company is considering the sale of certain non-strategic assets
of Transok, including approximately 1,000 miles of pipeline and a natural gas
processing plant in one of Transok's gathering systems.

Transok's ownership and operation of the Greasy Creek Storage Facility
provides Transok with a readily available supply of natural gas. This facility
enables Transok to meet demands for natural gas during

S-30

periods of peak delivery without incurring peak demand charges from suppliers of
natural gas and provides Transok flexibility in managing its gas inventory. In
addition to having an aggregate storage capacity of approximately 26 BCF, the
facility's operating capabilities include the ability to withdraw about 300
MMCF/d of natural gas and to inject 200 MMCF/d of natural gas.

As a result of the oversupply of natural gas delivery capability to the
western U.S. markets and the continuing strength of eastern coastal U.S.
markets, industry strategy is to move natural gas supplies from the western and
Mid-Continent gas supply basins to the northeastern, midwestern and southeastern
U.S. markets. Transok's pipeline system, situated at the center of this
aggregation and distribution network with access to major market centers through
the interstate pipeline grid should be positioned to provide transportation and
related services to national marketers, such as Coral. The Company intends to
continue to aggregate additional supply in the western regions and to continue
to develop the necessary relationships with, and connections to, downstream
pipelines to provide adequate take-away capacity and attractive markets to its
customers.

As part of its growth strategy, the Company will continue to seek to
improve its position as an aggregator of supply, making investments that provide
Transok with direct access to wellhead supplies. In the last two years, Transok
has connected, through various projects, over 400 MMCF/d in new gas well
production to its pipelines. The majority of this new gas has come from existing
drilling areas in northern Louisiana and western Oklahoma and a new gas field in
Stephens County, Oklahoma.

The Transok operations include processing the natural gas it is marketing
or transporting to extract NGLs. In addition, Transok also processes natural gas
under contracts with third parties: processing gas in exchange for a percentage
of NGLs extracted or for a fee; and arranging third party processing of Transok
gas. Currently Transok is one of the largest natural gas processors in Oklahoma
and ranks among the largest NGL producers nationwide. Transok's gas storage
field enables it to manage the cost of gas processing by utilizing the most
economical source of gas for both processing input and shrink replacement.

CORAL ENERGY RESOURCES, L.P.

On November 1, 1995, Coral, an independently managed natural gas and energy
marketing venture between the Company and Shell, commenced operations. The
Company and Shell formed Coral in order to better serve their customers and
position their consolidated natural gas marketing activities for further growth.
Coral currently ranks among the top five natural gas marketers in the United
States. Coral commenced operations with natural gas sales of 3.7 BCF/d, 1.5
BCF/d of which was natural gas purchased on the Company's systems. Effective
July 1, 1996, sales of natural gas increased to approximately 5.0 BCF/d as a
result of Coral's acquisition of Catex Vitol, Inc., which markets natural gas
primarily to industrial end users. Coral has access to all of the Company's
pipelines and storage facilities and Shell dedicates over 2 BCF/d of gross
natural gas production and approximately 5.5 trillion cubic feet of natural gas
reserves. In addition to volumes provided by the Company, Coral markets
substantially all of Shell's U.S. gas production. In addition, Coral has entered
into a contractual arrangement with a major financial institution to assist it
in providing a variety of specially tailored risk management services. Coral has
also received regulatory approval to market electricity in wholesale markets and
has begun increasing staff and taking other administrative measures in
anticipation of commencing such activities in the third quarter of 1996.

Coral is owned one-third by the Company and two-thirds by Shell. The
Company has the option to increase its ownership in Coral up to a 50% interest
in either 1998 or 1999 based on the attainment of certain earnings and/or volume
levels. Coral's board of directors consists of four members, two of whom are
appointed by the Company and two by Shell. Coral was initially staffed with
employees from the Company and Shell.

The Company and Shell have each contributed economic interests in natural
gas sales contracts and cash to Coral for their respective interests. Each
partner has received equity credit for natural gas committed to the partnership
that is subject to long-term contracts, and natural gas volumes and margins are
subject to make-up payments by the responsible partner if actual volumes and
margins fail to meet targeted contract

S-31

levels. If Coral is unable to take all of the natural gas tendered for delivery
by its partners, Coral is obligated to pay for such natural gas at the price
that would have otherwise been applicable, mitigated by the amount obtained from
any sales of such natural gas to third parties. In the future, Coral will
purchase Transok volumes on comparable terms as other gas tendered by the
Company.

PRO FORMA SUMMARY OF OPERATIONS

The following table sets forth pro forma summary data for the Company's
operations as adjusted to give effect to the Transok acquisition:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996 AS OF DECEMBER 31, 1995
------------------------------- -------------------------------
HISTORICAL HISTORICAL
------------------ ------------------
COMPANY TRANSOK PRO FORMA COMPANY TRANSOK PRO FORMA
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Miles of pipeline(1)............... 5,488 7,094 12,582 5,488 7,094 12,582
Operating gas processing
plants(2)....................... 8 8 16 8 7 15
Processing capacity
(MMCF/d)................... 165 564 729 165 444 609
Operating treating plants.......... 2 -- 2 2 -- 2
Treating capacity (MMCF/d).... 100 -- 100 100 -- 100
Underground natural gas storage
facilities:
Number of storage
facilities(3)................. 2 1 3 2 1 3
Storage capacity (BCF).......... 129 26 155 129 26 155
Withdrawal capacity (MMCF/d).... 775 300 1,075 775 300 1,075
Injection capacity (MMCF/d)..... 320 200 520 160 200 360

(2) In connection with the Transok acquisition, seven of the eight Transok
plants were leased to the Company.

(3) Includes one leased storage facility in Louisiana.

S-32

LEGAL PROCEEDINGS

THE LONG TRUSTS LITIGATION

The Company is a defendant or party in various lawsuits that have arisen in
the ordinary course of the Company's business. In particular, a subsidiary of
the Company is a defendant in THE LONG TRUSTS V. TEJAS GAS CORP. ET. AL., 123rd
judicial District Court, Panola County, Texas, filed March 1, 1989, in which
plaintiffs assert claims and allege damages for breach of contract and failure
to take-or-pay for natural gas pursuant to three natural gas purchase contracts.
Plaintiffs allege that, in addition to failing to take or pay for gas, the
Company breached (a) one of the contracts by failing to take a minimum quantity
of gas and to install and maintain pipeline facilities sufficient to permit the
Company to meet its quantity purchase obligations, and (b) all three contracts
by failing to take gas in quantities sufficient to enable plaintiffs to produce
ratably with other producers in a common reservoir. In plaintiffs' Sixth Amended
Original Petition filed June 6, 1995, the plaintiffs are seeking take-or-pay
damages for the ten year period 1984-1994 in excess of $36.0 million, plus
pre-judgment interest, post-judgment interest, attorneys' fees and court costs
and other unspecified actual damages. In connection with their depositions in
this matter, certain expert witnesses retained by The Long Trusts have presented
damage models purporting to show approximately $60 million in take-or-pay
damages and $70 million in damages for failure to take the Long Trusts' gas
ratably. Management disputes The Long Trusts' claims and believes that The Long
Trusts' damage models are seriously flawed. On January 6, 1993, the court
entered an interlocutory summary judgment order granting in part and denying in
part plaintiffs' motions for summary judgment. The court found, among other
things, as a matter of law that (a) the Company breached the minimum take
obligations under one of the contracts, (b) the Company is not entitled to any
credits or offsets for natural gas purchased by third parties, and (c) the
"availability" of natural gas for take-or-pay purposes is established by the
delivery capacity testing procedures in the contracts. Damages, if any, have not
been determined. The effect of this order on the Company's case is unclear and
the Company has sought clarification and rehearing, but intends nevertheless to
defend its position aggressively. Although the trial judge had previously
indicated a preference for an August 1996 trial date, no firm trial date has
been set.

Although the Company has not obtained a formal opinion, based on
discussions with outside counsel and an internal examination of this lawsuit,
management believes that it has adequate defenses or recourse to third parties
relating to such lawsuit and does not believe this matter will have a material
adverse effect on the Company's financial condition. Because of the relationship
between The Long Trusts contracts and certain contracts between the Company and
Valero Transmission Company ("VTC"), and in order to resolve existing and
potential claims and disputes, the Company, VTC and Valero Transmission, L.P.
("VTLP") entered into an agreement, pursuant to which, among other things, the
Company, VTC and VTLP would cooperate in the conduct of The Long Trusts
litigation, and VTC and VTLP would bear a substantial portion of the costs of
any appeal and of the amount of any nonappealable final judgment rendered
against the Company. On April 15, 1994, the plaintiffs named VTC and VTLP
(collectively "Valero") as additional defendants to the lawsuit, alleging that
Valero intentionally and maliciously interfered with the plaintiffs' contracts
with the Company. In its Sixth Amended Original Petition, plaintiffs are seeking
damages against Valero in an amount in excess of $36.0 million, and plaintiffs
added a conspiracy claim against the Company alleging that the Company conspired
with Valero in interfering with the contracts. Plaintiffs also have added a
claim for exemplary damages treble the amount of the actual damages, if any,
found by the court for the interference and conspiracy claims. Plaintiffs assert
that the Company should be jointly liable with Valero for the damages plaintiffs
have asserted against Valero.

CITY OF BAYTOWN LITIGATION

The Company is a member of a joint defense group comprised of twenty-seven
companies that have been threatened with claims by various cities in Texas that
the companies owe franchise type fees for commercial gas operations within their
city limits. The Company and certain of its subsidiaries were named as
defendants in CITY OF BAYTOWN V. TEJAS GAS CORPORATION, 11th Judicial District
Court, Harris County, Texas, filed August 31, 1995. Plaintiff alleged that the
defendants carried on their commercial gas operations within the city limits of
Baytown without the City of Baytown's permission and without payment of fees to
the City, and asserted a number of causes of action against the defendants.
Plaintiff sought

S-33

unspecified damages based on various theories of recovery, including a
percentage of gross receipts from gas sales inside the City of Baytown, and
other remedies, including injunctive relief and exemplary damages. On January
18, 1996, the City of Baytown filed a Notice of Nonsuit Without Prejudice,
thereby dismissing its claims against the Company. The Company has filed a
counterclaim against the plaintiff seeking injunctive and declaratory relief
with respect to certain issues raised in the plaintiff's suit, which
counterclaim is pending. The law firm that represented the City of Baytown
announced that it would continue its efforts to bring similar suits by other
cities against pipeline companies. It is possible that claims by other cities
may be filed against the Company and other pipeline companies alleging similar
causes of action. Management believes that the Company has adequate defenses
relating to these types of claims, and does not believe that these matters will
have a material adverse effect on the Company's financial condition. However,
there can be no assurance that additional lawsuits will not be filed against the
Company or that the Company will prevail in any lawsuit that may be filed
against it.

UNDERWRITING

Subject to the terms and conditions set forth in the U.S. purchase
agreement (the "U.S. Purchase Agreement") among the Company and each of the
underwriters named below (the "U.S. Underwriters"), the Company has agreed to
sell to each of the U.S. Underwriters, and each of the U.S. Underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Oppenheimer & Co. Inc., PaineWebber Incorporated and Prudential Securities
Incorporated are acting as representatives (the "U.S. Representatives"), has
severally agreed to purchase from the Company, the number of shares of Common
Stock set forth below opposite their respective names.

NUMBER
U.S. UNDERWRITER OF SHARES
- ---------------------------------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............
Oppenheimer & Co., Inc..................
PaineWebber Incorporated................
Prudential Securities Incorporated......
---------
Total...................... 2,260,000
=========

The Company has also entered into an international purchase agreement (the
"International Purchase Agreement") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters"), for whom Merrill Lynch International,
Cazenove & Co. and NatWest Securities Limited are acting as representatives (the
"International Representatives" and, together with the U.S. Representatives,
the "Representatives"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of 2,260,000
shares of Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase
Agreement, the Company has agreed to sell to the International Managers, and the
International Managers severally have agreed to purchase from the Company, an
aggregate of 565,000 shares of Common Stock. The public offering price per share
and the total underwriting discount per share are identical under the U.S.
Purchase Agreement and the International Purchase Agreement.

In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such

S-34

Purchase Agreement if any of such shares are purchased. Under certain
circumstances, the commitments of the non-defaulting U.S. Underwriters or the
International Managers (as the case may be) may be increased as set forth in the
U.S. Purchase Agreement and the International Purchase Agreement, respectively.
The closing with respect to the sale of shares of Common Stock to be purchased
by the International Managers and the U.S. Underwriters are conditioned upon one
another.

The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale at the public offering price, less an amount not
greater than the selling concession. Under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are non-United States and non-Canadian persons or to persons they believe
intend to resell to persons who are non-United States persons or non-Canadian
persons, and the International Managers and any dealer to whom they sell shares
of Common Stock will not offer to sell or sell shares of Common Stock to persons
who are United States or Canadian persons or to persons they believe intend to
resell to United States or Canadian persons, except, in each case, for
transactions pursuant to the Intersyndicate Agreement.

The U.S. Representatives have advised the Company that the U.S.
Underwriters propose to offer the shares of Common Stock offered hereby to the
public initially at the public offering price set forth on the cover page of
this Prospectus Supplement, and to certain dealers at such price less a
concession not in excess of $ per share. The U.S. Underwriters may allow,
and such dealers may re-allow, a discount not in excess of $ per share on
sales to certain other dealers. After the U.S. Offering, the public offering
price, concession and discount may be changed.

The Company has granted the U.S. Underwriters an option, exercisable by the
U.S. Representatives, to purchase up to 339,000 additional shares of Common
Stock at the public offering price set forth on the cover page of this
Prospectus Supplement, less the underwriting discount. Such option, which
expires 30 days after the date of this Prospectus Supplement, may be exercised
solely to cover over-allotments. To the extent that the U.S. Representatives
exercise such option, each of the U.S. Underwriters will be obligated, subject
to certain conditions, to purchase approximately the same percentage of the
option shares that the number of shares to be purchased initially by that U.S.
Underwriter bears to the total number of shares to be purchased initially by the
U.S. Underwriters. The Company has also granted an option to the International
Managers, which expires 30 days after the date of this Prospectus Supplement, to
purchase up to 84,750 additional shares of Common Stock to cover
over-allotments, if any, on terms similar to those granted to the U.S.
Underwriters.

The Company and certain of its directors and executive officers have agreed
that they will not, for a period of 90 days from the date of this Prospectus
Supplement, without the prior written consent of Merrill Lynch, directly or
indirectly, offer, sell or otherwise dispose of or grant any option with respect
to, pledge, hypothecate or dispose of any shares of Common Stock or securities
convertible into Common Stock, except for the exercise of options granted
pursuant to existing employee plans (and except for the over-allotment option
granted to the Underwriters in the Offerings).

The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act or to
contribute to payments the Underwriters may be required to make in respect
thereof.

Certain of the Representatives, including Merrill Lynch & Co., have
performed investment banking services for the Company and its affiliates,
including providing a fairness opinion in connection with acquisitions, for
which they have received customary compensation. The Offerings are being made
pursuant to the provisions of Sections 2710(c)(8)(A) and 2720(c)(3)(B) of the
Conduct Rules of the National Association of Securities Dealers, Inc.

S-35

TEJAS GAS CORPORATION

INDEX TO FINANCIAL STATEMENTS

PAGE
-----
TEJAS GAS CORPORATION
Audited Annual and Unaudited Interim
Financial Statements:
Independent Auditors' Report....... SF-2
Consolidated Balance Sheets, March
31, 1996 (unaudited) and December
31, 1995 and 1994................. SF-3
Consolidated Statements of Earnings
for the Three Months Ended March
31, 1996 and 1995 (unaudited) and
the Years Ended December 31, 1995,
1994 and 1993..................... SF-4
Consolidated Statements of
Stockholders' Equity for the Three
Months Ended March 31, 1996
(unaudited) and the Years Ended
December 31, 1995, 1994 and
1993.............................. SF-5
Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1996 and 1995
(unaudited) and the Years Ended
December 31, 1995, 1994 and
1993.............................. SF-6
Notes to Consolidated Financial
Statements........................ SF-7

TRANSOK, INC.
Audited Annual and Unaudited Interim
Financial Statements:
Report of Independent Public
Accountants....................... SF-28
Consolidated Balance Sheets as of
December 31, 1995 and December 31,
1994 (audited) and as of March 31,
1996 (unaudited).................. SF-29
Consolidated Statements of Income
for each of the Three Years in the
Period Ended December 31, 1995
(audited) and for the Three Months
Ended March 31, 1996 and 1995
(unaudited)....................... SF-30
Consolidated Statements of Equity
for each of the Three Years in the
Period Ended December 31, 1995
(audited) and for the Three Months
Ended March 31, 1996
(unaudited)....................... SF-31
Consolidated Statements of Cash
Flows for each of the Three Years
in the Period Ended December 31,
1995 (audited) and for the Three
Months Ended March 31, 1996 and
1995 (unaudited).................. SF-32
Notes to Consolidated Financial
Statements........................ SF-33

SF-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors of
Tejas Gas Corporation:

We have audited the accompanying consolidated balance sheets of Tejas Gas
Corporation and its subsidiaries ("Tejas") as of December 31, 1995 and 1994,
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of Tejas' management. Our
responsibility is to express an opinion on the financial statements based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tejas as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

Houston, Texas
February 14, 1996
(April 11, 1996 as to
paragraph 5 of Note 12)

SF-2

TEJAS GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

DECEMBER 31,
MARCH 31, ----------------------
1996 1995 1994
---------- ---------- ----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents........... $ 937 $ 4,816 $ 7,954
Accounts receivable................. 185,081 181,704 112,368
Exchange gas receivable............. 9,547 10,004 8,543
Storage gas inventory............... 10,484 38,733 28,139
Prepaids and other current assets... 3,042 9,124 4,900
Deferred income tax asset........... 2,948 2,024 3,997
---------- ---------- ----------
Total current assets........... 212,039 246,405 165,901
---------- ---------- ----------
Property, Plant and Equipment -- at
cost.................................. 799,817 793,376 769,642
Less accumulated depreciation....... 186,364 178,642 148,114
---------- ---------- ----------
Property, plant and equipment,
net.......................... 613,453 614,734 621,528
---------- ---------- ----------
Goodwill, net........................... 10,161 10,278 10,745
---------- ---------- ----------
Investments in Unconsolidated
Entities.............................. 35,005 31,927 30,515
---------- ---------- ----------
Other Assets............................ 11,300 12,107 12,269
---------- ---------- ----------
Total.......................... $ 881,958 $ 915,451 $ 840,958
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Gas purchases payable............... $ 163,820 $ 153,867 $ 104,990
Exchange gas payable................ 14,285 9,825 8,776
Accounts payable.................... 10,929 9,508 4,543
Accrued liabilities................. 25,591 25,397 23,518
Income taxes payable................ 3,821 1,881 1,034
Current maturities of long-term
obligations...................... 5,317 5,317 --
---------- ---------- ----------
Total current liabilities...... 223,763 205,795 142,861
---------- ---------- ----------
Long-Term Debt.......................... 242,075 306,075 378,875
---------- ---------- ----------
Deferred Income Taxes................... 54,105 50,413 41,748
---------- ---------- ----------
Commitments and Contingencies........... -- -- --
---------- ---------- ----------
Preferred Membership Units of a
Subsidiary............................ 50,683 50,683 --
---------- ---------- ----------
Stockholders' Equity:
Preferred Stock, $1 par value;
6,000,000 shares authorized;
200,000 shares of 9.96%
Cumulative Preferred Stock
issued and outstanding in
1995 and 1994; $250
liquidation preference per
share........................ 200 200 200
260,000 shares of 5 1/4%
Convertible Preferred Stock
issued and outstanding in
1995 and 1994; $250
liquidation preference per
share........................ 260 260 260
Common Stock, $.25 par value;
30,000,000 shares authorized;
17,405,307, 11,603,263 and
10,508,729 shares issued and
outstanding at March 31, 1996,
December 31, 1995 and December
31, 1994, respectively........... 4,351 2,901 2,627
Capital surplus..................... 191,497 191,490 138,499
Retained earnings................... 115,024 107,634 135,888
---------- ---------- ----------
Total stockholders' equity..... 311,332 302,485 277,474
---------- ---------- ----------
Total.......................... $ 881,958 $ 915,451 $ 840,958
========== ========== ==========

See notes to consolidated financial statements.

SF-3

TEJAS GAS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- --------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 432,401 $ 215,633 $ 1,043,621 $ 1,031,967 $ 790,178
Costs and Expenses:
Cost of sales...................... 389,072 173,770 877,088 873,829 678,198
Operating expenses................. 9,516 9,372 38,081 36,153 19,504
Depreciation and amortization...... 8,079 7,947 32,324 30,398 23,314
General and administrative......... 6,047 5,294 20,407 20,264 17,870
---------- ---------- ------------ ------------ ----------
Total......................... 412,714 196,383 967,900 960,644 738,886
---------- ---------- ------------ ------------ ----------
Earnings From Operations................ 19,687 19,250 75,721 71,323 51,292
---------- ---------- ------------ ------------ ----------
Other Income (Expense):
Equity in earnings (loss) of
unconsolidated entities.......... 3,666 (74) (158) 1,057 2,043
Interest expense................... (5,155) (6,321) (26,130) (24,670) (18,053)
Distributions on Preferred Membership
Units of a Subsidiary................. (947) -- -- -- --
Other, net......................... 394 154 2,357 295 698
---------- ---------- ------------ ------------ ----------
Total......................... (2,042) (6,241) (23,931) (23,318) (15,312)
---------- ---------- ------------ ------------ ----------
Earnings Before Income Taxes............ 17,645 13,009 51,790 48,005 35,980
---------- ---------- ------------ ------------ ----------
Income Taxes:
Current............................ 3,939 1,955 9,656 9,354 7,328
Deferred........................... 2,768 2,875 9,197 8,105 6,583
---------- ---------- ------------ ------------ ----------
Total......................... 6,707 4,830 18,853 17,459 13,911
---------- ---------- ------------ ------------ ----------
Net Earnings............................ 10,938 8,179 32,937 30,546 22,069
---------- ---------- ------------ ------------ ----------
Preferred Stock Dividend Requirements... 2,098 2,098 8,393 8,393 5,053
---------- ---------- ------------ ------------ ----------
Net Earnings Applicable to Common
Stock................................. $ 8,840 $ 6,081 $ 24,544 $ 22,153 $ 17,016
========== ========== ============ ============ ==========
Weighted Average Number of Common Shares
Outstanding........................... 17,405 17,339 17,352 17,738 17,738
========== ========== ============ ============ ==========
Earnings Per Common Share............... $ .51 $ .35 $ 1.41 $ 1.25 $ .96
========== ========== ============ ============ ==========
</TABLE>
See notes to consolidated financial statements.

SF-4

TEJAS GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1996 1995 1994 1993
--------------------- -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock:
Par Value, $1 Per Share:
Authorized, 6,000,000 Shares:
9.96% Cumulative beginning balance.. 200,000 $ 200 200,000 $ 200 200,000 $ 200 -- $ --
Shares issued....................... -- -- -- -- -- -- 200,000 200
--------- -------- --------- --------- --------- --------- --------- ---------
Ending Balance.................. 200,000 $ 200 200,000 $ 200 200,000 $ 200 200,000 $ 200
========= ======== ========= ========= ========= ========= ========= =========
5 1/4% Convertible beginning
balance........................... 260,000 $ 260 260,000 $ 260 260,000 $ 260 -- $ --
Shares issued....................... -- -- -- -- -- -- 260,000 260
--------- -------- --------- --------- --------- --------- --------- ---------
Ending Balance.................. 260,000 $ 260 260,000 $ 260 260,000 $ 260 260,000 $ 260
========= ======== ========= ========= ========= ========= ========= =========
Common Stock:
Par Value, $0.25 Per Share:
Authorized, 30,000,000 Shares:
Beginning balance................... 11,603,263 $ 2,901 10,508,729 $ 2,627 10,350,544 $ 2,588 10,279,597 $ 2,570
10% Stock dividend.................. -- -- 1,053,330 263 -- -- -- --
Purchase of fractional shares....... -- -- (422) -- -- -- (247) --
Exercise of stock options, net...... 275 27,970 7 158,185 39 71,194 18
Three-for-two stock split........... 5,801,769 1,450 -- -- -- -- -- --
Other............................... 13,656 4 -- -- -- --
--------- -------- --------- --------- --------- --------- --------- ---------
Ending Balance.................. 17,405,307 $ 4,351 11,603,263 $ 2,901 10,508,729 $ 2,627 10,350,544 $ 2,588
========= ======== ========= ========= ========= ========= ========= =========
Capital Surplus:
Beginning balance................... 191,490 $ 138,499 $ 138,267 $ 28,681
10% Stock dividend.................. -- 52,535 -- --
Purchase of fractional shares....... -- (19) -- (7)
Exercise of stock options, net...... 7 (11) 253 291
Preferred shares issued............. -- -- -- 110,515
Preferred stock issuance cost....... -- -- (21) (1,213)
Other............................... -- 486 -- --
-------- --------- --------- ---------
Ending Balance.................. $191,497 $ 191,490 $ 138,499 $ 138,267
======== ========= ========= =========
Retained Earnings:
Beginning balance................... 107,634 $ 135,888 $ 113,735 $ 96,719
10% Stock dividend.................. (52,798) -- --
Net earnings........................ 10,938 32,937 30,546 22,069
Three-for-two stock split........... (1,450) -- -- --
Preferred dividend requirements..... (2,098) (8,393) (8,393) (5,053)
-------- --------- --------- ---------
Ending Balance.................. $115,024 $ 107,634 $ 135,888 $ 113,735
======== ========= ========= =========
Total................................... $311,332 $ 302,489 $ 277,474 $ 255,050
======== ========= ========= =========
</TABLE>
See notes to consolidated financial statements.

SF-5

TEJAS GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings.................... $ 10,938 $ 8,179 $ 32,937 $ 30,546 $ 22,069
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and
amortization............ 8,079 7,947 32,324 30,398 23,314
Amortization of deferred
loan costs.............. 221 232 928 1,360 899
Deferred income taxes...... 2,768 2,875 9,197 8,105 6,583
Equity in (earnings) loss
of unconsolidated
entities................ (3,666) 74 158 (1,057) (2,043)
Distributions from
unconsolidated
entities................ 2,389 385 1,467 2,673 2,520
Other, net................. 238 290 (646) 1,103 185
---------- ---------- ---------- ---------- ------------
20,967 19,982 76,365 73,128 53,527
Net increase in working capital,
net of effects from
acquisitions.................. 49,379 (7,317) (27,683) (39,449) (6,215)
---------- ---------- ---------- ---------- ------------
Net cash provided by
operating activities.... 70,346 12,665 48,682 33,679 47,312
---------- ---------- ---------- ---------- ------------
Cash Flows from Investing Activities:
Capital expenditures............ (6,758) (10,139) (19,101) (63,225) (10,066)
Acquisition from Exxon, net of
cash acquired................. -- -- -- -- (237,262)
Other acquisitions, net of cash
acquired...................... -- -- (6,746) -- (5,301)
Investments in unconsolidated
entities...................... (1,801) (162) (3,037) (304) (8,520)
Other, net...................... 425 (1,192) 3,664 (605) 460
---------- ---------- ---------- ---------- ------------
Net cash used in investing
activities.............. (8,134) (11,493) (25,220) (64,134) (260,689)
---------- ---------- ---------- ---------- ------------
Cash Flows from Financing Activities:
Net borrowings (repayments)
under line-of-credit
agreements.................... 3,000 (5,600) (19,700) 26,700 4,000
Exercise of stock options,
net........................... 7 -- 106 656 118
Proceeds from issuance of
long-term debt................ -- 15,000 22,000 74,900 272,000
Retirement of long-term debt.... (67,000) (10,000) (74,100) (62,190) (161,500)
Debt issuance/amendment costs
incurred...................... -- -- (1,493) -- (4,538)
Issuance of preferred stock, net
of expenses................... -- -- -- -- 109,974
Preferred stock dividends....... (2,098) (2,098) (8,393) (8,326) (3,721)
Proceeds from sale of preferred
membership units of a
subsidiary.................... -- -- 55,000 -- --
Other, net...................... -- -- (20) (21) (7)
---------- ---------- ---------- ---------- ------------
Net cash (used in) provided
by financing
activities.............. (66,091) (2,698) (26,600) 31,719 216,326
---------- ---------- ---------- ---------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents................... (3,879) (1,526) (3,138) 1,264 2,949
Cash and Cash Equivalents at
Beginning of Period................ 4,816 7,954 7,954 6,690 3,741
---------- ---------- ---------- ---------- ------------
Cash and Cash Equivalents at End of
Period............................. $ 937 $ 6,428 $ 4,816 $ 7,954 $ 6,690
========== ========== ========== ========== ============
</TABLE>
See notes to consolidated financial statements.

SF-6

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Tejas Gas Corporation ("Tejas") was organized in 1988 by Hamilton Oil
Corporation ("HOC") for the purpose of holding the capital stock of Tejas Gas
Corp. ("Tejas Gas"). Tejas Gas was incorporated in 1967 and had been an
indirect wholly owned subsidiary of HOC since 1979. On December 27, 1988, Tejas'
stock was distributed to the stockholders of HOC in the form of a spin-off and
Tejas became an independent, publicly traded company.

Tejas is a natural gas pipeline company engaged in purchasing, gathering,
processing, treating, transporting and marketing natural gas. Tejas conducts
operations through three subsidiaries of Tejas-Acadian Holding Company
("TAHC"): Tejas Gas, Acadian Gas Corporation ("Acadian") and Tejas Natural
Gas Company ("TNGC"). Tejas Gas conducts operations itself and through its
subsidiaries, Gulf Energy Pipeline Company, Gulf Energy Gathering & Processing
Corporation, Gulf Energy Marketing Company, Gulf Energy Liquids Company, Tejas
Hydrocarbons Company, East Texas Industrial Gas Company, Valley Gas
Transmission, Inc. and Tejas-Gulf Corporation. Acadian conducts operations
through Acadian Gas Pipeline System, Pontchartrain Natural Gas System, Pelican
Transmission System, Calcasieu Gas Gathering System, Spindletop Gas Distribution
System, Neches Pipeline System, LEDCO, Inc., Louisiana State Gas Corporation and
LEDCO Gas Gathering Inc. TNGC conducts operations through Tejas Gas Pipeline
Company, Tejas Gas Marketing Company, Tejas Gas Storage Company, Tejas Gas
Services Company, Cypress Gas Pipeline Company and Cypress Gas Marketing
Company. Tejas Alliance Holding Company ("TALHC"), through its subsidiaries,
owns a one-third interest in Coral Energy Resources, L.P. ("Coral"), a natural
gas marketing venture.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION -- The accompanying consolidated financial statements
include the accounts of Tejas and its wholly owned subsidiaries. Investments in
companies in which Tejas' ownership interest ranges from 20 to 50 percent and
Tejas exercises influence over operating and financial policies are accounted
for using the equity method. Other investments are accounted for using the cost
method. All significant intercompany balances and transactions have been
eliminated in consolidation. In connection with the preparation of these
financial statements, management was required to make estimates and assumptions
that effect the reported amount of assets, liabilities, revenues, expenses and
disclosure of contingent liabilities. Actual results could differ from such
estimates.

The accompanying consolidated financial statements and information as of
March 31, 1996 and for the three month periods ended March 31, 1996 and 1995 are
unaudited. In the opinion of Tejas' management, all adjustments (all of which
are normal and recurring) have been made which are necessary to fairly state
these interim financial statements.

Certain immaterial amounts in the consolidated financial statements for
periods prior to 1995 have been reclassified to conform to the current
presentation.

CASH AND CASH EQUIVALENTS -- Cash and cash equivalents consist of all cash
balances and highly liquid investments which have an original maturity at
purchase of three months or less.

EXCHANGE GAS -- Exchange gas volumes receivable are valued at the lower of
cost or market at the end of each period. Exchange gas volumes payable are
recorded at market value at the end of each period.

STORAGE GAS INVENTORY -- Storage gas inventory is valued at the lower of
cost or market at the end of each period. Natural gas is removed from inventory
at weighted average cost.

DERIVATIVES -- Realized gains and losses on hedges of existing assets or
liabilities are deferred and are ultimately recognized in income as part of the
carrying amounts of the related assets or liabilities. Gains and

SF-7

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

losses related to qualifying hedges of firm commitments or anticipated
transactions also are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs.

PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at
cost. Additions, improvements and major renewals are capitalized. Maintenance,
repairs and minor renewals are expensed as incurred.

The cost of property sold or retired is credited to the asset account, and
the related depreciation is charged to the accumulated depreciation account.
Profit or loss resulting from the sale or retirement is included in earnings.

Depreciation of property, plant and equipment is provided on a
straight-line basis over the estimated useful lives of the assets as follows:

Buildings............................ 7-30 years
Natural gas systems, storage,
processing plants and treating
plants............................... 10-35 years
Other equipment...................... 3-7 years

CAPITALIZED INTEREST -- Interest on funds used to finance construction of
significant assets is capitalized and amortized over the productive lives of the
related assets. All other interest is charged to expense as incurred. During
1994 and 1993, Tejas capitalized interest of $0.4 million and $0.1 million,
respectively. During 1995, no capital projects were of sufficient duration or
size to result in capitalized interest.

GOODWILL -- The excess of the acquisition costs over the fair value of
purchased assets, arising from the acquisition of Tejas Gas by HOC in 1978, is
recorded as goodwill and is being amortized $467,000 annually on a straight-line
basis over 40 years. At December 31, 1995 and 1994, the accumulated amortization
of goodwill was $8.4 million and $7.9 million, respectively. Tejas periodically
reviews the carrying value of goodwill in relation to the current and expected
operating results of Tejas Gas in order to assess whether there has been a
permanent impairment of goodwill.

REVENUES -- Customers are invoiced and the related revenue is recorded as
natural gas deliveries are made.

INCOME TAXES -- Tejas accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income
taxes are recorded for the effects of temporary differences between financial
and taxable income.

EARNINGS PER COMMON SHARE -- Earnings per common share are based upon the
weighted average number of shares of Common Stock and common stock equivalents,
if dilutive, outstanding during the year. Common stock equivalents consist of
shares issued assuming all stock options are exercised using the treasury stock
method. The difference between earnings per common share on a primary and a
fully diluted basis is not significant.

Earnings per common and common equivalent share amounts and average shares
entering into such computation for all periods reflect the three-for-two stock
split of Tejas' common stock effected in the form of a stock dividend authorized
in March 1993, the stock dividend of one-tenth of one share of common stock for
each share of common stock outstanding authorized July 19, 1995, and the
three-for-two stock split of Tejas' common stock effected in the form of a stock
dividend authorized in April 1996.

NEW FINANCIAL ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121 ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Certain long-lived
assets and certain identifiable intangibles to be disposed

SF-8

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of must be reported at the lower of carrying amount or fair value less cost to
sell. SFAS No. 121 is effective for the fiscal years beginning after December
15, 1995. As of March 31, 1996, the Company is not aware of any assets that
would meet the test for impairment.

In October, 1995, the FASB issued SFAS No. 123 ACCOUNTING FOR STOCK BASED
COMPENSATION which defines a fair value method of accounting for employee stock
options and similar equity instruments. This statement is effective for fiscal
years beginning after December 15, 1995. As allowed by SFAS No. 123, Tejas plans
to continue to measure compensation cost for their plans using the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25 ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES with pro forma disclosure in the
future of any difference between compensation cost determined by using the
intrinsic value method and the related cost measured by using the fair value
method.

3. ACQUISITION

In September 1993, Tejas, through a newly formed wholly owned subsidiary,
TNGC, acquired substantially all of Exxon Corporation's ("Exxon") intrastate
natural gas pipeline operations in Texas and Louisiana (the "Exxon
Transaction"). Significant assets acquired, either through cash purchase or
lease, included a 1,442-mile pipeline system in Texas (the "Tejas Gas Pipeline
System," formerly known as the EGSI System), a 565-mile pipeline system in
Louisiana (the "Cypress Gas Pipeline System," formerly known as the Monterey
System) and a 125 billion cubic feet ("BCF") natural gas storage facility
located near the Houston Ship Channel (the West Clear Lake Storage Facility (the
"WCLSF")). These pipeline systems have a combined throughput capacity of
approximately 3.2 BCF per day.

Approximately 508 miles of the Tejas Gas Pipeline System were purchased
from Exxon by an unrelated third party (the "Lessor") and leased to Tejas
under a five-year operating lease. Tejas has the option to purchase the leased
portion of the pipeline system (the "Leased System") during the term of the
lease for approximately $144.5 million or pay a termination fee at the end of
the lease of approximately $122.8 million.

The total consideration paid to Exxon for the Exxon Transaction at closing
was $380.0 million, of which $235.5 million was paid by Tejas and $144.5 million
was paid by the Lessor. Tejas financed its cash requirements for the Exxon
Transaction, including transaction costs of approximately $12.0 million,
primarily with bank borrowings (see Note 5).

The acquisition by TNGC was accounted for as a purchase, and the purchase
price was allocated to the acquired assets and liabilities based upon their
estimated fair market value at September 15, 1993. The lease of the Leased
System is for a five-year term and is accounted for as an operating lease (see
Note 14). The results of operations for the assets acquired or leased as a
result of the Exxon Transaction are included in the accompanying financial
statements for the period subsequent to September 15, 1993.

SF-9

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The unaudited pro forma condensed statement of earnings which follows
represents consolidated results of operations as if the Exxon Transaction had
been consummated at the beginning of 1993. Pro forma adjustments have been made
to the historical amounts for the entities and operations acquired for operating
expenses, depreciation and amortization, general and administrative expenses,
interest expense and related tax effects. Such amounts do not include the pro
forma effects of either issue of preferred stock (see Note 11), which were
integral to Tejas' financial condition prior to and after the Exxon Transaction.

YEAR ENDED
DECEMBER 31, 1993
--------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNT - UNAUDITED)
Revenues............................. $1,060,397
=============
Net earnings......................... $ 29,842
=============
Earnings per common share............ $ 1.40
=============

The pro forma results do not purport to be indicative of the results of
operations that would actually have been obtained if the acquisition had
occurred at the beginning of 1993.

4. PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment is as follows:

DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
Buildings and land................... $ 4,505 $ 3,181
Natural gas systems, storage,
processing plants and treating
plants............................. 776,719 756,482
Other equipment...................... 12,152 9,979
---------- ----------
Total........................... $ 793,376 $ 769,642
========== ==========

5. LONG-TERM DEBT

Long-term debt consisted of the following (See Note 18):

DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
Revolving Credit Agreements.......... $ 284,900 $ 337,000
Industrial Development Bonds......... 11,175 11,175
Money Market Lines of Credit......... 11,000 30,700
---------- ----------
307,075 378,875
Less current installments............ 1,000 --
---------- ----------
Total long-term debt............ $ 306,075 $ 378,875
========== ==========

TAHC AND TNGC FACILITIES

Effective January 12, 1995, Tejas amended its credit facilities to roll-up
a majority of the existing bank debt of its three principal operating
subsidiaries into a single, $455.0 million, eight-year, revolving credit
facility at a newly formed subsidiary, TAHC. One of the subsidiaries, TNGC,
retained a $25.0 million working capital facility with terms and conditions
substantially similar to the rolled-up facility. The two facilities combined
provide Tejas with $480.0 million in borrowing capacity. Both the TAHC and TNGC

SF-10

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

credit facilities bear interest rates, at Tejas' option, based on either the
prime rate or the London Interbank Offered Rate ("LIBOR"). The margins over
the LIBOR rate that TAHC and TNGC must pay vary depending on TAHC's funded debt
to capitalization ratio test which may range from a minimum of 0.5% to a maximum
of 1.25%. Based on borrowings at December 31, 1995, of $284.9 million, and after
considering restrictions to provide for a $10.0 million letter of credit and
borrowings under its money market credit lines (offset by cash available
pursuant to the terms of such credit lines), approximately $178.9 million of
additional borrowings were available under these amended facilities.
Additionally, at year-end, based upon TAHC's funded debt to capitalization ratio
test, both the TAHC and TNGC credit facilities bore interest rates, at Tejas'
option, of prime or LIBOR plus 0.50%. Under the terms of the agreements, the
revolving credit facilities will convert to six-year reducing revolvers on
December 31, 1997, unless extended at the option of the lenders. Commitment
reductions of $15.0 million per quarter are scheduled to begin March 31, 1998
with the final remaining commitment reduction to occur on December 31, 2003.
Based upon the current terms of the credit agreements and the outstanding
principal balance thereunder at December 31, 1995, no principal payments are
required until early 2001.

INDUSTRIAL DEVELOPMENT BONDS

In 1990, a Tejas Gas subsidiary issued two notes in the aggregate amount of
approximately $11.2 million related to the issuance of Industrial Development
Refunding Revenue Bonds ("IDRRBs") by Lewis and Pleasants Counties, West
Virginia, and called for redemption of previously outstanding notes and related
Industrial Development Revenue Bonds ("IDRBs") of those counties in the
aggregate amount of approximately $11.2 million. As of December 31, 1995 the
notes and IDRRBs have a weighted average interest rate of 8.6%, including bank
fees, and require annual principal payments of $1.0 million in 1996, $2.0
million in each of the years 1997 through 2000, $1.6 million in 2001 and $0.6
million in 2002. The notes are secured by bank letters of credit which in turn
are secured by mortgages on two natural gas processing plants located in West
Virginia. The notes are also subject to certain covenants and require that Tejas
Gas' subsidiaries, Gulf Energy Development Corporation and Gulf Energy Gathering
& Processing Corporation, maintain certain financial standards.

MONEY MARKET CREDIT LINES

Tejas has uncommitted money market credit lines which allow Tejas to borrow
up to $40.0 million for periods of up to one month. Any such borrowings are
unsecured and may be extended for additional periods if agreed to by the lender.
At December 31, 1995, Tejas had an outstanding balance of $11.0 million borrowed
under the money market credit lines at an average interest rate of 6.4%. Tejas
has agreed to maintain available funds under its revolving credit facilities
sufficient to repay borrowings under the money market credit lines and
accordingly, the $11.0 million outstanding is classified as long-term at
December 31, 1995.

Cash payments for interest in 1995, 1994 and 1993, net of amounts
capitalized, were $25.1 million, $22.7 million and $17.0 million, respectively.
Scheduled maturities of long-term debt at December 31, 1995 are as follows:

(IN THOUSANDS)

1996................................. $ 1,000
1997................................. 2,000
1998................................. 2,000
1999................................. 2,000
2000................................. 2,000
Thereafter........................... 298,075
------------------
Total........................... $307,075
==================

SF-11

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTEREST RATE SWAPS

Tejas has entered into various interest rate swap agreements as a means of
hedging interest rates on its floating rate debt and a floating rate operating
lease obligation. At December 31, 1995, Tejas had interest rate swap agreements
in a notional amount of $325.0 million (see Note 7). Of this amount, $180.5
million converts a like amount of Tejas' debt to an effective interest rate of
6.20%. Of the $180.5 million, $50.0 million of the agreements expire in each of
1996 and 1997, $5.5 million expire in 1998 and the remaining $75.0 million
expire in 1999. Although Tejas does not presently anticipate terminating any of
these agreements prior to their respective expiration dates, it monitors options
available to it given market conditions.

Subsequent to year-end, Tejas entered into additional delayed start
interest rate swap agreements in a notional amount of $125.0 million. These
agreements will convert a like amount of Tejas' debt to an effective interest
rate of 6.34%. Of this amount, $100 million of the agreements become effective
in December, 1996 and expire in December, 2000. The remaining $25.0 million
become effective in January, 1999 and expire in December, 2001.

RESTRICTIVE COVENANTS

Under the terms of the TAHC and TNGC credit facilities (the "Credit
Agreements"), TAHC is required to maintain certain financial ratios. The Credit
Agreements also contain, among other things, limitations related to the transfer
of funds between TAHC and its subsidiaries, the transfer of funds between TAHC
and Tejas and the sale of assets in excess of specified amounts. Borrowings
under the Credit Agreements are secured by certain subsidiary guarantees, the
pledge of the capital stock and partnership interests of all material TAHC
subsidiaries and partnerships (excluding the capital stock of Acadian, but
including the pledge of the capital stock and partnership interests of the
material operating subsidiaries and partnerships of Acadian) and various
intercompany notes.

The amount of loans, advances and distributions (collectively
"Distributions") that may be made under the credit facilities is subject to
certain limitations. At year-end 1995, Distributions to Tejas of $231.5 were
permitted, of which $45.1 and $186.4 could be paid in dividends and loaned,
respectively. In general, dividend and loan allowances may be adjusted by a
percentage of consolidated quarterly net earnings or losses of TAHC, certain
investments and any cumulative aggregate Distributions.

6. INCOME TAXES

Provisions for income taxes consisted of the following:

YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
U.S. federal statutory rate.......... 35% 35% 35%
========= ========= =========
Tax computed at the statutory rate on
earnings
before income taxes................ $ 18,127 $ 16,802 $ 12,593
State income taxes................... 695 495 418
Retroactive effect of federal rate
increase........................... -- -- 773
Other................................ 31 162 127
--------- --------- ---------
Total provision for income
taxes......................... $ 18,853 $ 17,459 $ 13,911
========= ========= =========
Effective rate....................... 36.4% 36.4% 38.7%
========= ========= =========

As a result of legislation enacted in August 1993, the maximum federal tax
rate for corporations was increased from 34% to 35%, effective January 1, 1993.
During 1993, Tejas recorded a charge to deferred

SF-12

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tax expense of approximately $0.8 million for the cumulative effect of the rate
increase on prior periods. Effective January 1, 1993, Tejas adopted SFAS No. 109
ACCOUNTING FOR INCOME TAXES which did not result in any adjustment for the
cumulative effect of adoption.

At December 31, 1995, Tejas had an alternative minimum tax credit available
of $16.3 million. The 1994 regular tax net operating loss carryforward of $2.7
million was fully utilized in 1995.

Deferred income taxes typically reflect (a) the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) alternative minimum tax, net operating loss and tax credit carryforwards.
Significant components of Tejas' net deferred income tax liability are as
follows:

DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
Deferred income tax liabilities:
Tax over book depreciation...... $ 67,481 $ 54,048
Other........................... -- 171
--------- ---------
67,481 54,219
--------- ---------
Deferred income tax assets:
Alternative minimum tax credit
carryforward.................. 16,336 11,789
Other........................... 2,756 4,679
--------- ---------
19,092 16,468
--------- ---------
Net deferred income tax liability.... $ 48,389 $ 37,751
========= =========

At December 31, 1995 and 1994, $2.0 million and $4.0 million, respectively,
of deferred income tax assets were classified as current assets on the
Consolidated Balance Sheets. No valuation allowances were required for deferred
income tax assets at either December 31, 1995 or 1994.

Tejas was obligated to pay HOC for utilization subsequent to the spin-off
of any of the investment tax credit ("ITC") carryforwards which existed at the
spin-off date. As of December 31, 1993, all such ITC carryforwards had been
utilized. Tejas made income tax payments in 1995, 1994 and 1993 of $7.4 million,
$5.1 million and $5.5 million, respectively. Such amounts include payments to
HOC for investment tax credits utilized of $1.1 million for 1993.

SF-13

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. FINANCIAL INSTRUMENTS

The estimated fair value amounts of Tejas' financial instruments have been
determined by Tejas using available market data and valuation methodologies.
Fair value represents the amount at which the instrument could be exchanged in a
current transaction between willing parties. Judgment is necessarily required in
interpreting market data and the use of different market assumptions or
estimation methodologies may affect the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1995 1994
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance Sheet Financial Instruments:
Long-Term Debt (excluding current
installments):
Revolving credit agreements..... $ 284,900 $ 284,900 $ 337,000 $ 337,000
Money market credit lines....... 11,000 11,000 30,700 30,700
Industrial development bonds.... 10,175 11,144 11,175 11,620
Other Financial Instruments:
Interest rate swap agreements... -- (2,906) -- 23,507
Commodity swap agreements....... -- 8,086 -- 96
Commodity futures............... -- (4,361) -- 1,362
</TABLE>
LONG-TERM DEBT

Tejas' revolving credit agreements and money market credit lines bear
floating interest rates at current market levels and therefore carrying values
in the financial statements approximate fair value. The estimated values of the
industrial development bonds are based on interest rates at December 31, 1995
for new issues with maturities which approximate the remaining life of the
existing bonds.

INTEREST RATE SWAP AGREEMENTS

At December 31, 1995 and 1994, Tejas had entered into interest rate swap
agreements with a notional amount of $325.0 million, as a means of hedging
floating interest rate exposure related to its revolving credit facilities
($180.5 million in 1995 and 1994) and an operating lease obligation ($144.5
million in both years). The fair value of interest rate swap agreements is based
upon approximated termination values obtained from third parties. The negative
fair value at December 31, 1995 is the estimated amount Tejas would pay if it
canceled the contracts or transferred them to other parties.

COMMODITY FUTURES AND SWAPS

Tejas uses derivative financial instruments (primarily futures, swaps and
other contracts) as an extension of its commercial natural gas purchases and
sales and to hedge price exposure, including location and pricing basis, of its
storage and exchange gas inventories, commitments, and certain anticipated
transactions. At December 31, 1995 Tejas had a realized but unrecognized loss of
$15.5 million and an unrealized loss of $4.4 million on futures contracts. Open
swap contracts where Tejas pays one price basis in exchange for another cover a
notional volume of 28.1 BCF and extend into December 1997. The fair value of
these swap contracts at December 31, 1995 was $8.1 million payable to Tejas
based upon estimated termination values. The realized but unrecognized futures
loss of $15.5 million, unrealized futures loss of $4.4 million and unrealized
swaps gain of $8.1 million have been incurred in conjunction with the Company's
storage arbitrage program and either have been offset or will be offset by
transactions involving the physical delivery of natural gas.

SF-14

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CREDIT RISK

While notional contract amounts are used to express the magnitude of
interest rate swap agreements, the amounts potentially subject to credit risk,
in the event of nonperformance by third parties, are substantially smaller.
Tejas does not anticipate any material impact to its results of operations as a
result of nonperformance by third parties as these agreements are with
established exchanges, energy companies, and major financial institutions. Under
certain circumstances, commodity swap agreements may require the parties to post
letters of credit issued by financial institutions acceptable to the
counterparty to satisfy margin requirements.

8. UNCONSOLIDATED ENTITIES

At December 31, 1995, Tejas owned an interest in several entities which are
accounted for under the equity method of accounting. Tejas' investments in these
entities are detailed as follows:

DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
Unconsolidated entities:
Evangeline Gas Pipeline Company,
L.P................................ $ 7,950 $ 9,436
Evangeline Gas Corp.................. 1,268 1,230
Gulf Coast Natural Gas Company....... 19,054 19,849
Coral Entities....................... 3,655 --
--------- ---------
Total........................... $ 31,927 $ 30,515
========= =========

CORAL ENTITIES

On November 1, 1995, Coral, a new independently managed energy marketing
venture between Tejas and Shell, commenced operations. Coral is a Delaware
limited partnership formed in September 1995 to market natural gas and energy
for Tejas and Shell Oil Company ("Shell"). Coral is owned one-third by
subsidiaries of Tejas and two-thirds by certain subsidiaries of Shell. Tejas has
the option to acquire up to a 50% interest in Coral in either 1998 or 1999 based
on the attainment of certain earnings and/or volume levels. Coral's board of
directors consists of four members, two of whom are appointed by Tejas and two
by Shell.

Coral initially began marketing 3.7 BCF per day of Tejas and Shell natural
gas volumes. Tejas provides Coral access to Tejas' 5,488 miles of natural gas
pipeline. Coral was initially staffed with employees from Tejas and Shell. In
addition, Coral has entered into a contractual arrangement with a financial
institution to assist the new company in providing a variety of specially
tailored risk management services.

Pursuant to the Coral limited partnership agreement and related gas sales
contracts, Tejas has committed to Coral substantially all of its natural gas
supply, and Shell has committed to Coral substantially all of its natural gas
production in the United States (excluding Alaska and Hawaii). In addition,
Tejas provides intrastate marketing expertise, Shell provides interstate
marketing expertise, as well as treasury and administrative support services.
Coral conducts natural gas marketing activities for both Tejas and Shell.

Tejas and Shell have each contributed cash and economic interests in gas
sales contracts to Coral for their respective interests. Each partner has
received equity credit for gas committed to the partnership that is subject to
long-term contracts, and gas volumes and margins are subject to make-up payments
by the responsible partner if actual volumes and margins fail to meet targeted
contract levels. If Coral is unable to take all of the gas tendered for delivery
by the parties, Coral is obligated to pay for such gas at the price that

SF-15

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

would have otherwise been applicable, mitigated by the amount obtained from any
sales of such gas to third parties.

Summarized balance sheet and income statement information for Coral, which
Tejas accounts for using the equity method, as of and for the two months ended
December 31, 1995 is presented below.

DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Balance Sheet:
Current assets.................. $246,562
Property, plant and equipment,
net........................... 1,535
Other noncurrent assets......... 70,768
Current liabilities............. 236,359
Owners' equity.................. 82,506
Statement of Earnings:
Revenues........................ $335,020
==============
Gross profit.................... $ 8,723
==============
Net earnings.................... $ 2,189
==============
Tejas' share of net earnings.... $ 729
==============

EVANGELINE ENTITIES

In December 1991, Tejas and other parties formed Evangeline Gas Pipeline
Company, L.P., a limited partnership ("Evangeline") and Evangeline Gas Corp.
("EGC"). Tejas owns a 45% limited partnership interest in Evangeline and 45%
of the common stock of EGC. EGC is the general partner of Evangeline and owns a
10% general partnership interest.

Although the December 1991 projections for Evangeline anticipated losses
during the first four years of operations, at no time during the anticipated
20-year life of Evangeline did the projected cumulative losses exceed the agreed
Tejas sharing levels. By agreement, Tejas did not bear any losses in the
Evangeline entities until cumulative losses totaled $7.7 million. Tejas'
interests in the Evangeline entities bore 45% of all losses until cumulative
losses totaled $9.7 million, and bears 100% of all losses until cumulative
losses total $19.2 million. Evangeline is not permitted to make distributions to
its partners until its debt is extinguished. At December 31, 1995 and 1994,
cumulative losses of the Evangeline entities totaled $11.2 million and $9.7
million, respectively. While Tejas has incurred losses during 1994 and 1995 from
Evangeline at the net income level, Evangeline's cash flow from operating
activities during that time period has been sufficient to service debt and meet
other cash requirements.

GULF COAST NATURAL GAS COMPANY

In January 1992, Tejas and another company formed a general partnership,
Gulf Coast Natural Gas Company ("Gulf Coast"). Tejas purchased a 50% capital
interest in the partnership over a 12-month period at a total cost of $19.4
million. Tejas invested $0.1 million in Gulf Coast for its share of capital
expenditures in both 1995 and 1994 and $0.2 million in 1994 for working capital.

By agreement, Tejas receives 70% of the cash operating income of Gulf Coast
until December 31, 1998 and 50% thereafter. Depreciation expense is shared
evenly for substantially all of the assets.

SF-16

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SUMMARIZED FINANCIAL INFORMATION

Combined summarized financial information for all Tejas' unconsolidated
entities as of and for the twelve months ended December 31, 1995 and 1994 is
presented below. Amounts due from shareholders of EGC of $1.7 million for demand
notes are netted against equity.

DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
Balance Sheet:
Current assets.................. $ 264,991 $ 16,501
Property, plant and equipment,
net........................... 53,738 54,648
Other noncurrent assets......... 139,232 72,129
Current liabilities............. 254,472 16,510
Noncurrent liabilities.......... 73,191 76,083
Owners' equity.................. 130,298 50,685
Statement of Earnings:
Revenues........................ $ 477,375 $ 154,996
========== ==========
Gross profit.................... $ 24,560 $ 16,686
========== ==========
Net earnings.................... $ 940 $ 524
========== ==========
Tejas' share of net earnings
(loss)........................ $ (158) $ 1,057
========== ==========

All noncurrent liabilities of the unconsolidated entities at December 31,
1995, consisting of Evangeline's debt agreements, are nonrecourse to Tejas.

9. RELATED PARTIES

During 1995, Tejas had sales of $105.9 million, $16.7 million and $74.6
million to Coral, Gulf Coast, and Evangeline, respectively. Additionally, Tejas
received $1.5 million and $0.3 million from Gulf Coast and Evangeline,
respectively, for administrative and management services in 1995. At December
31, 1995, Tejas had current receivables from Coral, Evangeline and Gulf Coast of
$52.6 million, $6.3 million and $2.4 million, respectively. Tejas had amounts
payable to Coral and Gulf Coast of $8.8 million and $0.7 million, respectively
at December 31, 1995.

10. PREFERRED MEMBERSHIP UNITS OF A SUBSIDIARY COMPANY

On December 29, 1995, a wholly owned subsidiary of Tejas, Tejas-Magnolia
Energy, L.L.C., issued preferred equity interests to a third party in return for
a capital investment of $55.0 million. Tejas-Magnolia is required to make
preferred distributions to the third party which constitute a return on capital
(at an effective fixed after tax cost to Tejas of 4.2%) and return of capital
over an eight-year term. Annual distributions of approximately $8.7 million are
payable from 1996 through 2001 and approximately $9.5 million in each of 2002
and 2003. In connection with the issuance of the preferred equity interests in
Tejas-Magnolia, another subsidiary of Tejas has contributed a portion of the
proceeds from sales under certain long term natural gas sales contracts to
Tejas-Magnolia in exchange for common equity interests in Tejas-Magnolia. This
ongoing contribution supports the preferred distribution obligations of Tejas-
Magnolia during the eight-year term. Required distributions for 1996 of $4.3
million are classified as current maturities of long-term obligations.

SF-17

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. PREFERRED STOCK

At December 31, 1995 and 1994, Tejas has authorized 6,000,000 shares of $1
par value preferred stock. The preferred stock may be issued in one or more
series and the Board of Directors will determine the specific terms and
conditions of each series in the event such shares are issued.

In February 1993, Tejas completed the sale of 2,000,000 depositary shares,
each such depositary share representing one-tenth of a share of Tejas' 9.96%
Cumulative Preferred Stock (the "9.96% Preferred Stock"). Net proceeds from
the sale of the 9.96% Preferred Stock totaled $48.2 million and $48.0 million of
the net proceeds was initially used to repay indebtedness under a subsidiary's
$120.0 million reducing revolving credit facility which existed at such time.
Dividends on the 9.96% Preferred Stock are cumulative from the date of original
issuance and are payable quarterly, commencing May 1, 1993, in an amount equal
to $2.49 per annum per depositary share. The 9.96% Preferred Stock is redeemable
at Tejas' option at any time after February 1, 1998 at a redemption price equal
to $250 per share.

In November 1993, Tejas completed the sale of 1,300,000 depositary shares,
each such depositary share representing one-fifth of a share of Tejas' 5 1/4%
Convertible Preferred Stock (the "5 1/4% Preferred Stock"). Net proceeds from
the sale of the 5 1/4% Preferred Stock totaled $62.8 million and were used to
repay substantially all of a $65.0 million term loan incurred in conjunction
with the Exxon Transaction. Dividends on the 5 1/4% Preferred Stock are
cumulative from the date of original issuance and are payable quarterly,
commencing February 1, 1994, in an amount equal to $2.625 per annum per
depositary share. Each share of 5 1/4% Preferred Stock is convertible, in whole
or in part, at any time, at the option of the holders thereof, into shares of
common stock at a conversion price of $63.6364 per share of common stock
(equivalent to a conversion rate of .7857 shares of common stock for each
depositary share). The 5 1/4% Preferred Stock is redeemable, at Tejas' option
(i) at any time after November 10, 2003, at a redemption price of $250 per
share, or (ii) at any time between November 10, 1996 and November 10, 2003 at
redemption prices which range from $259.19 to $251.31 per share. See Note 12.

Both the 9.96% Preferred Stock and the 5 1/4% Preferred Stock rank, as to
dividends and liquidation, prior to Tejas' common stock. If the equivalent of
six quarterly dividends payable on either the 9.96% Preferred Stock or the
5 1/4% Preferred Stock is in arrears, then the number of directors of Tejas will
be increased by two and the holders of the classes of preferred stock with
dividends in arrears will be entitled to elect the two additional directors
until all dividends in arrears have been paid or declared and set apart for
payment. No arrearages currently exist.

12. COMMON STOCK

On November 11, 1994, Tejas adopted a stockholders rights plan and declared
a dividend of one right (a "Right") for each share of Tejas' common stock, par
value $.25 per share (the "Common Stock"), outstanding as of the close of
business on November 22, 1994. The Rights, which under certain circumstances
entitle their holders to purchase one one-hundredth of a share of Series C
Junior Participating Preferred Stock, par value $1.00 per share, for an exercise
price of $200, will expire on November 11, 2004.

The Rights are not exercisable until the earlier to occur of (i) 10 days
following the first date of public announcement that a person or group of
affiliated persons (an "Acquiring Person") has acquired beneficial ownership
of 15% or more of the outstanding shares of Common Stock or such earlier date as
a majority of the Board of Directors shall become aware of the existence of an
Acquiring Person (the "Stock Acquisition Date") or (ii) 10 business days (or
such later date as may be determined by action of the Board of Directors prior
to such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the outstanding
shares of Common Stock.

SF-18

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the event that any person becomes an Acquiring Person, each holder of a
Right, other than Rights beneficially owned by the Acquiring Person (which will
thereupon become void), will thereafter have the right to receive upon exercise
of a Right at the then current exercise price of the Right, that number of
shares of Common Stock having a market value of two times the exercise price of
the Right. In the event that, after a person or group has become an Acquiring
Person, Tejas is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earning power are sold, each holder
of a Right other than Rights beneficially owned by an Acquiring Person (which
will have become void) will thereafter have the right to receive, upon the
exercise of the Right at the then current exercise price of the Right, that
number of shares of common stock of the person with whom Tejas has engaged in
the foregoing transaction which number of shares at the time of such transaction
will have a market value of two times the exercise price of the Right.

At any time until ten days following the Stock Acquisition Date (subject to
extension by the Board of Directors), Tejas may redeem the Rights in whole, but
not in part, at a price of $.01 per Right.

On April 11, 1996, the Tejas Board of Directors authorized a three-for-two
split of the Common Stock effected in the form of a stock dividend payable to
stockholders of record as of April 26, 1996. All references to average shares
outstanding and earnings per share and stock option plan information included in
the financial statements and accompanying notes have been restated to give
effect to the stock split. The par value of the additional shares, approximately
$1.5 million, has been transferred from retained earnings to Common Stock as of
March 31, 1996. As a result of the stock split, the conversion price of Tejas
5 1/4% Convertible Preferred Stock was adjusted from $63.64 to $42.42
(equivalent to an adjustment in the conversion rate from .7857 to 1.1786 shares
of Common Stock for each Depositary Share representing a one-fifth interest in a
share of the 5 1/4% Convertible Preferred Stock). The adjustment to the
conversion price (and conversion rate) was effective as of April 27, 1996.
Additionally, options to purchase Common Stock under Tejas' Stock Option Plans
as well as option prices were adjusted as a result of the Common Stock split.

On July 19, 1995, Tejas Board of Directors authorized a stock dividend of
one-tenth of one share of Common Stock for each share of Common Stock
outstanding payable to stockholders of record on July 27, 1995. All references
to average shares outstanding and earnings per share included in the financial
statements and accompanying notes for periods prior to the stock dividend have
been restated to give retroactive effect to the stock dividend. As a result of
the stock dividend, 1,052,908 shares (net of 422 fractional shares repurchased)
of common stock were added to the 10,533,303 common shares outstanding at June
30, 1995. The fair value of the additional shares at the declaration date, $52.8
million, was transferred from retained earnings to Common Stock and capital
surplus in the amount of $0.3 million and $52.5 million, respectively. As a
result of the stock dividend, the conversion price of Tejas 5 1/4% Preferred
Stock was adjusted from $70 to $63.64 (equivalent to an adjustment in the
conversion rate from .7143 to .7857 shares of Common Stock for each Depositary
Share representing a one-fifth interest in a share of the 5 1/4% Preferred
Stock). The adjustment to the conversion price (and conversion rate) was
effective as of July 28, 1995. Additionally, options to purchase Common Stock
under Tejas Stock Option Plans as well as option prices were adjusted as a
result of the Common Stock dividend.

On March 5, 1993, Tejas' Board of Directors authorized a three-for-two
stock split of Tejas' common stock effected in the form of a stock dividend,
effective March 30, 1993, payable to stockholders of record at March 15, 1993.
Such stock dividend was distributed in March 1993. The restatement for the stock
split at December 31, 1992 resulted in an additional 3,426,532 shares being
added to the shares issued at such date. The par value of such additional shares
was transferred from capital surplus to the common stock account. All references
to average shares outstanding, earnings per share and stock option plan
information included in the financial statements and accompanying notes and
schedules have been restated for periods

SF-19

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

prior to the stock split to give retroactive effect to the stock split. In May
1993, Tejas increased its authorized shares of common stock from 15,000,000
shares to 30,000,000 shares.

In 1988, Tejas adopted the Executive Officers Stock Option Plan (the
"Tejas Plan"), which provided for the granting of options for 1,651,652 shares
of Common Stock. During 1992, Tejas amended the Tejas Plan to include key
employees other than executive officers and to increase the number of shares
available for grant under the Tejas Plan by an additional 1,312,318 shares.
During 1995, options to purchase 161,795 shares of Common Stock were granted
under the Tejas Plan to executive officers and key employees at option prices
ranging from $24.55-$33.83 per share. In 1992, Tejas implemented the Directors
Stock Option Plan (the "DSOP"), which provided for the granting of options for
371,250 shares of Common Stock to directors of Tejas. Options to purchase 12,375
shares of Common Stock were granted in 1995 under the DSOP at an option price of
$29.62 per share. Since inception, all stock options have been granted at the
market price in effect at the date of the grant.

<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Options outstanding, January 1.......... 738,341 1,034,223 1,081,491
Granted................................. 298,670 177,785 147,855
Exercised............................... (81,612) (464,589) (195,123)
Canceled................................ (5,321) (9,078) --
------------- ------------ ------------
Options outstanding, December 31........ 950,078 738,341 1,034,223
------------- ------------ ------------
Options available for grant at December
31.................................... 783,594 1,076,943 1,245,654
Options exercisable at December 31...... 501,123 405,467 750,563
Range of option prices exercised during
the year.............................. $ 3.85-$24.85 $3.85-$23.33 $3.55-$19.24
Range of option prices outstanding,
December 31........................... $10.50-$33.83 $3.85-$33.64 $3.85-$26.36
</TABLE>
13. COMMITMENTS AND CONTINGENCIES

Tejas is a defendant or party in various lawsuits that have arisen in the
ordinary course of Tejas' business. In particular, a subsidiary of Tejas is a
defendant in THE LONG TRUST V. TEJAS GAS CORP. ET. AL., 123rd Judicial District
Court, Panola County, Texas, filed March 1, 1989, in which plaintiffs assert
claims and allege damages for breach of contract and failure to take-or-pay for
natural gas pursuant to three natural gas purchase contracts. Plaintiffs allege
that, in addition to failing to take or pay for gas, Tejas breached (a) one of
the contracts by failing to take a minimum quantity of gas and to install and
maintain pipeline facilities sufficient to permit Tejas to meet its quantity
purchase obligations, and (b) all three contracts by failing to take gas in
quantities sufficient to enable plaintiffs to produce ratably with other
producers in a common reservoir. In plaintiffs' Sixth Amended Original Petition
filed June 6, 1995, the plaintiffs are seeking take-or-pay damages for the ten
year period 1984-1994 in excess of $36 million, plus pre-judgment interest,
post-judgment interest, attorneys' fees and court costs and other unspecified
actual damages. In connection with their depositions in this matter, certain
expert witnesses retained by The Long Trusts have presented damage models
purporting to show approximately $60 million in take-or-pay damages and $70
million for failure to take the Long Trusts' gas ratably. Management disputes
The Long Trusts' claims and believes that The Long Trusts' damage models are
seriously flawed. On January 6, 1993, the court entered an interlocutory summary
judgment order granting in part and denying in part plaintiffs' motions for
summary judgment. The court found, among other things, as a matter of law that
(a) Tejas breached the minimum take obligations under one of the contracts, (b)
Tejas is not entitled to any credits or offsets for natural gas purchased by
third parties, and (c) the "availability" of natural gas for take-or-pay
purposes is established by the delivery capacity testing procedures in the
contracts. Damages, if any, have not been determined. The effect of this order
on Tejas' case is unclear and Tejas has sought clarification and

SF-20

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

rehearing, but intends nevertheless to defend its position aggressively.
Although the trial judge had previously indicated a preference for an August
1996 trial date, no firm trial date has been set.

Although Tejas has not obtained a formal opinion, based on discussions with
outside counsel and an internal examination of this lawsuit, management believes
that it has adequate defenses or recourse to third parties relating to such
lawsuit and does not believe this matter will have a material adverse effect on
Tejas' financial condition. Because of the relationship between the Long Trusts'
contracts and certain contracts between Tejas and Valero Transmission Company
("VTC"), and in order to resolve existing and potential claims and disputes,
Tejas, VTC and Valero Transmission, L.P. ("VTLP") entered into an agreement,
pursuant to which, among other things, Tejas, VTC and VTLP would cooperate in
the conduct of The Long Trusts litigation, and VTC and VTLP would bear a
substantial portion of the costs of any appeal and of the amount of any
nonappealable final judgment rendered against Tejas. On April 15, 1994, the
plaintiffs named VTC and VTLP (collectively "Valero") as additional defendants
to the lawsuit, alleging that Valero intentionally and maliciously interfered
with the plaintiffs' contracts with Tejas. In its Sixth Amended Original
Petition, plaintiffs are seeking damages against Valero in an amount in excess
of $36 million, and plaintiffs added a conspiracy claim against Tejas alleging
that Tejas conspired with Valero in interfering with the contracts. Plaintiffs
also have added a claim for exemplary damages treble the amount of the actual
damages, if any, found by the court for the interference and conspiracy claims.
Plaintiffs assert that Tejas should be jointly liable with Valero for the
damages plaintiffs have asserted against Valero.

Tejas is a member of a joint defense group comprised of twenty-seven
companies that have been threatened with claims by various cities in Texas that
the companies owe franchise type fees for commercial gas operations within their
city limits. Tejas and certain of its subsidiaries were named as defendants in
CITY OF BAYTOWN V. TEJAS GAS CORPORATION, 11th Judicial District Court, Harris
County, Texas, filed August 31, 1995. Plaintiff alleged that the defendants
carried on their commercial gas operations within the city limits of Baytown
without the City of Baytown's permission and without payment of fees to the
City, and asserted a number of causes of action against defendants. Plaintiff
sought unspecified damages based on various theories of recovery, including a
percentage of gross receipts from gas sales inside the City of Baytown, and
other remedies, including injunctive relief and exemplary damages. On January
18, 1996, the City of Baytown filed a Notice of Nonsuit Without Prejudice,
thereby dismissing its claims against Tejas. Tejas has filed a counterclaim
against the plaintiff seeking injunctive and declaratory relief with respect to
certain issues raised in the plaintiff's suit, which counterclaim is pending.
The law firm that represented the City of Baytown announced that it would
continue its efforts to bring similar suits by other cities against pipeline
companies. It is possible that claims by other cities may be filed against Tejas
and other pipeline companies alleging similar causes of action. Management
believes that Tejas has adequate defenses relating to these types of claims, and
does not believe that these matters will have a material adverse effect on
Tejas' financial condition. However, there can be no assurance that additional
lawsuits will not be filed against Tejas or that Tejas will prevail in any
lawsuit that may be filed against it.

Tejas is also a party to various other claims and other pending and
possible legal actions arising in the ordinary course of business. There is
considerable uncertainty inherent in any litigation or governmental proceeding
and the evaluation of individual matters is necessarily dependent on the
historical experience of Tejas and others in similar circumstances and the stage
of the litigation or proceeding. Tejas believes that an adequate provision has
been made for probable losses. In cases where losses are possible but not
probable, it is Tejas' belief that their ultimate resolution will not have a
materially adverse effect on Tejas' consolidated financial position or the
results of its consolidated operations.

In conjunction with the acquisition of the Acadian Gas Group on December
28, 1990, Acadian is committed to pay contingent deferred payments based upon
certain future natural gas sales volumes and profit margins, if achieved. Such
payments in any one year are not expected to exceed 2% of the cash purchase
price of the Acadian Gas Group and cumulative deferred payments are limited to a
maximum of

SF-21

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$25.0 million, of which $4.8 million had been paid or accrued as of December 31,
1995. Such payments expire if unearned not later than December 31, 2003. Tejas
has guaranteed the performance of the deferred payment agreement. At December
31, 1995, Tejas accrued $0.8 million for contingent deferred payments paid in
February 1996. As such payments are accrued, the cost is included in property,
plant and equipment and amortized over the remaining estimated lives thereof.

Tejas WCLSF requires the maintenance of cushion gas in order to sustain
anticipated operational requirements. Such cushion gas requirements have been
satisfied by a combination of natural gas purchased by Tejas and third party
natural gas stored in the facility. At March 31, 1996 and December 31, 1995,
Tejas owned approximately 10.4 BCF of cushion gas. In late 1994, Tejas entered
into an agreement with a third party whereby the third party agreed to purchase
up to 35 BCF of natural gas at a cost not to exceed $65.0 million and to store
such gas in the WCLSF. The agreement with the third party is currently scheduled
to expire in September 2000. In order to secure Tejas' ability to purchase the
gas from the third party, the agreement provides for the payment by Tejas of a
reservation fee to the third party which is adjusted quarterly based upon the
third party's financing costs. On certain option dates, Tejas may elect to
purchase specified volumes of the third party's gas at market prices. Should
Tejas decline to purchase the gas, the third party may instruct Tejas to sell
such volumes on the third party's behalf. In such case, it will be necessary for
Tejas to obtain cushion gas through other means in order to meet the anticipated
operational requirements of the WCLSF. At March 31, 1996 and December 31, 1995,
the third party had 18.5 BCF and 34.6 BCF, respectively of natural gas in
storage at the WCLSF, valued at $33.1 million and $62.4 million, respectively.
Based upon the volumes and rates in effect at March 31, 1996 and December 31,
1995, Tejas estimates the net annual cost related to the reservation fee on the
18.5 BCF and 34.6 BCF of natural gas to be approximately $1.2 million and $1.9
million, respectively.

Tejas has an obligation to redeliver certain volumes of gas from the WCLSF.
In addition to the 18.5 BCF and 34.6 BCF described above, Tejas has an
obligation to redeliver approximately 1.8 BCF and 2.7 BCF of gas held in storage
for other third parties as of March 31, 1996 and December 31, 1995,
respectively. Tejas bears the cost of physical loss, if any, incurred during
storage. Management estimates that physical losses will not be significant and
has insured against physical losses due to catastrophic events. Of the total 35
BCF and 65.4 BCF of natural gas in the WCLSF at March 31, 1996 and December 31,
1995, respectively, 20.3 BCF and 37.3 BCF was owned by third parties.

SF-22

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. LEASES

Tejas leases certain property, facilities and equipment under various
operating leases. During 1993, as part of the Exxon Transaction, Tejas entered
into a five-year operating lease for the Leased System (see Note 3), and Tejas
is committed to pay a termination fee of $122.8 million in the event Tejas
elects not to exercise its purchase option for the Leased System in 1998. Lease
payments under the lease for the Leased System are adjusted quarterly based on
the Lessor's financing costs, and Tejas has entered into interest rate swap
agreements in a notional amount of $144.5 million to fully hedge the effects of
such adjustments on the required minimum lease payments. Such interest rate swap
agreements expire in 1998 and effectively fix Tejas' minimum lease payments for
the Leased System, excluding the termination fee, at $8.4 million per anum.
Future minimum lease payments under all leases, excluding the termination fee of
the Leased System, as of December 31, 1995 are:

(IN THOUSANDS)

1996................................. $10,070
1997................................. 10,523
1998................................. 9,068
1999................................. 6,239
2000................................. 290
Thereafter........................... 580
---------------
Total........................... $36,770
===============

Rental expense for all operating leases totaled $11.6 million, $13.3
million and $5.1 million for 1995, 1994 and 1993, respectively.

15. SUPPLEMENTAL CASH FLOW INFORMATION

The "Net increase in working capital, net of effects from acquisitions"
amount included in the Consolidated Statements of Cash Flows is comprised of the
following:

YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
(IN THOUSANDS)
Decrease (increase) in accounts
receivable........................... $ (67,379) $ 1,847 $ (5,321)
Increase in exchange gas
receivable........................... (1,355) (1,133) (3,124)
Increase in storage gas inventory.... (10,594) (17,975) (9,548)
Decrease (increase) in prepaids and
other current assets............... (4,171) (2,661) 903
Increase (decrease) in gas purchases
payable............................ 48,746 (15,908) 9,398
Increase (decrease) in exchange gas
payable............................ 975 (4,270) 6,882
Increase (decrease) in accounts
payable............................ 3,350 2,344 (2,965)
Increase (decrease) in accrued
liabilities........................ 878 (6,550) (2,398)
Increase (decrease) in income taxes
payable............................ 1,867 4,857 (42)
---------- ---------- ---------
Total........................... $ (27,683) $ (39,449) $ (6,215)
========== ========== =========

In 1995, 1994 and 1993, stock options exercised were paid for in part by
the tendering of shares previously held by the party exercising the stock
options. The value of tendered shares received and an equivalent value for
shares issued are regarded as non-cash transactions for cash flow purposes.
Accordingly, Tejas' Consolidated Statements of Cash Flows include only actual
cash received as a result of the exercise of stock options.

The computation of changes in current assets and current liabilities as
reflected on Tejas' Consolidated Statements of Cash Flows for the year ended
December 31, 1993 excludes negative working capital related

SF-23

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to the Exxon Transaction, as adjusted for the allocation of the purchase price,
of approximately $14.7 million.

16. SEGMENT INFORMATION AND MAJOR CUSTOMERS

Tejas predominantly operates in one industry segment, natural gas pipeline
operations.

During 1995, one customer accounted for approximately 10% of Tejas' total
revenues. No single customer accounted for 10% or more of total revenues in
1994. During 1993, two customers accounted for approximately 13% and 10% of
Tejas' total revenues, respectively.

Tejas' natural gas pipeline operations have a concentration of customers in
the electric and natural gas utility industries, principally in Texas and
Louisiana. This concentration of customers in a regional geographic area may
impact Tejas' overall exposure to credit risk, either positively or negatively,
in that the customers may be similarly affected by changes in economic or other
conditions. Historically, Tejas has not incurred any significant credit losses
related to receivables from its customers. Receivables are generally not
collateralized.

17. EMPLOYEE BENEFITS

Effective January 1, 1989, Tejas adopted a noncontributory, defined benefit
pension plan. This plan covers all employees.

Under the plan, pension benefits are based on years of service and the
employee's average monthly compensation. Tejas funds pension expense as accrued,
subject to the minimum requirements of the Employee Retirement Income Security
Act of 1974, the Omnibus Budget Reconciliation Act of 1987 and the tax
deductibility of such contributions.

The components of pension expense are as follows:

YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
Service costs -- costs during the
period............................. $ 735 $ 587 $ 581
Interest cost on projected benefit
obligation......................... 319 261 214
Actual return on plan assets......... (260) (219) (169)
Net amortization and deferral........ (23) (9) (4)
--------- --------- ---------
Net periodic pension costs...... $ 771 $ 620 $ 622
========= ========= =========

SF-24

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the pension plan's funded status and the
amount of the net pension liability at December 31, 1995 and 1994. Plan assets
are comprised of investments in an equity fund maintained by the plan trustee
and a guaranteed deposit account with an insurance company.

DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits
of $3,297 and $2,481,
respectively....................... $ 3,876 $ 2,850
========= =========
Projected benefit obligation......... $ (5,731) $ (3,907)
Plan assets at fair value............ 3,838 3,150
--------- ---------
Funded status........................ (1,893) (757)
Unrecognized net (gain) loss......... 156 (333)
Unrecognized prior service cost...... (86) (93)
--------- ---------
Accrued pension liability....... $ (1,823) $ (1,183)
========= =========

Assumptions used in determining pension expense and the status of Tejas'
plan for 1995 and 1994 were as follows:

1995 1994
--- ---

Discount rate........................ 7.25% 8.00%
Rates of increase in compensation
levels............................. 5.00% 5.00%
Rate of return on plan assets........ 8.00% 8.00%

THRIFT PLAN

Tejas adopted a contributory, trusteed thrift plan covering all of its
employees, effective January 1, 1989. Tejas matches 100% of the employee
contributions to the plan, up to a maximum of three percent (3%) of the annual
salary paid to each participant. Tejas' share of contributions recognized in
1995, 1994 and 1993 was $0.5 million, $0.5 million and $0.3 million,
respectively.

18. SUBSEQUENT EVENTS (UNAUDITED)

TRANSOK ACQUISITION

On June 6, 1996, the Company acquired Transok from Central and Southwest
("CSW") through a merger of a recently formed wholly owned subsidiary of the
Company into Transok. Immediately prior to the acquisition, Transok sold seven
natural gas processing plants (the "Transok Plants") to a third party lessor
(the "Lessor"), which in turn leased these facilities to the Company.

SF-25

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and (ii) $387 million, net of a voluntary prepayment, borrowed under a new $425
million credit facility (the "Transok Credit Facility"). The Lessor is leasing
the Transok Plants to the Company for a five-year term with annual lease
payments of approximately $9 million. The lease agreement may be extended by the
Company, with approval by the Lessor, and provides the Company the option to
purchase the Transok Plants during the term. The option to purchase all of the
Transok Plants is exercisable for $125 million. If such purchase option is not
exercised, the Company will be obligated to pay the Lessor a termination fee of
approximately $106 million at the end of the lease. However, such fee will be
reduced by the amount, if any, by which the proceeds from the Lessor's sale of
the assets exceeds $19 million. The lease also provides the Company the option
to purchase at any time during the term one or more of the Transok Plants for an
amount not exceeding $31 million, with corresponding reductions in the $106
million termination fee and $19 million threshold amount.

In connection with the Company's acquisition of Transok, the Company
incurred indebtedness of $387 million (at an approximate 6.7% interest rate),
net of a voluntary payment, under the Transok Credit Facility, which matures on
December 31, 1997; borrowed $181 million under the TAHC credit facility; and
assumed $200 million of Transok's medium term notes which bear interest at rates
of approximately 7.7% and with maturities of $92 million from 1999 to 2003 and
$108 million thereafter. Following the Transok acquisition, the Company's
long-term debt aggregated approximately $1 billion.

Following the acquisition of Transok, availability under the TAHC and TNGC
revolving credit facilities was reduced to $58.1 million. Under the terms of the
Credit Agreements, after two years, the revolving credit facilities will, unless
extended at the option of the lenders, convert to six-year reducing revolvers.
During the fourth quarter of 1995, the lenders under such Credit Agreements
agreed to extend by one year both the maturity date and the period in which
commitment reductions commence. Commitment reductions of $15.0 million per
quarter are currently scheduled to begin March 31, 1998 with the final remaining
commitment reduction to occur on December 31, 2003. Based upon the current terms
of the Credit Agreements and the outstanding principal balance thereunder at
June 6, 1996, the date of the Transok acquisition, no principal payments will be
required until early 1999.

The obligations under the Transok Credit Facility are secured by the
capital stock of all of Transok's subsidiaries and certain partnership interests
held by Transok and are guaranteed by such subsidiaries. The Transok Credit
Facility is also secured by certain intercompany notes. In addition, the Company
guarantees Transok's obligations under the Transok Credit Facility and under the
lease agreement for the Transok Plants. All of the Company's credit facilities
are subject to certain covenants, including the maintenance of certain financial
ratios, with which the Company expects to be able to comply in the ordinary
course of business.

In connection with the Transok acquisition, the Company also entered into
certain fixed interest rate swaps and caps and $200 million notional amount of
other interest rate option agreements. As of June 30, 1996, the Company has
entered into a total notional amount of $580.5 million of fixed interest rate
swaps and caps for hedging purposes with a weighted average LIBOR rate of 6.22%
(excluding the Company's average borrowing cost over LIBOR). The weighted
average life of the interest rate swap and cap hedging transactions is
approximately four years.

SF-26

TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995:
Revenues........................... $215,633 $238,122 $246,510 $343,356
Earnings from operations........... 19,250 15,975 18,734 21,762
Net earnings....................... 8,179 7,110 7,646 10,002
Preferred stock dividend
requirements..................... 2,098 2,098 2,098 2,099
Net earnings applicable to common
stock............................ 6,081 5,012 5,548 7,903
Earnings per common share(1)....... .35 .29 .32 .45
1994:
Revenues........................... $288,535 $273,274 $250,953 $219,205
Earnings from operations........... 16,472 16,441 17,609 20,801
Net earnings....................... 6,940 7,056 7,307 9,243
Preferred stock dividend
requirements..................... 2,098 2,098 2,099 2,098
Net earnings applicable to common
stock............................ 4,842 4,958 5,208 7,145
Earnings per common share(1)....... .27 .28 .30 .40
</TABLE>
- ------------
(1) Earnings per common share have been adjusted to give retroactive effect to
(i) a stock dividend of one-tenth of one share of Common Stock for each
share of Common Stock outstanding on July 27, 1995 and (ii) a three-for-two
Common Stock split effective April 26, 1996, as if such transactions had
occurred at the beginning of each period presented.

SF-27

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Transok, Inc.:

We have audited the accompanying consolidated balance sheets of Transok,
Inc. (an Oklahoma Corporation and a wholly owned subsidiary of Central and South
West Corporation) and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, cash flows and stockholder's equity
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transok, Inc., and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

As discussed in Notes 3 and 7 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 106, No. 109 and
No. 112 effective January 1, 1993.

ARTHUR ANDERSEN LLP

Dallas, Texas
February 9, 1996

SF-28

TRANSOK, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)

DECEMBER 31,
---------------------- MARCH 31,
1995 1994 1996
---------- ---------- ---------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents....... $ 7,195 $ 3,601 $ 7,797
Accounts receivable less
allowance for doubtful
accounts
of $450 in 1995 (Note 1)...... 44,660 35,014 29,023
Advances to affiliates.......... 6,586 -- 42,607
Gas stored underground (Note
2).............................. 10,567 22,550 117
Materials and supplies, at
average cost.................... 8,869 10,796 8,647
Extracted products, at average
cost............................ 1,878 821 21
Income taxes receivable......... 143 3,144 914
Prepayments and other........... 8,121 4,610 12,082
---------- ---------- ---------
88,019 80,536 101,208
Property, Plant and Equipment........ 868,595 798,312 878,058
Less -- Accumulated Depreciation..... 236,043 203,488 244,914
---------- ---------- ---------
632,552 594,824 633,144
Other Investments, net (Note 2)...... 30,576 32,392 29,805
Deferred Charges and Other Assets.... 21,133 18,997 23,539
---------- ---------- ---------
$ 772,280 $ 726,749 $ 787,696
========== ========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Advances from affiliates........ $ -- 28,104 $ --
Accounts payable................ 118,198 77,913 124,998
Accrued interest................ 5,107 5,105 1,333
Accrued taxes................... 5,102 3,884 2,788
Other........................... 1,615 6,019 2,828
---------- ---------- ---------
130,022 121,025 131,947
Long-Term Debt (Note 4).............. 200,000 200,000 200,000
Deferred Income Taxes (Note 3)....... 116,192 104,985 121,371
Stockholder's Equity
Common stock, $100 par value,
authorized 95,000 shares,
issued and outstanding 92,186
shares........................ 9,219 9,219 9,219
Paid-in capital................. 162,000 162,000 162,000
Retained earnings............... 154,847 129,520 163,159
---------- ---------- ---------
326,066 300,739 334,378
---------- ---------- ---------
$ 772,280 $ 726,749 $ 787,696
========== ========== =========

The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.

SF-29

TRANSOK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1994 1993 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Revenues (Note 1).......... $ 720,866 $ 646,719 $ 702,192 $ 255,635 $ 159,706
Operating Expenses and Taxes
Natural gas purchased for
resale........................ 466,384 404,569 501,719 176,827 95,440
Product extraction and
marketing..................... 109,237 98,103 85,613 35,919 28,060
Operations and maintenance...... 25,123 24,163 24,559 6,163 6,558
Administrative and general...... 22,750 25,350 24,953 7,779 7,608
Depreciation and amortization... 31,478 32,162 28,822 8,995 9,014
Taxes, other than income
taxes......................... 9,248 9,693 8,377 2,567 2,661
---------- ---------- ---------- ---------- ----------
664,220 594,040 674,043 238,250 149,341
---------- ---------- ---------- ---------- ----------
Operating Income..................... 56,646 52,679 28,149 17,385 10,365
---------- ---------- ---------- ---------- ----------
Other Income and (Deductions)
Interest expense................ (14,031) (15,783) (15,318) (2,929) (3,852)
Factoring expense............... (4,795) (3,636) (3,747) (1,826) --
Other, net...................... 1,269 1,926 7,832 (39) 577
---------- ---------- ---------- ---------- ----------
(17,557) (17,493) (11,233) (4,794) (3,275)
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes and
Cumulative Effect of Changes in
Accounting Principles.............. 39,089 35,186 16,916 12,591 7,090
---------- ---------- ---------- ---------- ----------
Provision for Income Taxes (Note
3)................................. 13,762 10,053 4,463 4,279 2,390
---------- ---------- ---------- ---------- ----------
Income Before Cumulative Effect of
Changes in Accounting Principles... 25,327 25,133 12,453 8,312 4,700
---------- ---------- ---------- ---------- ----------
Cumulative Effect of Changes in
Accounting Principles (Note 3 and
7)................................. -- -- 6,691 -- --
---------- ---------- ---------- ---------- ----------
Net Income........................... $ 25,327 $ 25,133 $ 19,144 $ 8,312 $ 4,700
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.

SF-30

TRANSOK, INC.
STATEMENTS OF EQUITY
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE
MONTHS
DECEMBER 31, ENDED
---------------------------------- MARCH 31,
1995 1994 1993 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, beginning of period............ $ 300,739 $ 255,606 $ 191,462 $ 326,066
Net Income.............................. 25,327 25,133 19,144 8,312
Capital Contribution.................... -- 20,000 45,000 --
---------- ---------- ---------- ---------
Balance, end of Period.................. $ 326,066 $ 300,739 $ 255,606 $ 334,378
========== ========== ========== =========
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.

SF-31

TRANSOK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31, 1995
--------------------------------- ----------------------
1995 1994 1993 1996 1995
---------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net Income...................... $ 25,327 $ 25,133 $ 19,144 $ 8,312 $ 4,700
Non-cash items included in net
income
Depreciation and
amortization............ 32,453 33,149 29,689 9,026 9,251
Deferred Income taxes...... 11,207 19,439 16,461 5,179 3,486
Tex/Con reserve write
off..................... -- -- (3,430) -- --
Operations reserve......... -- -- 3,743 -- --
Cumulative effect of
changes in accounting
principles.............. -- -- (6,691) -- --
Other........................... (1,659) (1,767) (1,490) (553) (495)
---------- --------- ---------- ---------- ----------
Funds provided by operations.... 67,328 75,954 57,426 21,964 16,942
Changes in assets and
liabilities
(Note 5)...................... 37,470 (45,653) 47,086 22,905 1,752
---------- --------- ---------- ---------- ----------
104,798 30,301 104,512 44,869 18,694
========== ========= ========== ========== ==========
Investing Activities
Capital expenditures............ (65,931) (64,893) (88,310) (10,003) (9,871)
Other........................... (583) 388 (941) 1,757 (267)
---------- --------- ---------- ---------- ----------
(66,514) (64,505) (89,251) (8,246) (10,138)
---------- --------- ---------- ---------- ----------
Financing Activities
Medium-term notes issued........ -- -- 60,000 -- --
Capital contribution............ -- 20,000 45,000 -- --
Advances from/to affiliates..... (34,690) 6,830 (70,945) (36,021) (7,337)
Note payable to CSW............. -- -- (47,468) -- --
---------- --------- ---------- ---------- ----------
(34,690) 26,830 (13,413) (36,021) (7,337)
---------- --------- ---------- ---------- ----------
Net Change in Cash and Cash
Equivalents........................ 3,594 (7,374) 1,848 602 1,219
Cash and Cash Equivalents at
Beginning of Year.................. 3,601 10,975 9,127 7,195 3,601
---------- --------- ---------- ---------- ----------
Cash and Cash Equivalents at End of
Year............................... $ 7,195 $ 3,601 $ 10,975 $ 7,797 $ 4,820
========== ========= ========== ========== ==========
</TABLE>
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.

SF-32

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. TRANSACTIONS WITH AFFILIATES

Transok, Inc. (the Company or Transok) is an intrastate natural gas
transmission, storage, marketing, gathering and processing company with
headquarters in Tulsa, Oklahoma. Incorporated in 1955, Transok was created to
supply natural gas to Public Service Company of Oklahoma (PSO) electric power
generation stations and has since expanded its operations to transport gas for
other parties, as well as engage in other services such as gas processing,
storage, gathering, compression, risk management and gas and liquids marketing.

Transok is a wholly owned subsidiary of Central and South West Corporation
(CSW). On January 9, 1996, CSW announced it will explore strategic alternatives
for Transok, including a possible sale.

As a wholly-owned subsidiary of CSW, a holding company subject to the
Public Utility Holding Company Act of 1935, Transok engages in transactions and
coordinates its activities and operations with other members of the CSW System,
principally PSO. The Company provides administrative services in support of
PSO's natural gas requirements. It further provides for the transportation of
PSO's natural gas fuel supply through the Company's gathering and transmission
system.

The transportation and administration fees charged to PSO are determined
annually through a fully allocated cost of service study that allocates costs to
the Company's various business functions. In addition to actual transportation
and administration costs allocated to PSO, the Company is permitted to earn a
return on equity equal to the rate allowed PSO in its most recent rate case
before the Corporation Commission of the State of Oklahoma (OCC). Revenues from
transportation and administration services with PSO were $31.8 million in 1995,
$31.4 million in 1994 and $28.5 million in 1993.

The Company also provides transportation services to West Texas Utilities
Company, (WTU) and Southwestern Electric Power Company, (SWEPCO). Transportation
fees charged to WTU and SWEPCO are based on the Company's cost of providing
service plus an equity return. Revenues from transportation fees charged to WTU
and SWEPCO were $3.0 million, $3.5 million and $.8 million in 1995, 1994 and
1993, respectively.

The Company also makes gas sales to CSW affiliates. Gas sales to PSO were
$77.6 million, $76.9 million and $54.4 million in 1995, 1994 and 1993,
respectively. Gas sales to other members of the CSW system were $16.8 million,
$14.4 million and $17.7 million in 1995, 1994 and 1993, respectively. All sales
made to PSO and other members of the CSW system are made at cost and therefore
have no impact on the Company's net financial results of operations.

The Company, together with other members of the CSW System, has established
a money pool to coordinate short-term borrowings from banks and through the
issuance of commercial paper. Money pool balances are shown as advances from and
to affiliates on the consolidated balance sheets. Funds borrowed from, or loaned
to, the money pool are charged, or earn, interest in accordance with the money
pool arrangement. The Company incurred net interest costs of $0.5 million, $1.3
million and $1.3 million under the money pool arrangement in 1995, 1994 and
1993, respectively. The Company is authorized to borrow up to $200 million under
this arrangement.

Central and South West Services, Inc., performs, at cost, certain
accounting, tax, legal, financial, electronic data processing and other services
for the Company. Costs incurred to provide such services are allocated to
Transok and other CSW affiliates based on various formulas. Amounts charged to
expense were $3.6 million, $4.8 million and $3.6 million in 1995, 1994 and 1993,
respectively.

The Company sells selected accounts receivable, without recourse, to CSW
Credit, Inc., a wholly owned subsidiary of CSW. At December 31, 1995 and 1994,
the Company had $79.7 million and $42.9 million in outstanding receivables which
had been sold to CSW Credit, Inc.

SF-33

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company and its subsidiary companies. All
significant intercompany balances and transactions have been eliminated.

BASIS OF PRESENTATION -- The accompanying consolidated interim financial
statements and notes thereto as of March 31, 1996 and 1995, of the Company have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial statements. Accordingly, certain
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. In the opinion of the Company's
management, all adjustments (all of which are normal and recurring) have been
made which are necessary to fairly state the consolidated financial position of
the Company and subsidiaries as of March 31, 1996, and the results of their
operations and cash flows for the three month periods ended March 31, 1996 and
March 31, 1995.

ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

PARTNERSHIPS -- The Company accounts for its partnership interests using
the equity method of accounting.

PROPERTY, PLANT AND EQUIPMENT -- Gas plant acquisitions are stated at fair
market value based on the purchase price while other gas plant is stated at the
original cost of construction, which includes the cost of contracted services,
direct labor, materials, overhead items and capitalized interest.

DEPRECIATION AND AMORTIZATION -- Provisions for depreciation of gas plant
are computed using the half-year convention straight-line method, generally at
individual rates applied to the various classes of depreciable property. The
annual consolidated composite rates averaged 3.6%, 3.2% and 3.4% for 1995, 1994
and 1993.

Amortization of the Tranpache investment is based on the Company's interest
in the Tranpache properties and the expected life of the investment. The average
annual amortization rates for 1995, 1994 and 1993 were 12.3%, 24.0% and 26.6%,
respectively.

STATEMENTS OF CASH FLOWS -- Cash equivalents are considered to be highly
liquid debt instruments purchased with a maturity of three months or less.
Accordingly, temporary cash investments are considered cash equivalents.

NEW ACCOUNTING STANDARDS -- Effective January 1, 1995, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 116, Accounting for
Contributions Made and Contributions Received. This statement establishes
accounting standards for contributions and applies to all entities that either
receive or make contributions. Contributions made, including unconditional
promises to give, must be recognized as expenses in the period made at fair
market value. Conditional promises to give must be recognized when they become
unconditional, that is, when the conditions of the gift are substantially met.
The impact of adopting this statement in 1995 was not material.

In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, to be effective for financial statements for fiscal
years beginning after December 15, 1995. The Statement establishes a two fold
test for identification and quantification of an impairment. The first test in
determining an impairment is to compare the sum of expected future cash flows
(undiscounted and without interest charges) to the

SF-34

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

carrying value of the asset. If the sum of expected cash flows are not
sufficient to recover the carrying value of the asset, then an impairment is
recognized. Once an impairment is identified, the second part of the test is
applied to quantify the value of the impairment. The statement lists several
alternative methods of establishing fair market value and quantifying the
impairment.

Transok will adopt SFAS No. 121 effective January 1, 1996. The Company is
not aware of any assets which would currently meet the test for impairment.

In October 1993, the FASB issued FAS No. 123, Accounting for Stock Based
Compensation, with an effective date for transactions entered into after
December 15, 1995. The Statement requires the use of an option pricing model to
calculate the value of stock-based transactions where such value cannot
otherwise be determined, but then allows for two options on how this value is
utilized. One method recognizes this value as a cost of compensation and as an
expense for the current period. The alternative allows for only footnote
disclosure of the compensation cost, without actually charging the amount
against current earnings.

As provided by the provisions of SFAS No. 123, Transok will continue to
apply the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and adopt the
disclosure requirements of SFAS No. 123 in 1996. Accordingly, the adoption of
SFAS No. 123 will not impact Transok's consolidated results of operations or
financial condition.

PRICE RISK MANAGEMENT ACTIVITIES -- The Company periodically uses natural
gas futures, options and basis swap contracts to manage the impact of price
fluctuations on its inventory of natural gas, fuel and shrinkage requirements
for its processing plants and certain fixed price purchase and sales contracts.
Such contracts are designated at inception as either a hedge, when there is a
direct relationship to the price risk associated with the Company's operations,
or as a speculative contract where there is no such relationship. Gains and
losses on hedge contracts are deferred until the effect of the corresponding
hedged transaction is recognized. For those contracts that are not designated as
hedges, changes in the fair value of those contracts are recognized as gains or
losses in income currently and are recorded in the balance sheet at fair value
at the reporting date. The Company determines the fair value of its contracts
based upon settlement prices for exchange-traded contracts, market-related
indexes or by obtaining quotes from brokers (see Note 9, "Price Risk Management
Activities").

INVENTORIES -- Gas stored underground represents gas stored in
Company-owned storage facilities as well as off-system storage facilities and
includes gas anticipated to be withdrawn in the next year. The non-current
portion of gas stored underground represents that quantity of gas in storage
that the Company does not anticipate using within the next year and is
classified as deferred charges and other assets. All inventories are valued at
the lower of average cost or market.

RECLASSIFICATION Certain financial statement items for prior years have
been reclassified to conform to the 1995 presentation.

NOTE 3. FEDERAL AND STATE INCOME TAXES

The Company, together with other members of the CSW System, files a
consolidated Federal income tax return.

The Company adopted SFAS No. 109, Accounting for Income Taxes, effective
January 1, 1993. The cumulative effect of adopting SFAS No. 109 on the Company's
financial statements was to increase 1993 net income by $7.0 million, of which,
federal deferred income taxes were reduced by $8.7 million and state deferred
taxes were increased by $1.7 million.

SF-35

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's net deferred tax liability at
December 31, 1995 and 1994 are as follows:

1995 1994
---------- ----------
(THOUSANDS)
Deferred Tax Liabilities:
Differences between book and tax
basis of property............... $ 112,778 $ 102,022
Other........................... 6,042 5,557
---------- ----------
118,820 107,579
---------- ----------
Deferred Tax Assets:
Accrued expenses not currently
deductible.................... 2,628 2,594
---------- ----------
Deferred income taxes................ $ 116,192 $ 104,985
========== ==========

Significant components of the provision for income taxes are as follows:

YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- --------- ----------
(THOUSANDS)
Current
Federal......................... $ 1,955 $ (8,971) $ (10,182)
State........................... 600 (415) (872)
--------- --------- ----------
Total current.............. 2,555 (9,386) (11,054)
--------- --------- ----------
Deferred
Federal......................... 9,567 16,602 13,457
State........................... 1,640 2,837 2,060
--------- --------- ----------
Total deferred current year
activity................ 11,207 19,439 15,517
--------- --------- ----------
Provision for income taxes........... $ 13,762 $ 10,053 $ 4,463
========= ========= ==========

A reconciliation of the statutory U.S. Federal income tax rate and the
Company's effective tax rate is as follows:

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(PERCENTAGE)
Statutory rate....................... 35.0 35.0 35.0
Increase (decrease) resulting from:
Tax credits..................... (4.3) (9.2) (11.9)
Consolidated Tax Savings........ (0.2) (2.0) 0.0
State Income Taxes.............. 5.7 5.3 5.2
Other........................... (1.0) (0.5) (1.9)
--------- --------- ---------
Effective income tax rate............ 35.2 28.6 26.4
========= ========= =========

SF-36

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. LONG-TERM DEBT

In 1993 and 1992 the Company sold $60 million and $140 million,
respectively, of medium-term notes maturing from 1999 to 2023 under its $200
million private placement medium-term note program. Proceeds from the sale of
these notes were used primarily to repay interim financing provided by CSW in
1991 and 1992 for acquisitions made by the Company. The weighted average
interest rate of the notes was 7.7% at December 31, 1995 and 1994. The long-term
debt outstanding at the end of December 31, 1995 and 1994 was as follows:

<TABLE>
<CAPTION>
MATURITIES INTEREST RATES
-------------------- --------------------
FROM TO FROM TO BALANCE
--------- --------- --------- --------- -----------
MEDIUM TERM NOTES (THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999 2003 6.600 8.280 $ 92,000
2004 2009 6.710 8.340 68,000
2010 2014 8.350 8.900 10,000
2015 2019 8.960 8.960 15,000
2020 2023 7.750 7.750 15,000
-----------
Total........................................... $ 200,000
===========
</TABLE>
NOTE 5. CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL
DISCLOSURES

Changes in operating assets and liabilities consist of:

YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- ---------- ----------
(THOUSANDS)
Decrease (increase) in:
Receivables..................... $ (6,645) $ 3,189 $ 56,425
Inventories..................... 12,853 (3,447) (13,912)
Other current assets............ (3,511) (82) 10,722
Other assets.................... (2,328) (5,590) (5,222)
Increase (decrease) in:
Accounts payable................ 40,285 (34,062) (8,268)
Accrued taxes................... 1,218 654 630
Accrued interest................ 2 63 1,724
Other liabilities............... (4,404) (6,378) 4,987
--------- ---------- ----------
$ 37,470 $ (45,653) $ 47,086
========= ========== ==========

Income taxes refunded were $1.3 million, $12.4 million and $3.3 million
during 1995, 1994 and 1993, respectively.

Interest paid, net of amounts capitalized, was $13.9 million, $15.6 million
and $12.8 million during 1995, 1994 and 1993, respectively.

NOTE 6. FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value.

CASH AND SHORT-TERM INVESTMENTS -- The carrying amount approximates fair
value because of the short maturity of those instruments.

SF-37

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LONG-TERM DEBT -- The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities.

The estimated fair values of the Company's financial instruments at
December 31 are as follows:

<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C>
Cash and short-term investments...... $ 7,195 $ 7,195 $ 3,601 $ 3,601
Long-term debt....................... $ 200,000 $ 216,211 $ 200,000 $ 185,651
</TABLE>

NOTE 7. BENEFIT PLANS

Defined Benefit Pension Plan -- The Company, together with other members of
the CSW System, maintains a tax qualified, non-contributory defined benefit
pension plan covering substantially all its employees. Benefits are based on
employees' years of credited service, age at retirement and final average annual
earnings with an offset for the participant's primary Social Security benefit.
The CSW System's funding policy is based on actuarially determined
contributions, taking into account amounts which are deductible for income tax
purposes and minimum contributions required by the Employee Retirement Income
Security Act of 1974, as amended. Contributions to the plan for the years ended
December 31, 1995, 1994 and 1993 were $2.0 million, $1.8 million and $1.8
million, respectively. Pension plan assets consist primarily of common stocks
and short-term and intermediate-term fixed income investments.

The components of net periodic pension cost and the assumptions used in
accounting for pensions are as follows:

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Net periodic Pension Cost
Service Cost.................... $ 1,420 $ 1,494 $ 1,275
Interest cost on projected
benefit obligation.............. 4,492 4,121 3,628
Actual return on plan assets.... (8,203) (292) (4,408)
Net amortization and deferral... 3,064 (4,632) 16
--------- --------- ---------
$ 773 $ 691 $ 511
========= ========= =========
Assumptions
Discount rate................... 8.00% 8.25% 7.75%
Long-term compensation
increase........................ 5.46% 5.46% 5.46%
Return on plan assets........... 9.50% 9.50% 9.50%

At December 31, 1995, the plan's net assets were approximately equal to the
total actuarial present value of the accumulated benefit obligation. No
reconciliation of the funding status of the plan is presented because such
information is unavailable.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS -- The Company adopted SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
January 1, 1993. The Company's accumulated postretirement benefit obligation was
$5.2 million at December 31, 1995 and $4.7 million at December 31, 1994. CSW
System's funding policy is based on actuarially determined contributions, taking
into account amounts which are deductible for income tax purposes. The Company
contributed $807,000 in 1995, $934,000 in 1994 and $874,000 in 1993.

SF-38

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Components of net periodic postretirement benefit cost and the
assumptions used in accounting for postretirement benefits are as follows:

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(THOUSANDS)
Net periodic Postretirement Benefit
Cost
Service cost.................... $ 458 $ 508 $ 460
Interest cost on accumulated
postretirement benefit
obligation.................... 383 388 338
Actual return on plan assets.... (220) (21) (24)
Amortization of transition
obligation.................... 166 166 166
Net amortization and deferral........ 20 (107) (66)
--------- --------- ---------
$ 807 $ 934 $ 874
========= ========= =========

A reconciliation of the funded status of the plan to the amounts recognized
on the consolidated balance sheets follows:

DECEMBER 31,
--------------------
1995 1994
--------- ---------
(THOUSANDS)
Accumulated Postretirement Benefit
Obligation (APBO)
Retirees........................ $ 2,020 $ 1,756
Other fully eligible
participants.................. 163 245
Other active participants....... 3,010 2,721
--------- ---------
Total APBO........................... 5,193 4,722
Plan Assets at Fair Value............ (3,227) (2,402)
--------- ---------
APBO in Excess of Plan Assets........ 1,966 2,320
Unrecognized Transition Obligation... (2,834) (3,000)
Unrecognized Gain (Loss)............. 871 643
--------- ---------
Accrued (Prepaid) Cost............... $ 3 $ (37)
========= =========

The following assumptions were used in accounting for SFAS No. 106:

Discount rate........................ 8.00% 8.25%
Return on plan assets................ 9.50% 9.50%
Tax rate for taxable trusts.......... 39.60% 39.60%

Health Care Cost Trend Rate Assumptions:

Pre-65 Participants:

1995 rate of 10.50% grading down .75% per year to an ultimate rate of 6.0%
in 2001.

1994 rate of 11.75% grading down .75% per year to an ultimate rate of 6.5%
in 2001.

Post-65 Participants:

1995 rate of 10.00% grading down .75% per year to an ultimate rate of 5.5%
in 2001.

1994 rate of 11.25% grading down .75% per year to an ultimate rate of 6.0%
in 2001.

Upon implementation of SFAS No. 106 in 1993, the CSW System decided to
amortize the transition obligation over a 20 year period.

SF-39

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Increasing the assumed health care cost trend rates by one percentage point
in each year would increase the accumulated postretirement benefit obligation as
of December 31, 1995 by $740,000 and increase the aggregate of the service and
interest cost components of net postretirement benefits by $168,000.

POSTEMPLOYMENT BENEFITS -- In November 1992, the FASB issued SFAS No. 112,
Employers' Accounting for Postemployment Benefits. This statement required the
accrual method of accounting for certain types of postemployment benefits
provided to former or inactive employees after employment, but before
retirement. This standard required that the expected cost of these benefits be
accrued during the period employees render service to qualify for benefits. The
most significant costs for the Company are the continued medical and salary
benefits during long-term disability. Effective January 1, 1993 the Company
adopted SFAS No. 112 and the effect of the change on 1993 income was $273,000,
net of taxes of $173,000 reflected in cumulative effect of changes in accounting
principles.

NOTE 8. RENTAL AND LEASE COMMITMENTS

The Company leases certain land, facilities and equipment under various
cancelable and non-cancelable operating leases. During 1993, the Company entered
into a long-term operating lease arrangement to lease all the pipeline
facilities of Palo Duro Pipeline Company (Palo Duro). The agreement, which
includes provisions to purchase the leased pipeline assets, provides for an
initial term of five years with several options to extend the lease for up to an
additional seventeen years.

Total rental charges to operating expenses for the year ended December 31,
including the Palo Duro lease noted above, were as follows:

(MILLIONS)

1993.................................... $ 2.5
1994.................................... $ 3.7
1995.................................... $ 3.7

Minimum rental commitments as of December 31, 1995 for all non-cancelable
leases are:

1996.................................... $ 4.3
1997.................................... $ 4.7
1998.................................... $ 3.3
1999.................................... $ 3.3
2000.................................... $ 3.2
Thereafter.............................. $ 17.9

NOTE 9. PRICE RISK MANAGEMENT ACTIVITIES

HEDGING ACTIVITIES -- The Company uses natural gas futures, options and
basis swaps to reduce its price risk exposure arising from the purchase and sale
of natural gas. Natural gas futures and options allow the Company to protect
against volatility in supply cost in fulfilling fixed price sales contracts,
meeting storage requirements and purchasing natural gas for processing
operations. Natural gas futures and options are also used to protect the Company
against price exposure on sales of natural gas from storage or fixed price
purchase agreements. In addition, basis swaps protect the Company against
volatility in price differentials between geographic areas. At December 31, 1995
and 1994, the Company had deferred gains (losses) of $(0.5) million and $1.9
million, respectively, from these transactions.

SF-40

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents the Company's net open positions at December
31 for the financial instruments described above:

<TABLE>
<CAPTION>
1995 1994
--------------------------- -----------------------------
FAIR FAIR
NOTIONAL MARKET NOTIONAL MARKET
BBTUS VALUE VALUE BBTUS VALUE VALUE
----- -------- ------ ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Swaps purchased (sold).................. 4,300 $7,297 $7,942 -- $ -- $ --
Futures purchased (sold)................ 5,200 $8,549 $6,559 (1,500) $ (3,933) $(2,546)
</TABLE>
At December 31, 1995, the Company held a net long position in basis swaps
with notional quantities of 6,000 BBtus valued at a net gain of $632,000.

TRADING ACTIVITIES -- Beginning in 1995, the Company entered into limited
transactions using its fundamental and technical analysis of market conditions
to earn additional revenues. The types of instruments used include futures,
price swaps, over-the-counter and exchange-traded options. These contracts run
for periods of up to 2 years. The following table discloses the fair value of
contracts held or issued for trading purposes and net gains (losses) from
trading activities as of or for the period ended December 31, 1995:

<TABLE>
<CAPTION>
FAIR VALUE OF ASSETS (LIABILITIES) NET
-------------------------------------- GAINS
BBTUS AVERAGE ENDING (LOSSES)
--------- ------------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Options.............................. (2,500) (124) (1,030) (755)
Basis Swaps.......................... (4,000) 17 (83) 517
Swaps................................ -- (7) -- (20)
Futures.............................. 2,000 203 1,164 2,383
--------- ------------- --------- ------
Total................................ (4,500) $ 89 $ 51 $2,125
========= ============= ========= ======
</TABLE>

NOTE 10. LITIGATION AND REGULATORY PROCEEDINGS

On October 30, 1992, Transok filed with the Federal Energy Regulatory
Commission ("FERC") a rate case in Docket No. PR93-4 for approval of cost of
service rates for Section 311 transportation on the Traditional System. On
September 18, 1995, the FERC approved a settlement of Transok's rate case. The
settlement provided for maximum rates of $2.7360 per MMBtu and $0.1045 per MMBtu
for firm reservation and firm usage charges, respectively, $0.1945 per MMBtu for
interruptible and an allowance of 1.7% of the gas received for fuel use and lost
and unaccounted for gas. These rates were effective from November 1, 1992, until
October 31, 1995, when Transok was required to file a new rate case. On November
17, 1995, Transok filed with the FERC a Refund Report indicating that it had
made refunds to its shippers of approximately $900,000 as the difference between
what it had collected from Section 311 shippers and the approved rates during
their effective time period plus interest.

On November 1, 1995, Transok filed with the FERC a rate case in Docket No.
PR96-2 for approval of cost of service rates for Section 311 transportation on
the Traditional System. Transok requested approval of maximum rates of $2.736
per MMBtu and $.1751 per MMBtu for firm reservation and firm usage charges,
respectively, $0.265 per MMBtu for interruptible plus the shipper's pro rata
share of compressor fuel and 0.5% of the volumes transported as an allowance for
lost and unaccounted for gas. Transok also informed the FERC in the case that it
was ceasing to offer new firm transportation service and was seeking approval of
the above firm rates only for the purpose of collecting the rates contained in
firm transportation contracts still in effect as of November 1, 1995. Ten
parties have intervened in the rate case. This matter is presently pending
before the FERC, and therefore, the outcome is not ascertainable at this time.

SF-41

TRANSOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Transok's Greasy Creek storage facility located on the Traditional System
is currently approved by the FERC to charge market based rates for up to 4.0 Bcf
of the facility's capacity. The rates are effective for an indefinite time
period, subject to Transok informing the FERC if it becomes affiliated with a
local distribution company outside of the State of Oklahoma.

Transok's Anadarko System in Oklahoma is currently authorized to collect a
maximum rate of $0.145 per MMBtu for Section 311 interruptible transportation,
plus each shipper's pro rata share of compressor fuel and 0.5% of the volumes
transported as an allowance for lost and unaccounted for gas. Transok is
required to file a new rate case with the FERC covering this system on or before
May 1, 1996.

Transok's North Louisiana System is currently authorized to collect a
maximum rate of $0.1866 per MMBtu for Section 311 interruptible transportation,
plus the shipper's pro rata share of compressor fuel and 0.5% of the volumes
transported as an allowance for lost and unaccounted for gas. Transok is
required to file a new rate case with the FERC covering this system on or before
November 1, 1996.

Transok leases the Palo Duro pipeline system in Texas that provides
transportation service both in intrastate commerce and under Section 311 of the
Natural Gas Policy Act. On April 29, 1994, Transok filed an Application for
Review of Reasonableness of Transportation Rates for the Palo Duro system with
the Texas Railroad Commission proposing a maximum rate of $0.20 per MMBtu (plus
taxes) plus the shipper's pro rata share of compressor fuel and lost and
unaccounted for volumes. The matter is still pending before the Railroad
Commission and the ultimate outcome of this filing is unknown at this time.

The Company, which provides natural gas services to PSO, and PSO have been
named defendants in various lawsuits filed in federal and state courts of
Oklahoma and Texas in 1984 through January 1995 by gas suppliers alleging claims
arising out of certain gas purchase contracts. Cases currently pending seek
approximately $1 million in actual damages, together with claims for punitive
damages which, in compliance with pleading code requirements, are alleged to be
in excess of $10,000. The plaintiffs seek relief through the filing dates as
well as attorney fees. As a result of settlements among the parties, certain
plaintiffs dismissed their claims with prejudice to further action. The
settlements were funded by PSO and did not have a significant effect on the
Company's consolidated results of operations. The remaining suits are in
preliminary stages. Management believes the ultimate resolution of the remaining
complaints will not have a significant effect on the Company's consolidated
financial position or results of operations. The Company is indemnified pursuant
to an agreement with PSO for any loss or costs that may be incurred by the
Company involving PSO gas supply contracts.

The Company's compressor engines and other emission sources are subject to
air permit requirements, including monitoring. As a result of Clean Air Act
amendments, the Company may become subject to additional permit requirements in
the future, including compliance assurance monitoring, at eight facilities.
Should these sites become subject to additional permit requirements, it is not
expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.

The Company is party to various other legal claims, actions and complaints
arising in the normal course of business. Management does not expect disposition
of these matters to have a material adverse effect on the Company's consolidated
financial position or results of operations.

NOTE 11. SUBSEQUENT EVENT (UNAUDITED)

On June 6, 1996, Tejas Gas Corporation ("Tejas") acquired Transok from
CSW through a merger of a recently formed wholly owned subsidiary of Tejas into
Transok. Immediately prior to the sale to Tejas, Transok sold seven natural gas
processing plants to a third party lessor, which in turn leased these facilities
to Tejas.

SF-42

================================================================================
<PAGE>

PROSPECTUS
$400,000,000

[LOGO] TEJAS GAS CORPORATION

DEBT SECURITIES
COMMON STOCK
------------------------
Tejas Gas Corporation (the "Company") may offer from time to time its
unsecured debt securities consisting of notes, debentures or other evidences of
indebtedness (the "Debt Securities"). The Company may also offer and sell from
time to time shares of Common Stock, par value $0.25 per share (the "Common
Stock"), of the Company. The aggregate initial offering price of the Debt
Securities and the Common Stock to be offered by the Company hereby (the
"Securities") will not exceed $400,000,000 or, if applicable, the equivalent
thereof in any other currency or currency unit. The Securities may be offered as
separate series in amounts, at prices and on terms to be determined in light of
market conditions at the time of sale and set forth in a Prospectus Supplement.

The terms of each series of Debt Securities, including, where applicable,
the specific designation, aggregate principal amount, authorized denominations,
maturity, rate or rates and time or times of payment of any interest, any terms
for optional or mandatory redemption, which may include redemption at the option
of holders upon the occurrence of certain events, or payment of additional
amounts or any sinking fund provisions, any provisions with respect to
conversion (in the case of Debt Securities that may be convertible into Common
Stock of the Company), any initial public offering price, the net proceeds to
the Company and any other specific terms in connection with the offering and
sale of such series will be set forth in a Prospectus Supplement. As used
herein, the Debt Securities shall include securities denominated in United
States dollars, or, at the option of the Company if so specified in an
applicable Prospectus Supplement, in any other currency or currency unit, or in
amounts determined by reference to an index.

The Securities may be sold directly by the Company to investors, through
agents designated from time to time or to or through underwriters or dealers.
See "Plan of Distribution". If any agents of the Company or any underwriters are
involved in the sale of any Securities in respect of which this Prospectus is
being delivered, the names of such agents or underwriters and any applicable
commissions or discounts will be set forth in a Prospectus Supplement. The net
proceeds to the Company from such sale also will be set forth in a Prospectus
Supplement.

The Common Stock is listed on the New York Stock Exchange under the Symbol
TEJ. Any Common Stock offered will be listed, subject to notice of issuance, on
such exchange.

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN
INVESTMENT IN THE SECURITIES.

This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.

------------------------

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 July 3, 1996.

<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING PROSPECTUS SUPPLEMENT IN CONNECTION WITH THE OFFERING COVERED
BY THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT CONSTITUTES AN OFFER TO SELL, OR A SOLICITATION OF ANY
OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR
TO ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

PAGE
----

Available Information................... 3
Incorporation of Certain Documents by
Reference............................. 3
The Company............................. 5
Risk Factors............................ 7
Use of Proceeds......................... 9
Ratio of Earnings to Fixed Charges...... 9
Description of Debt Securities.......... 9
Description of Capital Stock............ 15
Certain Anti-takeover Provisions........ 15
Plan of Distribution.................... 18
Legal Matters........................... 19
Experts................................. 19

------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON ANY EXCHANGES ON WHICH THE
SECURITIES ARE LISTED, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

AVAILABLE INFORMATION

The Company 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 filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission, 450
Fifth Street, NW, Judiciary Plaza, Washington, D.C. 20549; and at the following
regional offices of the Commission: 7 World Trade Center, New York, New York
10048; and Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, at prescribed rates. The Commission maintains an
Internet web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission (http://www.sec.gov). The Company's Common Stock, depositary shares
(the "9.96% Depositary Shares"), each representing a one-tenth interest in a
share of 9.96% Cumulative Preferred Stock, par value $1.00 per share (the "9.96%
Preferred Stock"), and depositary shares (the "5 1/4% Depositary Shares"), each
representing a one-fifth interest in a share of 5 1/4% Convertible Preferred
Stock, par value $1.00 per share (the "5 1/4% Preferred Stock"), are listed on
the New York Stock Exchange and such reports, proxy statements and other
information may be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.

This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act
with respect to the securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement for further information with respect to the Company and
the securities offered hereby. Statements contained herein concerning the
provisions of any contract, agreement or any other document or exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete; with respect to each such contract, agreement or document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act (File No. 0-17389), are incorporated in
this Prospectus by reference and shall be deemed to be a part hereof:

(1) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995;

(2) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996;

(3) the Company's Current Report on Form 8-K filed June 18, 1996;

(4) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed on December 3, 1992, as amended by
Forms 8-A/A filed on September 17, 1993 and March 18, 1994, as such
Registration Statement may be further amended from time to time for the
purpose of updating, changing or modifying such descriptions;

(5) the description of the Company's preferred stock purchase rights
associated with the Common Stock contained in the Company's Registration
Statement on Form 8-A filed on November 14, 1994, as such Registration
Statement may be amended from time to time for the purpose of updating,
changing or modifying such description;

(6) the description of the 9.96% Depositary Shares and the 9.96%
Preferred Stock contained in the Company's Registration Statement on Form
8-A filed on January 13, 1993, as amended by Form 8-A/A filed on March 25,
1993, as such Registration Statement may be further amended from time to
time for the purpose of updating, changing or modifying such description;

(7) the description of the 5 1/4% Depositary Shares and the 5 1/4%
Preferred Stock contained in the Company's Registration Statement on Form
8-A filed on September 27, 1993, as amended by Forms 8-A/A filed on
November 1, 1993 and December 23, 1993, as such Registration Statement may
be

further amended from time to time for the purpose of updating, changing or
modifying such description; and

(8) the Rights Agreement, dated as of November 11, 1994, between the
Company and Harris Trust and Savings Bank, which includes the Certificate
of Designation for the Series C Junior Participating Preferred Stock as
Exhibit A, the form of Right Certificate as Exhibit B, and the Summary of
Rights to Purchase Preferred Shares as Exhibit C (filed as Exhibit 1 to the
Company's Form 8-K dated November 11, 1994).

All documents filed by the Company with the Commission pursuant to sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering made hereby (by the
filing of a post-effective amendment to the Registration Statement which
indicates that all securities offered hereby have been sold, or which
deregisters all securities then remaining unsold) shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such document. 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 herein or in any other subsequently filed document that 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.

The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus is delivered,
upon the written or oral request of such person, a copy of any or all documents
that have been incorporated herein by reference (not including exhibits to the
documents that have been incorporated herein by reference unless such exhibits
are specifically incorporated by reference in the documents which this
Prospectus incorporates). Requests should be directed to James W. Whalen,
Executive Vice President, Chief Financial Officer and Treasurer, Tejas Gas
Corporation, 1301 McKinney, Suite 700, Houston, Texas 77010 (telephone: (713)
658-0509).

THE COMPANY

GENERAL

The Company is a major intrastate natural gas pipeline company engaged in
the business of purchasing, gathering, processing, treating, transporting and
marketing natural gas. The Company is one of the largest independent intrastate
gatherers and transporters of natural gas volumes through company-owned
pipelines in the United States. The Company's operations are situated primarily
in the major gas-producing areas in Texas, Louisiana, the Texas and Louisiana
Gulf Coast regions and Oklahoma, with additional facilities located in West
Virginia. The Company is a holding company that conducts operations through four
principal subsidiaries, Tejas Gas Corp. ("Tejas Gas"), Acadian Gas Corporation
("Acadian"), Tejas Natural Gas Company ("TNGC") and, since June 1996, Transok,
Inc. ("Transok"). See " -- Transok Acquisition." In addition, the Company offers
natural gas marketing throughout North America as well as other related energy
and financial services through Coral Energy Resources, L.P. ("Coral"), a joint
venture partnership with Shell Oil Company ("Shell"). Unless the context
indicates otherwise, references to the "Company" are to Tejas Gas Corporation
and its subsidiaries.

As of June 6, 1996, following the Transok acquisition, the Company owned
and/or operated approximately 12,500 miles of intrastate natural gas pipeline
systems, including systems held in nine joint ventures. The Company's pipeline
systems consist of main lines, lateral lines and gathering lines and have
approximately 290 interconnections with both interstate and intrastate pipelines
in Texas, Oklahoma and Louisiana. Through these interconnections, the Company
can access natural gas supplies from sources not directly connected to its
pipelines and deliver natural gas to those customers who are outside of the
Company's geographical area of pipeline operations. Excluding Transok, the
Company's natural gas sales, transportation and processing activities recorded
an average total throughput of 3.2 billion cubic feet ("BCF") of natural gas per
day ("BCF/d") in 1995 and 3.5 BCF/d in the first quarter of 1996. Transok's
average total throughput was 1.8 BCF/d in 1995 and 1.7 BCF/d in the first
quarter of 1996. The Company also owns underground natural gas storage
facilities in Texas and Oklahoma and leases an underground natural gas storage
facility in Louisiana. These facilities have a combined storage capacity of 155
BCF and a withdrawal capacity of 1.1 BCF/d. In addition, the Company operates
nine owned and seven leased natural gas processing plants, which have a combined
processing capacity of approximately 725 million cubic feet ("MMCF") of natural
gas per day ("MMCF/d") and approximately 50,000 barrels of natural gas liquids
("NGLs") per day.

December 28, 1990, the Company purchased through Acadian, a wholly owned
subsidiary, all of the capital stock of several corporations comprising the
Acadian Gas Group, a group of companies engaged in natural gas pipeline
operations, principally in Louisiana. On September 15, 1993, the Company,
through a newly formed wholly owned subsidiary, TNGC, acquired from Exxon
substantially all of Exxon's Texas and Louisiana intrastate natural gas pipeline
operations as well as a significant natural gas storage facility. In January
1995, the Company transferred the capital stock of Tejas Gas, Acadian and TNGC
to its wholly owned subsidiary, Tejas-Acadian Holding Company ("TAHC"), in
connection with the amendment and consolidation of the Company's credit
facilities. The Company, through subsidiaries of Tejas Alliance Holding Company,
holds a one-third interest in Coral, a natural gas and energy marketing joint
venture. In June 1996, the Company, through a subsidiary of Tejas Transok
Holding Company, acquired Transok, an intrastate natural gas pipeline operator
and gas processor with assets located primarily in Oklahoma, from Central and
South West Corporation ("CSW").

The executive offices of the Company are located at 1301 McKinney, Suite
700, Houston, Texas 77010, and its telephone number is (713) 658-0509.

TRANSOK ACQUISITION

Transok operates intrastate natural gas pipeline systems in Oklahoma,
Louisiana and Texas and is one of the largest processors of natural gas in
Oklahoma. Transok's operations include (i) approximately 7,000 miles of
gathering and transmission pipelines in Oklahoma, Louisiana and Texas with 2.3
BCF/d of pipeline capacity; (ii) eight operating processing plants, of which
seven are leased to Transok, with total processing capacity of 564 MMCF/d of
natural gas; (iii) a 26 BCF-capacity natural gas reservoir storage facility with
300 MMCF/d of withdrawal and 200 MMCF/d of injection capacity; and (iv) 1.4
trillion cubic feet of connected third-party natural gas reserves. Transok's
average system throughput was 1.2 BCF/d during the first quarter of 1996 and 1.3
BCF/d in 1995. NGL production averaged 25,100 barrels per day during the first
quarter of 1996 and 22,400 barrels per day in 1995.

The total purchase price received by CSW at closing was $690 million in
cash, of which $565 million was paid by the Company and $125 million was paid by
the Lessor to acquire the Transok Plants. In addition, as part of the
transaction, Transok retained $200 million of long-term debt. The Company's
financing for its cash requirements consisted of (i) $178 million borrowed under
an existing credit facility and (ii) $387 million, net of a voluntary
prepayment, borrowed under a new $425 million credit facility. The Lessor is
leasing the Transok Plants to the Company for a five-year term with annual lease
payments of approximately $9 million. The lease agreement may be extended by the
Company, with approval by the Lessor, and provides the Company the option to
purchase the Transok Plants during the term. The option to purchase all of the
Transok Plants is exercisable for $125 million. If such purchase option is not
exercised, the Company will be obligated to pay the Lessor a termination fee of
approximately $106 million at the end of the lease. However, such fee will be
reduced by the amount, if any, by which the proceeds from the Lessor's sale of
the assets exceeds $19 million. The lease also provides the Company the option
to purchase at any time during the term one or more of the Transok Plants for an
aggregate amount not exceeding $31 million, with corresponding reductions in the
$106 million termination fee and $19 million threshold amount.

RISK FACTORS

IN EVALUATING THE COMPANY AND ITS BUSINESS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN.

INDEBTEDNESS, LEVERAGE AND OTHER COMMITMENTS

In connection with the Transok acquisition, the Company borrowed (i) $178
million under an existing credit facility of a wholly owned Tejas subsidiary and
(ii) $387 million, net of a voluntary prepayment, under a new $425 million
credit facility. Transok had outstanding at the time of the acquisition $200
million principal amount of medium-term notes, which remained in place following
its merger with a Tejas subsidiary. As of June 6, 1996, the Company's total debt
was approximately $1.0 billion, including debt incurred or assumed in connection
with the Transok acquisition. In addition, immediately prior to the acquisition,
an unrelated third party paid $125 million to Transok for certain gas processing
assets and is leasing these assets to the Company as described above for an
annual lease payment of approximately $9 million. See "The Company -- Transok
Acquisition." The Company is also committed to (i) maintain certain natural gas
volumes in one of its storage facilities, for which it pays a third party
supplier an estimated annual reservation fee of approximately $1.2 million, (ii)
make preferred distributions to a third party of approximately $9 million
annually through 2003 in connection with such party's capital investment in a
subsidiary of the Company and (iii) make annual rent payments of approximately
$8.4 million through September 1998 pursuant to a lease of certain pipeline
facilities. In connection with the pipeline lease, the Company has the option to
purchase the facilities for approximately $144.5 million at the end of the term
or pay a termination fee of approximately $122.8 million, subject to certain
reductions. This indebtedness and these other obligations create a risk that the
Company may be unable to service its indebtedness and pay dividends on its 5
1/4% Preferred Stock and 9.96% Preferred Stock. While the Company does not
anticipate that it will be unable to service such indebtedness or pay such
dividends, there can be no assurance in that regard.

RELIANCE ON FUNDS FROM OPERATING SUBSIDIARIES; RESTRICTIONS ON DISTRIBUTIONS;
DIVIDENDS

The ability of the Company, as a holding company, to pay dividends on the
Common Stock will be dependent upon the payment of dividends or interest by, or
the availability of other funds from, its subsidiaries. Effective January 12,
1995, the Company amended its credit facilities to roll-up a majority of the
existing bank debt of its three principal operating subsidiaries into a single,
$455.0 million, eight-year revolving credit facility at a newly-formed
subsidiary, TAHC. Effective June 6, 1996, the Company established a new $425.0
million, revolving credit facility that matures December 31, 1997 in connection
with the Transok acquisition. The TAHC and Transok credit facilities and the
other subsidiary credit facilities restrict the amount of distributions that may
be made by the subsidiaries to the Company.

The Company does not currently intend to pay regular cash dividends on the
Common Stock. This policy will be reviewed by the Board of Directors of the
Company from time to time in light of, among other things, the Company's
earnings and financial position, capital requirements and limitations imposed by
its bank loan agreements. No dividend or distribution may be declared or paid
on, and no payment may be made on account of the purchase, redemption or
retirement of, the Common Stock unless and until all cumulative dividends on the
5 1/4% Preferred Stock and the 9.96% Preferred Stock have been declared and
either paid or funds therefor set aside for payment.

RISK OF INABILITY TO INTEGRATE TRANSOK OPERATIONS

Although the Company has previously integrated relatively large
acquisitions and expects to integrate the operations of Transok with its
existing operations, there can be no assurance that its efforts to do so will be
successful. The failure to successfully integrate Transok could adversely affect
the Company's operating results.

SENSITIVITY TO SHORT-TERM SUPPLY AND SALES CONTRACTS

Currently, the Company purchases, and Coral, a marketing joint venture
between the Company and Shell, resells natural gas primarily under short-term
contracts, which are subject to renegotiation of prices and volumes, usually on
a monthly basis. Although this affords the Company greater flexibility in
responding to changing market conditions, supplies and markets under such
contracts are not assured. In addition, the profitability of short-term sales is
strongly influenced by the balance of supply and demand in the marketplace. For
example, excess supplies in relation to demand may cause significant competition
for available markets, which, in turn, may result in depressed profit margins
for short-term sales.

ABILITY OF PRINCIPAL STOCKHOLDERS TO EXERCISE CONTROL

As of May 31, 1996, the amount of the Common Stock controlled by members of
the Board of Directors of the Company or their affiliates was approximately 25%.
Such stockholders, if they vote together, may be able to materially influence
the outcome of all matters submitted to a vote of the Company's stockholders.

POTENTIAL LIABILITY UNDER TAKE-OR-PAY CONTRACTS; LITIGATION

The Company is a party to certain natural gas purchase contracts containing
take-or-pay provisions, which require the Company to take a minimum amount of
natural gas or pay for such minimum quantities if not taken. The Company is a
defendant in a take-or-pay lawsuit, THE LONG TRUSTS V. TEJAS GAS CORP. ET. AL.,
in which the plaintiffs in their pleadings have alleged damages in excess of $36
million (including prejudgment interest) against the Company. In connection with
depositions taken for the suit, certain expert witnesses retained by the Long
Trusts have presented damage models purporting to show approximately $60 million
in damages for take-or-pay claims and approximately $70 million in damages for
claims that plaintiffs were prevented by actions of the Company from producing
gas ratably with other producers in a common reservoir. Management disputes the
Long Trusts' claims and believes that the Long Trusts' damage models are
seriously flawed. Plaintiffs also have added a claim for exemplary damages
treble the amount, if any, found by the court for interference and conspiracy
claims. Plaintiffs assert that the Company should be jointly liable with its
co-defendant for damages asserted against such co-defendant. In addition, the
Company is a defendant in various lawsuits that have arisen in the ordinary
course of business. Although the Company has not obtained any formal opinion,
based on discussions with outside counsel and an internal examination of such
lawsuits, management believes that it has adequate defenses or recourse to third
parties relating to such lawsuits and does not believe these matters will have a
material adverse effect on the Company's financial condition.

COMPETITION

The Company has numerous competitors in its geographic area of operations,
many of which are larger pipeline companies with more extensive pipeline
networks and greater capital resources. Accordingly, for the Company to remain
competitive it must continually meet or exceed such competitors' ability to
offer reliable services and competitive pricing. The Company also faces varying
degrees of competition from the use of energy sources, such as electricity, coal
and oil. In addition, excess industry wide supplies in relation to demand will
cause increased competition for available markets.

SEASONAL AND WEATHER VARIATIONS RESULT IN FLUCTUATIONS IN THROUGHPUT, REVENUES
AND EARNINGS

The Company's natural gas sales are affected by seasonal changes in demand
for natural gas because of weather. The Company has its greatest demands during
the winter heating season and the summer air-conditioning season so that greater
volumes, revenues and earnings from operations are usually experienced during
those periods of the year. Variations in extremes of weather from year to year
in the past resulted in significant variations in the Company's natural gas
throughput, revenues and earnings for those years.

NO ASSURANCE OF CONTINUED EXPANSION OPPORTUNITIES OR CONTINUED AVAILABILITY OF
FINANCING

In order for the Company to expand its business by acquiring additional
gathering and pipeline systems through either the purchase or construction of
new facilities, the Company will be required to identify expansion opportunities
and to finance such activities, using either equity or debt financing, or a
combination thereof. No assurance can be given that appropriate opportunities
for expansion at levels of profitability comparable to existing operations can
be obtained or that financing on terms acceptable to the Company can be
obtained.

RISK OF ADDITIONAL COSTS AND LIABILITIES RELATED TO ENVIRONMENTAL AND SAFETY
REGULATIONS
AND CLAIMS

The pipeline operations of the Company are subject to various federal,
state and local environmental, safety, health and other laws, which can increase
the cost of planning, designing, installing and operating such facilities. There
can be no assurance that costs and liabilities relating to compliance will not
be incurred in the future. Moreover, it is possible that other developments,
such as increasingly strict environmental and safety laws, regulations and
enforcement policies thereunder, and claims for damages to property or persons
resulting from the Company's operations, could result in additional costs to and
liabilities of the Company.

USE OF PROCEEDS

Except as otherwise described in any Prospectus Supplement or any Pricing
Supplement, the net proceeds from the sale of Securities will be used for
general corporate purposes, which may include refinancings of indebtedness,
working capital, capital expenditures, acquisitions and repurchases and
redemptions of Securities.

RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges... 3.17 2.55 2.49 2.37 2.71 1.83 1.58
</TABLE>

For purposes of calculating the ratios of earnings to fixed charges
"earnings" represent income from continuing operations before interest charges
and before federal and state income taxes. "Fixed charges" represent the sum of
interest charges (whether expensed or capitalized) and the portion of rental
expense representative of an interest factor.

DESCRIPTION OF DEBT SECURITIES

The following description of the Debt Securities sets forth certain general
terms and provisions of the Debt Securities to which any Prospectus Supplement
may relate ("Offered Debt Securities"). The particular terms of the Offered Debt
Securities and the extent to which such general provisions may apply will be
described in a Prospectus Supplement relating to such Offered Debt Securities.

The Debt Securities will be general unsecured obligations of the Company
and will be issued under an Indenture (the "Indenture"), between the Company and
Texas Commerce Bank, N.A., as trustee (the "Trustee"). The statements under this
caption relating to the Debt Securities and the Indenture are summaries only and
do not purport to be complete. Such summaries make use of terms defined in the
Indenture. Wherever such terms are used herein or particular provisions of the
Indenture are referred to, such terms or provisions, as the case may be, are
incorporated by reference as part of the statements made herein, and such
statements are qualified in their entirety by such reference. Certain defined
terms in the Indenture are capitalized herein. The italicized parenthetical
references below refer to the section numbers in the Indenture, unless otherwise
indicated.

GENERAL

The Indenture does not limit the aggregate principal amount of Debt
Securities which can be issued thereunder and provides that Debt Securities may
be issued from time to time thereunder in one or more series, each in an
aggregate principal amount authorized by the Company prior to issuance. The
Indenture does not limit the amount of other unsecured indebtedness or
securities which may be issued by the Company.

Unless otherwise indicated in a Prospectus Supplement, the Debt Securities
will not benefit from any covenant or other provision that would afford Holders
of such Debt Securities special protection in the event of a highly leveraged
transaction involving the Company.

Reference is made to the Prospectus Supplement for the following terms of
the Offered Debt Securities, which will be issued in registered form: (i) the
title and aggregate principal amount of the Offered Debt Securities; (ii) the
date or dates on which the Offered Debt Securities will mature; (iii) the rate
or rates (which may be fixed or variable) per annum, if any, at which the
Offered Debt Securities will bear interest or the method of determining such
rate or rates; (iv) the date or dates from which such interest, if any, will
accrue and the date or dates at which such interest, if any, will be payable;
(v) the terms for redemption or early payment, if any, including any mandatory
or optional sinking fund or analogous provision; (vi) the terms for conversion
or exchange, if any, of the Offered Debt Securities; (vii) whether such Offered
Debt Securities will be issued in the form of one or more global securities and
whether such global securities are to be issuable in temporary global form or
permanent global form; (viii) if other than U.S. dollars, the currency,
currencies or currency unit or units in which such Offered Debt Securities will
be denominated and in which the principal of, and premium and interest, if any,
on, such Offered Debt Securities will be payable; (ix) whether, and the terms
and conditions on which, the Company or a Holder may elect that, or the other
circumstances under which, payment of principal of, or premium or interest, if
any, on, such Offered Debt Securities is to be made in a currency or currencies
or currency unit or units other than that in which such Offered Debt Securities
are denominated; and (x) any other specific terms of the Offered Debt
Securities. Reference is also made to the Prospectus Supplement for information
with respect to any additional covenants that may be included in the terms of
the Offered Debt Securities. (SECTION 301)

No service charge will be made for any registration of transfer or exchange
of the Debt Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
(SECTION 305)

To the extent the Company conducts its operations through Subsidiaries, the
Holders of Debt Securities will have a junior position to any creditors of the
Company's Subsidiaries.

Offered Debt Securities may be sold at a discount (which may be
substantial) below their stated principal amount bearing no interest or interest
at a rate which at the time of issuance is below market rates. Any material
United States federal income tax consequences and other special considerations
applicable thereto will be described in the Prospectus Supplement relating to
any such Offered Debt Securities.

If any of the Offered Debt Securities are sold for any foreign currency or
currency unit or if the principal of, or premium or interest, if any, on any of
the Offered Debt Securities is payable in any foreign currency or currency unit,
the restrictions, elections, tax consequences, specific terms and other
information with respect to such Offered Debt Securities and such foreign
currency or currency unit will be set forth in the Prospectus Supplement
relating thereto.

EVENTS OF DEFAULT

Unless otherwise provided with respect to any series of Debt Securities,
the following are Events of Default under the Indenture with respect to the Debt
Securities of such series issued under such Indenture: (a) failure to pay
principal of (or premium, if any, on) any Debt Security of such series when due;
(b) failure to pay any interest on any Debt Security of such series when due,
continued for 30 days; (c) failure to deposit any mandatory sinking fund
payment, when due, in respect of the Debt Securities of such series,

continued for 30 days; (d) failure to perform any other covenant of the Company
in the Indenture (other than a covenant included in the Indenture for the
benefit of a series of Debt Securities other than such series), continued for 90
days after written notice as provided in the Indenture; (e) certain events of
bankruptcy, insolvency or reorganization; and (f) any other Event of Default as
may be specified with respect to Debt Securities of such series. (SECTION 501)
If an Event of Default with respect to any outstanding series of Debt Securities
occurs and is continuing, either the Trustee or the Holders of at least 25% in
principal amount of the outstanding Debt Securities of such series (in the case
of an Event of Default described in clause (a), (b), (c) or (f) above) or at
least 25% in principal amount of all outstanding Debt Securities under the
Indenture (in the case of other Events of Default) may declare the principal
amount of all the Debt Securities of the applicable series (or of all
outstanding Debt Securities under the Indenture, as the case may be) to be due
and payable immediately. At any time after a declaration of acceleration has
been made, but before a judgment has been obtained, the Holders of a majority in
principal amount of the outstanding Debt Securities of such series (or of all
outstanding Debt Securities under the applicable Indenture, as the case may be)
may, under certain circumstances, rescind and annul such acceleration. (SECTION
502) Depending on the terms of other indebtedness of the Company outstanding
from time to time, an Event of Default under the Indenture may give rise to
cross defaults on such other indebtedness of the Company.

The Indenture provides that the Trustee will within 90 days after the
occurrence of a default in respect of any series of Debt Securities, give to the
Holders of the Debt Securities of such series notice of all uncured and unwaived
defaults known to it, provided, however, that, except in the case of a default
in the payment of the principal of (or premium, if any) or any interest on, or
any sinking fund installment with respect to, any Debt Securities of such
series, the Trustee will be protected in withholding such notice if it in good
faith determines that the withholding of such notice is in the interest of the
Holders of the Debt Securities of such series; and provided, further, that such
notice shall not be given until at least 30 days after the occurrence of a
default in the performance, or breach, of any covenant or warranty of the
Company under such Indenture other than for the payment of the principal of (or
premium, if any) or any interest on, or any sinking fund installment with
respect to, any Debt Securities of such series. For the purpose of this
provision, "default" with respect to Debt Securities of any series means any
event which is, or after notice or lapse of time, or both, would become, an
Event of Default with respect to the Debt Securities of such Series. (SECTION
602)

The Holders of a majority in principal amount of the outstanding Debt
Securities of any series (or, in certain cases, all outstanding Debt Securities
under the Indenture) have the right, subject to certain limitations, to direct
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 with
respect to the Debt Securities of such series (or of all outstanding Debt
Securities under the Indenture). (SECTION 512) The Indenture provides that in
case an Event of Default shall occur and be continuing, the Trustee shall
exercise such of its rights and powers under the applicable Indenture and use
the same degree of care and skill in its exercise as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(SECTION 601)Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any of the Holders of the Debt Securities unless they shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request.
(SECTION 603)

The Holders of a majority in principal amount of the outstanding Debt
Securities of any series (or, in certain cases, all outstanding Debt Securities
under the Indenture) may on behalf of the Holders of all Debt Securities of such
series (or of all outstanding Debt Securities under the Indenture) waive any
past default under the Indenture, except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security or in respect
of a provision which under the applicable Indenture cannot be modified or
amended without the consent of the Holder of each outstanding Debt Security
affected. (SECTION 513) The Holders of a majority in principal amount of the
outstanding Debt Securities affected thereby may on behalf of the Holders of all
such Debt Securities waive compliance by the Company with certain restrictive
provisions of the Indenture. (SECTION 1006)

The Company is required to furnish to the Trustee annually a statement as
to the performance by the Company of certain of its obligations under each
Indenture and as to any default in such performance. (SECTION 1005)

MODIFICATION

Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in principal
amount of the outstanding Debt Securities under the Indenture affected thereby;
provided, however, that no such modification or amendment may, without the
consent of the Holder of each outstanding Debt Security affected thereby, (a)
change the stated maturity date of the principal of, or any installment of
interest on, any Debt Security, (b) reduce the principal amount of, or the
premium (if any) or interest on, any Debt Security, (c) change the place or
currency, currencies, or currency unit or units of payment of principal of, or
premium (if any) or interest on, any Debt Security, (d) impair the right to
institute suit for the enforcement of any payment on or with respect to any Debt
Security or (e) reduce the percentage in principal amount of outstanding Debt
Securities the consent of the Holders of which is required for modification or
amendment of the Indenture or for waiver of compliance with certain provisions
of the Indenture or for waiver of certain defaults. (SECTION 902)

The Indenture provides that the Company and the Trustee may, without the
consent of any Holders of Debt Securities, enter into supplemental indentures
for the purposes, among other things, of adding to the Company's covenants,
adding additional Events of Default, establishing the form or terms of Debt
Securities or curing ambiguities or inconsistencies in the Indenture, provided
that such action to cure ambiguities or inconsistencies shall not adversely
affect the interests of the Holders of the Debt Securities in any material
respect.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Company, without the consent of any Holders of outstanding Debt
Securities, may consolidate with or merge into, or convey, transfer or lease its
assets substantially as an entirety to, any Person, provided that (i) the Person
formed by such consolidation or into which the Company is merged or which
acquires or leases the assets of the Company substantially as an entirety is a
Person which assumes by supplemental indenture the Company's obligations on the
Debt Securities and under the Indenture, (ii) after giving effect to the
transaction, no Event of Default and no event which, after notice or lapse of
time or both, would become an Event of Default shall have occurred and be
continuing, and (iii) certain other conditions are met. Upon compliance with
these provisions by a successor Person, the Company will (except in the case of
a lease) be relieved of its obligations under the Indenture and the Debt
Securities. (ARTICLE EIGHT)

DISCHARGE AND DEFEASANCE

The Company may terminate its obligations under the Indenture, other than
its obligation to pay the principal of (and premium, if any) and interest on the
Debt Securities of any series and certain other obligations, if it (i)
irrevocably deposits or causes to be irrevocably deposited with the Trustee as
trust funds money or U.S. Government Obligations maturing as to principal and
interest sufficient to pay the principal of, any interest on, and any mandatory
sinking funds in respect of, all outstanding Debt Securities of such series on
the stated maturity of such payments or on any redemption date and (ii) complies
with any additional conditions specified to be applicable with respect to the
covenant defeasance of Debt Securities of such series. (SECTION 401)

The terms of any series of Debt Securities may also provide for legal
defeasance pursuant to each Indenture. In such case, if the Company (i)
irrevocably deposits or causes to be irrevocably deposited money or U.S.
Government Obligations as described above, (ii) makes a request to the Trustee
to be discharged from its obligations on the Debt Securities of such series and
(iii) complies with any additional conditions specified to be applicable with
respect to legal defeasance of Debt Securities of such series, then the Company
shall be deemed to have paid and discharged the entire indebtedness on all the
outstanding Debt Securities of such series and the obligations of the Company
under the Indenture and the Debt

Securities of such series to pay the principal of (and premium, if any) and
interest on the Debt Securities of such series shall cease, terminate and be
completely discharged, and the Holders thereof shall thereafter be entitled only
to payment out of the money or U.S. Government Obligations deposited with the
Trustee as aforesaid, unless the Company's obligations are revived and
reinstated because the Trustee is unable to apply such trust fund by reason of
any legal proceeding, order or judgment. (SECTIONS 403 AND 404)

"U.S. Government Obligations" is defined in the Indenture as direct
noncallable obligations of, or noncallable obligations the payment of principal
of and interest on which is guaranteed by, the United States of America, or to
the payment of which obligations or guarantees the full faith and credit of the
United States of America is pledged, or beneficial interests in a trust the
corpus of which consists exclusively of money or such obligations or a
combination thereof. (SECTION 101)

FORM, EXCHANGE, REGISTRATION AND TRANSFER

Debt Securities are issuable in definitive form as Registered Debt
Securities. (SECTION 301)Reference is made to the Prospectus Supplement for the
terms relating to the form, exchange, registration and transfer of Debt
Securities issuable in temporary or permanent global forms.

Registered Debt Securities of any series will be exchangeable for other
Registered Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations.

Registered Debt Securities may be presented for registration of transfer
(with the form of transfer endorsed thereon duly executed), at the office of the
Security Registrar or at the office of any transfer agent designated by the
Company for such purpose with respect to any series of Debt Securities and
referred to in an applicable Prospectus Supplement, without service charge and
upon payment of any taxes and other governmental charges as described in the
Indenture. Such transfer or exchange will be effected upon the Security
Registrar or such transfer agent, as the case may be, being satisfied with the
documents of title and identity of the Person making the request. The Company
has appointed the Trustee as Security Registrar. (SECTION 305) If a Prospectus
Supplement refers to any transfer agents (in addition to the Security Registrar)
initially designated by the Company with respect to any series of Debt
Securities, the Company may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, except that, if Debt Securities of a series are issuable
solely as Registered Debt Securities, the Company will be required to maintain a
transfer agent in each Place of Payment for such series. The Company may at any
time designate additional transfer agents with respect to any series of Debt
Securities. (SECTION 1002)

In the event of any redemption in part, the Company shall not be required
to (i) issue, register the transfer of or exchange Registered Debt Securities of
any series during a period beginning at the opening of business 15 days prior to
the selection of Debt Securities of that series for redemption and ending on the
close of business on the day of mailing of the relevant notice of redemption; or
(ii) register the transfer of or exchange any Registered Debt Security, or
portion thereof, called for redemption, except the unredeemed portion of any
Registered Debt Security being redeemed in part. (SECTION 305)

PAYMENT AND PAYING AGENTS

Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and any premium and interest on Registered Debt Securities will
be made in the designated currency or currency unit at the office of such Paying
Agent or Paying Agents as the Company may designate from time to time, except
that, at the option of the Company, payment of any interest may be made by check
mailed to the address of the Person entitled thereto as such address shall
appear in the Security Register. Unless otherwise indicated in an applicable
Prospectus Supplement, payment of any installment of interest on Registered Debt
Securities will be made to the Person in whose name such Registered Debt
Security is registered at the close of business on the Regular Record Date for
such interest. (SECTION 307)

Unless otherwise indicated in an applicable Prospectus Supplement, the
Corporate Trust Office of the Trustee in Houston, Texas will be designated as a
Paying Agent for the Company for payments with respect to Debt Securities which
are issuable solely as Registered Debt Securities. The Company may at any time

designate additional Paying Agents or rescind the designation of any Paying
Agent or approve a change in the office through which any Paying Agent acts,
except that the Company will be required to maintain a Paying Agent in each
Place of Payment for such series. (SECTION 1002)

All moneys paid by the Company to a Paying Agent for the payment of
principal of and any premium or interest on any Debt Security which remain
unclaimed at the end of three years after such principal, premium or interest
shall have become due and payable will (subject to applicable escheat laws) be
repaid to the Company, and the Holder of such Debt Security or any coupon will
thereafter look only to the Company for payment thereof. (SECTION 1003)

BOOK-ENTRY DEBT SECURITIES

The Debt Securities of a series may be issued, in whole or in part, in the
form of one or more global Debt Securities that would be deposited with a
depositary or its nominee identified in the applicable Prospectus Supplement.
The specific terms of any depositary arrangement with respect to any portion of
a series of Debt Securities and the rights of, and limitations on, owners of
beneficial interests in any such global Debt Security representing all or a
portion of a series of Debt Securities will be described in the applicable
Prospectus Supplement. (SECTION 204)

MEETINGS

The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series. (SECTION 1301) A meeting may be called at any time
by the Trustee, and also, upon request, by the Company or the Holders of at
least 10% in principal amount of the Outstanding Debt Securities of such series,
in any such case upon notice given as described under "Notices" below. (SECTION
1302) Except for any consent that must be given by the Holder of each
Outstanding Debt Security affected thereby, as described under "Modification"
above, any resolution presented at a meeting or adjourned meeting at which a
quorum is present may be adopted by the affirmative vote of the Holders of a
majority in principal amount of the Outstanding Debt Securities of that series;
provided, however, that, except for any consent that must be given by the Holder
of each Outstanding Debt Security affected thereby, as described under
"Modification" above, any resolution with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that may be
made, given or taken by the Holders of a specified percentage, which is less
than a majority in principal amount of the Outstanding Debt Securities of a
series, may be adopted at a meeting or adjourned meeting duly reconvened at
which a quorum is present by the affirmative vote of the Holders of such
specified percentage in principal amount of the Outstanding Debt Securities of
that series. Subject to the proviso set forth above, any resolution passed or
decision taken at any meeting of Holders of Debt Securities of any series duly
held in accordance with the Indenture will be binding on all Holders of Debt
Securities of that series and any related coupons. The quorum at any meeting
called to adopt a resolution, and at any reconvened meeting, will be Persons
holding or representing a majority in principal amount of the Outstanding Debt
Securities of a series. (SECTION 1304)

NOTICES

Notices to Holders of Registered Debt Securities will be given by mail to
the addresses of such Holders as they appear in the Security Register. (SECTION
107)

THE TRUSTEE

The Indenture contains certain limitations on the right of the Trustee, as
a creditor of the Company, to obtain payment of claims in certain cases and to
realize on certain property received with respect to any such claims, as
security or otherwise. (SECTION 613) The Trustee is permitted to engage in other
transactions, except that, if it acquires any conflicting interest (as defined),
it must eliminate such conflict or resign. (SECTION 608)

The Trustee has made loans to the Company and its subsidiaries and
affiliates from time to time in the ordinary course of business and at
prevailing interest rates under agreements with commercial bank groups.

In addition, the Trustee may from time to time serve as a depositary of funds
of, and perform other services for, the Company.

DESCRIPTION OF CAPITAL STOCK

The Certificate of Incorporation of the Company, as amended (the
"Charter"), provides that the aggregate number of shares of all classes of stock
that the Company has authority to issue is 36,000,000 shares, divided into two
classes consisting of 30,000,000 shares of Common Stock and 6,000,000 shares of
Preferred Stock. Additional shares of authorized capital stock may be issued
without stockholder approval. The following description of the capital stock of
the Company is intended as a summary only and is qualified in its entirety by
reference to the Charter and the By-Laws of the Company, the Certificate of
Designation for the Company's 9.96% Preferred Stock, the Certificate of
Designation for the Company's 5 1/4% Preferred Stock and the Certificate of
Designation for the Company's Series C Junior Participating Preferred Stock.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share on all
matters on which stockholders generally are entitled to vote, including
elections of directors, and, except as otherwise required by law or by the terms
of any series of preferred stock of the Company, the holders of Common Stock
exclusively possess all voting power. The Charter does not provide for
cumulative voting for the election of directors; therefore, the holders of a
majority of the voting power of the total number of outstanding shares of Common
Stock are able to elect the entire Board of Directors of the Company.

Subject to any preferential rights of any outstanding series of preferred
stock of the Company designated from time to time by the Board of Directors or,
to the extent permitted by law, a committee of the Board of Directors, the
holders of Common Stock are entitled to such dividends as may be declared from
time to time by the Board of Directors from funds legally available therefor
and, upon liquidation, dissolution or winding up, will be entitled to receive
pro rata all assets of the Company available for distribution to such holders.
No holder of Common Stock has any preemptive right to subscribe to any kind or
class of securities of the Company. As of May 31, 1996, 17,408,651 shares of
Common Stock were issued and outstanding.

PREFERRED STOCK

The Board of Directors is empowered without stockholder approval to issue
up to 6,000,000 shares of preferred stock of the Company, from time to time, in
series and with respect to each series to determine (1) the number of shares
constituting such series, (2) the dividend rate on the shares of each series,
whether such dividends shall be cumulative and the relation of such dividends
payable on any other class or series of stock, (3) whether the shares of each
series shall be redeemable and the terms thereof, (4) whether the shares shall
be convertible into Common Stock and the terms thereof, (5) the amount per share
payable on each series, or other rights of holders of such shares on liquidation
or dissolution of the Company, (6) the voting rights, if any, of shares of each
series and (7) generally, any other rights and privileges consistent with the
Charter for each series and any qualifications, limitations or restrictions. As
of May 31, 1996, the Company had outstanding (a) 200,000 shares of 9.96%
Preferred Stock represented by 2,000,000 issued and outstanding 9.96% Depositary
Shares and (b) 260,000 shares of 5 1/4% Preferred Stock represented by 1,300,000
issued and outstanding 5 1/4% Depositary Shares. In addition, the Board of
Directors has authorized the issuance of up to 300,000 shares of Series C Junior
Participating Preferred Stock pursuant to a stockholder rights plan, none of
which are outstanding. See "Certain Anti-takeover Provisions -- Stockholder
Rights Plan."

CERTAIN ANTI-TAKEOVER PROVISIONS

The Charter and By-laws of the Company contain provisions which may have
the effect of delaying, deferring or preventing a change in control. The
following description of certain provisions of the Charter

and By-laws is intended as a summary only and is qualified in its entirety by
reference to the Charter and the By-laws of the Company.

NUMBER OF DIRECTORS, REMOVAL OF DIRECTORS AND FILLING VACANCIES ON THE BOARD OF
DIRECTORS

The Company's By-laws provide that the number of directors shall be fixed
by the Board of Directors. The Board of Directors, and not the stockholders, has
the authority to determine the number of directors and could prevent any
stockholder from obtaining majority representation by enlarging the Board of
Directors and filling the new directorships with its own nominees. Moreover, the
Charter provides for removal of directors by the stockholders only for cause and
that the affirmative vote of the holders of at least 75% of the voting power of
the outstanding securities entitled to vote generally for the election of
directors (the "Voting Shares") would be required to remove a director from
office. The Charter and the By-laws provide that a vacancy on the Board of
Directors occurring during the course of the year, including a vacancy created
by an increase in the authorized number of directors, may be filled by the
remaining directors. Subject to applicable law and the rights of holders of any
series of preferred stock, the Charter and the By-laws do not provide for the
filling of vacancies by the stockholders.

CLASSIFIED BOARD OF DIRECTORS

The Board of Directors of the Company is divided into three classes of
directors serving staggered terms. One class of directors is elected at each
annual meeting of stockholders for a three-year term.

ANNUAL AND SPECIAL MEETINGS

Under the Charter and By-laws, subject to the rights of holders of any
series of preferred stock, stockholders are not permitted to call an annual or
special meeting of stockholders. Only the Board of Directors, the Chairman, the
President or Chief Executive Officer will be able to call an annual or special
meeting. Generally, stockholder action may be taken only at an annual or special
meeting of stockholders and may not be taken by written consent. Moreover, the
business to be conducted at any special meeting of stockholders is limited to
business brought before the meeting by the Board of Directors unless a
stockholder complies with the requirements for advance notification.

RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS

The Charter and Delaware Law impose various conditions on the consummation
of certain transactions between the Company or its stockholders and a
stockholder who acquires beneficial ownership of a specified number of shares.
The Charter imposes conditions on transactions involving "Interested
Stockholders." Interested Stockholders include, generally, holders of more than
10% of the Company's outstanding voting stock who acquired more than 5% of the
Company's outstanding voting stock within the two previous years. Excepted from
the definition, however, are stockholders who owned more than 600,000 shares of
voting stock on any day on which the Company was a majority owned subsidiary of
HOC, stockholders who owned more than 5% of the outstanding voting stock on the
first day on which the Company was not a majority owned subsidiary of HOC, and
any stockholder who purchased 5% or more of the outstanding voting stock with
the approval of the Board of Directors within 15 days of such date. Because the
affirmative vote of at least 75% of the total votes entitled to be cast would be
required to approve business combinations (mergers, consolidations and certain
other transactions) involving Interested Stockholders, holders of a minority of
the number of shares of Common Stock may prevent the consummation of a
transaction favored by holders of a majority of the number of shares of Common
Stock. In addition, the failure of a sufficient number of stockholders to vote
could also result in the defeat of a proposed transaction.

VOTE REQUIRED TO AMEND OR REPEAL CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND THE BY-LAWS

Unless declared advisable by the affirmative vote of two-thirds of the
total number of directors which the Company would have if there were no
vacancies on the Board of Directors and, if there is an Interested Stockholder,
a majority of the Continuing Directors, the affirmative vote of the holders of
(i) at least 75% of

the then outstanding Voting Shares and (ii) if there is an Interested
Stockholder, at least a majority of the voting power of the then outstanding
Voting Shares not beneficially owned by such person, will be required to amend,
repeal or adopt any provision inconsistent with the provisions of the Charter or
By-Laws discussed above. Continuing Directors include, generally, members of the
Board of Directors who are not affiliated with or were not nominated by an
Interested Stockholder and who were members of the Board of Directors prior to
the time such person became an Interested Stockholder.

REQUIREMENT FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS OR PROPOSALS

The Charter and By-Laws provide that advance notice of stockholder
nominations for the election of directors must be received by the Secretary of
the Company. A notice regarding any nomination must contain certain information
including information concerning the nominating stockholder and any information
required to be included in a proxy statement had the nominee been nominated by
the Board of Directors. In addition, each stockholder giving such notice must
provide all other information reasonably requested by the Company.

EVALUATION OF CERTAIN TRANSACTIONS

The Charter provides that a director, when evaluating any tender or
exchange offer or business combination, may, in addition to considering the
effects of any action on the Company's stockholders, consider any other factors
the director considers pertinent, including: applicable law; the amount and type
of consideration; alternative transactions; the business and financial condition
of the acquiring person; the competence and integrity of the acquiring person;
and the social, legal and economic effects, of the proposed transaction on
employees, suppliers and customers of the Company and on the communities in
which the Company conducts its business.

STOCKHOLDER RIGHTS PLAN

On November 11, 1994, the Company adopted a stockholder rights plan and
declared a dividend of one right (a "Right") for each share of Common Stock
outstanding as of the close of business on November 22, 1994. The Rights, which
under certain circumstances entitle their holders to purchase one one-hundredth
of a share of Series C Junior Participating Preferred Stock, par value $1.00 per
share, for an exercise price of $200, will expire on November 11, 2004.

The Rights are not exercisable until the earlier to occur of (i) 10 days
following the first date of public announcement that a person or group of
affiliated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding shares of Common Stock or such earlier date as a
majority of the Board of Directors shall become aware of the existence of an
Acquiring Person (the "Stock Acquisition Date") or (ii) 10 business days (or
such later date as may be determined by action of the Board of Directors prior
to such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the outstanding
shares of Common Stock.

In the event that any person becomes an Acquiring Person, each holder of a
Right, other than Rights beneficially owned by the Acquiring Person (which will
thereupon become void), will thereafter have the right to receive upon exercise
of a Right at the then current exercise price of the Right, that number of
shares of Common Stock having a market value of two times the exercise price of
the Right. In the event that, after a person or group has become an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
each holder of a Right other than Rights beneficially owned by an Acquiring
Person (which will have become void) will thereafter have the right to receive,
upon the exercise of the Right at the then current exercise price of the Right,
that number of shares of common stock of the person with whom the Company has
engaged in the foregoing transaction which number of shares at the time of such
transaction will have a market value of two times the exercise price of the
Right.

At any time until 10 days following the Stock Acquisition Date (subject to
extension by the Board of Directors), the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right.

PLAN OF DISTRIBUTION

The Company may sell the Securities in and/or outside the United States:
(i) through underwriters or dealers; (ii) directly to a limited number of
purchasers or to a single purchaser; or (iii) through agents. The Prospectus
Supplement with respect to the Securities offered thereby (the "Offered
Securities") will set forth the terms of the offering of the Offered Securities,
including the name or names of any underwriters or agents, the purchase price of
the Offered Securities and the proceeds to the Company from such sale, any
delayed delivery arrangements, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed or paid to dealers. Any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.

If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Securities to be named in the
Prospectus Supplement relating to such offering and, if an underwriting
syndicate is used, the managing underwriter or underwriters will be set forth on
the cover of such Prospectus Supplement. Unless otherwise set forth in the
Prospectus Supplement relating thereto, the obligations of the underwriters to
purchase the Offered Securities will be subject to conditions precedent and the
underwriters will be obligated to purchase all the Offered Securities if any are
purchased.

If dealers are utilized in the sale of Offered Securities in respect of
which this Prospectus is delivered, the Company will sell such Offered
Securities to dealers as principals. The dealers may then resell such Offered
Securities to the public at varying prices to be determined by such dealers at
the time of resale. The names of the dealers and the terms of the transaction
will be set forth in the Prospectus Supplement relating thereto.

The Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Any agent involved in the offer or
sale of the Offered Securities in respect to which this Prospectus is delivered
will be named, and any commissions payable by the Company to such agent will be
set forth, in the Prospectus Supplement arising thereto. Unless otherwise
indicated in the Prospectus Supplement, any such agent will be acting on a best
efforts basis for the period of its appointment.

The Securities may be sold directly by the Company to institutional
investors or others, who may be deemed to be underwriters within the meaning of
the Securities Act with respect to any sale thereof. The terms of any such sales
will be described in the Prospectus Supplement relating thereto.

If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters or dealers to solicit offers from certain types of
institutions to purchase Offered Securities from the Company at the public
offering price set forth in the Prospectus Supplement pursuant to delayed
delivery contracts providing for payment and delivery on a specified date in the
future. Such contracts will be subject only to those conditions set forth in the
Prospectus Supplement, and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts.

Agents, dealers and underwriters may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which such agents, dealers or underwriters may be
required to make in respect thereof. Agents, dealers and underwriters may be
customers of, engage in transactions with, or perform services for the Company
in the ordinary course of business.

The Securities may or may not be listed on a national securities exchange.
No assurances can be given that there will be a market for the Securities.

LEGAL MATTERS

Certain legal matters in connection with the Securities offered hereby will
be passed upon for the Company by Baker & Botts, L.L.P., Houston, Texas and for
any underwriters or agents by Andrews & Kurth L.L.P., Houston, Texas.

EXPERTS

The consolidated financial statements and related financial statement
schedule of the Company contained in its Annual Report on Form 10-K incorporated
by reference in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.

The consolidated financial statements of Transok, Inc. as of December 31,
1995 and 1994, and for each of the three years in the period ended December 31,
1995, incorporated by reference in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.

NO DEALER, SALESPERSON OR ANY OTHER 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 OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK 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. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.................................................................................. S-3
Use of Proceeds................................................................................................ S-10
Capitalization................................................................................................. S-10
Price Range of Common Stock and Dividend Policy................................................................ S-11
Unaudited Pro Forma Consolidated Financial Statements.......................................................... S-12
Selected Historical Financial Data............................................................................. S-19
Management's Discussion and Analysis of Financial Condition and Results of Operation........................... S-20
Business....................................................................................................... S-28
Underwriting................................................................................................... S-34
Index to Financial Statements.................................................................................. SF-1

PROSPECTUS

Available Information.......................................................................................... 3
Incorporation of Certain Documents by Reference................................................................ 3
The Company.................................................................................................... 5
Risk Factors................................................................................................... 7
Use of Proceeds................................................................................................ 9
Ratio of Earnings to Fixed Charges............................................................................. 9
Description of Debt Securities................................................................................. 9
Description of Capital Stock................................................................................... 15
Certain Anti-takeover Provisions............................................................................... 15
Plan of Distribution........................................................................................... 18
Legal Matters.................................................................................................. 19
Experts........................................................................................................ 19
</TABLE>

2,825,000 SHARES

[LOGO]

TEJAS GAS CORPORATION

================================================================================

COMMON STOCK

-------------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------------

MERRILL LYNCH & CO.
OPPENHEIMER & CO., INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED

, 1996

================================================================================